In the hotseat - Gray's Euro vision

European Commission chief accountant Brian Gray tells Chris Quick about his battle under fire to improve the EC's financial management.

Later this month we can expect a flurry of headlines focusing on EU finances sparked by the publication of the European Court of Auditors' annual report on EU expenditure. Due out this year on 13 November, the report is usually seized upon as evidence of widespread fraud and mismanagement of EU funds, and is an annual bonanza for Eurosceptics.

Former European Commission chief accounting officer Marta Andreasen is likely to be mentioned frequently. She became well known when she went public with her concerns over fraud and the institution's finances in 2002, and was subsequently feted as a whistleblower and joined the speaker circuit, appearing at many events aimed at accountants.

The man who took over and still holds this hot potato of a finance job is much less well known. Brian Gray, 61, is a Briton who joined the European Commission with a sense of idealism in 1978 and has risen through various roles, taking the post of chief accounting officer in 2003 in the painful wake of Andreasen's departure. A chartered accountant, he trained at Deloitte in London, enjoying a spell with the firm in Zambia before taking up this first EU post with the European Court of Auditors.

Constant attacks on EC accounting go with the territory, but Gray was moved to contact Accountancy earlier this year after our columnist Emile Woolf penned an acerbic piece (April, p19), claiming, among other things, that the EC was plagued by corruption and fraud at all levels while remaining immune from control and accountability.

In a column written in response (June, p20), Gray took him to task. 'Firstly, controls within the Commission are very tight. Internal controls are complemented by OLAF, the EU's independent anti-fraud watchdog with investigating capacities. Secondly, the Commission's accounts are kept to the highest standards in the public sector,' he wrote.

Still a believer

Meeting Accountancy a few months later at the EC's modest London offices, his belief in the EU's altruistic aims shines through. So does the enormity of the task he has undertaken in reforming the internal controls, financial management and accounting of this giant institution.

Gray has been involved in improving financial management in the EU for decades. In the 1990s he was involved in reforming the management and control of the Common Agricultural Policy. He says: 'The agricultural policies were the laughing stock of Europe and I found the controls I'd got weren't very good, so I spent about nine years setting up the control systems over the agricultural policy. They are now seen as quite fit for purpose.'

Things heated up in 1999 when EC accountant Paul van Buitenen went public with allegations that fraud was much more widespread than acknowledged, and that senior officials were covering this up. Neil Kinnock headed the resulting drive to clean up the EC's act, not helped by Andreasen's allegations in 2002 of shambolic controls leaving EU funds wide open to fraud.

Gray had been involved in efforts to improve internal controls during this period, and this drive has now become formalised into an 'action plan towards an integrated control framework'. Its many elements include improving the presentation and transparency of control strategies, the consistency of approach, and looking at how the costs and benefits of controls activities can be better targeted and balanced.

Big budget business

One challenge Gray faces is sheer scale. The 2007 EU budget, for example, is EUR126.5bn (£88bn). 'The number of payments handled by the Commission is about 1.5m a year, and about 7,000 people use our IT system day-to-day,' says Gray.

But the main challenge in providing assurance that EU funds are spent for their intended purpose - and in managing fraud risk - is the fact that the vast majority of EU funds, some 80%, are handed over to governments and other institutions in member states to be distributed. In EC parlance, these funds are under 'shared management'.

It is these that tend to be at the root of much of the criticisms and fears about fraud. Making sure that these funds are being spent as they should be is, in Gray's words, 'the big issue'.

'You have to set up control systems that are worth it in terms of costs and benefits. It might cost £1,000 to send somebody up to the north of Scotland to count sheep, but if you only recover £100 it's obviously not worth it - and you can't check everything.'

The answer, says Gray, lies in cleverer systems. For agriculture, for example, an administrative database allows for cross-checking against map references and other details, and when errors or frauds are found there are heavy and well-publicised sanctions.

The EC has also started requiring some beneficiaries of EU funds to have their aid claims certified by external auditors. It is working with FEE, the European accountancy body, on appropriate guidelines for auditors.

