<EntPE>EUROPEAN PARLIAMENT</EntPE>
2004
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![](565764_image001.gif)
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2009
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<Commission>{CONT}Committee on Budgetary Control</Commission>
<Date>{8/04/2008}8.4.2008</Date>
<TitreType>WORKING DOCUMENT
No 2</TitreType>
<Titre>on the budget review
"Tolerable risk of error"</Titre>
<Commission>{CONT}Committee on
Budgetary Control</Commission>
Rapporteur: <Depute>Herbert Bösch</Depute>
Introduction
- The notion
"tolerable risk of error" was introduced by the European Court
of Auditors' Opinion 2/2004 on "a Community internal control framework".
- The European
Parliament made comments on the Court's important strategic considerations
in its 2003, 2004 and 2005 discharge reports and arranged also a workshop
to discuss the issue on 12 July 2006.
- The Commission
produced a follow up to the Court's Opinion in two separate
communications. First the "Roadmap to an Integrated Internal Control
Framework" from June 2005
and then the "Action Plan towards an Integrated Internal Control
Framework"
from January 2006.
- The Council
stated in a "conclusion" adopted on 8 November 2005 that
"it should reach an understanding with the European Parliament
regarding the risks to be tolerated in the underlying transactions, having
regard to the cost and benefits of controls for the different policy areas
and the value of the expenditure concerned".
- As of today
your rapporteur has not seen any initiatives from the Council in order to
reach this "understanding" with Parliament and wonders when the
Council will act on its own decision?
What is it about?
- "Tolerable
risk of error" is an expression of two basic facts:
-
the first is that internal control of EU
expenditure has its price;
-
the second is that aiming at zero risk is
extremely expensive and therefore not realistic.
Thus, it needs
to be made explicit what risk of error can be tolerated.
- It follows, so
say the Court and the Commission that it is important to find an appropriate
balance between the cost of controlling and the benefit
of such controls.
- The idea is
that above a certain level it is uneconomical to put further resources
into the control system, since the additional resources begin to outweigh
the benefit.
- The question
then arises: who tolerates? In other words: which
institution should decide on the tolerable level of error? The Court of Auditors
suggests that the budgetary authorities (Parliament and Council) should
approve the "tolerable risk of error".Â
- Why should
Parliament participate in this exercise? Is it "tolerable" that
a parliamentarian accepts that the use of public money can imply a risk?
Would it not - particularly for a parliamentarian wishing to be re-elected
- be wiser to forcefully underline the need for absolute assurance
and zero risk?
- The guiding
principle in the public sector has traditionally been "no risk".
If you ask taxpayers what they expect of public servants - and politicians
- the answer will most probably be "compliance with the rules"
rather than "innovation", "creativity" or "risk
taking".
- However, the
"no risk" approach implies an enormous rise of control costs and
thus -taxes. Therefore, parliamentarians have a duty to help find a
balance and to explain to the taxpayers that they are better off that way.
- The
introduction of the concept "tolerable risk of error" allows us
to move away from the "no risk" tradition in the public sector
and towards a more open and transparent attitude on the risk profiles of
the different EU policies and the cost of managing or containing that
risk.
Possible main elements of an
agreement
- If we move
towards a situation in which less than absolute assurance is politically
acceptable what might then be the main elements of an agreement on
"tolerable risk of error"?
Differentiation
- There should
probably be different levels in different policy areas. As of today the
European Court of Auditors operates within a 2 % materiality level for all
policy areas. However, it could be that some of the European Union's
policies are of such a nature that a 2 % materiality level is out of reach
at a reasonable cost.
- An example:
The need for humanitarian aid after a natural disaster is urgent and the
surrounding chaos overwhelming. In that situation it would seem not only
exaggerated but also irresponsible to aim for less than 2 % of errors. If
humanitarian aid were delivered only on the basis of this condition the
policy would be prohibitively expensive and administratively suffocating
making it ultimately useless.
- On the other
hand we have "Administrative expenditure" where the error rate
could and should be kept well below 2 %. Would 0.5 % be reasonable?
The rules
- Risks are to a
certain extent a result of rules which themselves result from the need to
achieve policies. Complex rules are by nature more prone to errors than
simple ones although complex rules are sometimes needed for targeted
policy achievement.
Definition of
"error"
- There should
be no discussion of what constitutes an error. The Court should be
ultimately responsible for the definition of errors, and this definition
should be made clear to all stakeholders.
Sanctions and
penalties
- Consideration
should be given to what happens in cases where the error rate in a Member State is higher than what had been agreed as "tolerable". Sanctions
and penalties should be sufficient to assure prompt follow-up from the
responsible actors. The follow-up should be that the control system is
tightened the following year to better achieve the desired risk level.
The price of
the actual control system as well as of additional control.
- At present the
cost of the current control systems is not known. Neither is it known how
much a reduced level of errors would cost. And furthermore: Is there a
direct relation between an increase in audit resources and fewer errors?
It could be the case that instead of more controls we need
fewer and better controls.
Complete and
truthful reporting from the Commission
- A fundamental
condition for the introduction of a "tolerable risk of error" is
clear, unequivocal and complete reporting from the Commission and
the Member States. Based on the experiences with inadequate quality of
some of the Directors-General Annual Activity Reports as identified by the
Court of Auditors this very basic requirement could be a major challenge
for the Commission.Â
Reservations
- In principle
your rapporteur would be in favour of making the "implicit
explicit" as Mr Caldeira said in the workshop of 12 July 2006. But
the following reservations cannot be neglected.
Avoid
confusions
- It should be
recognised that:
-
the problem is
the reality of (too many) errors in the underlying transactions in some policy
areas and this problem is mainly situated in the Member States;
-
the objective is to reduce the number of
errors to a known and agreed level;
-
the Statement of Assurance shall continue to be
based on the Court's audit results and not on wishful thinking.
Is cost/benefit a sufficient criterion?
- The Court
proposes that the 'tolerable risk of error' shall be set on the basis of
"costs and benefits" (paragraph 50 in Opinion 2/2004). Is this
an adequate criterion? Situations may arise where 'tolerable risk' cannot
be defined exclusively on a quantitative basis. It must also be
defined in qualitative terms in cases where we are dealing with
so-called "reputational risks".
A 'reputational
risk' is the risk of damage to reputation stemming from any incident of
any kind of any amount which throws doubt on the integrity of an
organisation as a whole. The question is to know how to establish the price of
the political damage caused by deficient control systems?
Who should set the 'tolerable risk of
error'?
- As mentioned
the Court proposes that "the budgetary authorities (Parliament and
Council)"
should approve the cost/benefit balance, but it does not
suggest which institution should set 'the tolerable risk of
error'.
- Your
rapporteur takes the view that a proposal from the Commission concerning
the tolerable risk of error for a given policy should be accompanied by a cost
calculation concerning the cost of controls.
- The quality of
the cost calculation should be assessed by the European Court of Auditors
who could then help the Council and Parliament to decide on what is deemed
tolerable.
- Independent
assessment of the cost information is important. The Commission would
maybe wish to stay on the safe side, and overestimate the resources
needed, or it would maybe set the level a bit higher in order to be sure
it can be attained with the available resources.
- In order to be
transparent and give the budgetary authorities a solid basis for decision
the Commission could even present differing options indicating the control
expenses for a 2% error rate, a 5 % error rate, etc as well as giving
information on how much the control expenses may be reduced if the
regulation governing a specific programme were to be amended in such and
such a way.
Way forward
- Your
rapporteur would like to suggest that:
- political recognition of the calculated risks involved in EU
actions be encouraged;
- the 'tolerable risk of error' be set on the basis of "what we
want" (by decision) and not on the basis of "what we have" (by
accident);
- precise and
reliable information as regards the present situation be provided;
- on the basis of the present situation action plans be developed in
view of a continuous reduction of errors over time until the agreed level,
taking into account the costs, is reached.
Final remarks
- A 'tolerable
risk of error' should not be an isolated and narrow technical instrument.
It should be an integrated element in the overall management of the
budget. It should help the implementation of the budget in a more rational
and flexible way by allowing a greater margin for those who implement it,
and taking specific account of the cost of control, whether incurred by
the Commission or the Member States.
- This greater
margin would of course have its price. Its name is accountability.
Since about 80 % of the EU budget is implemented by implementing
authorities within Member States, national accountability must be
strengthened.
- The Parliament
has proposed 'national management declarations' as a tool with which to
achieve this objective. It has also suggested that National Audit
Institutions could play a role in ensuring that national management
declarations give an honest assessment of the situation.
- Your
rapporteur invites the Commission to give due attention to these
considerations in the new proposals following the Budget review.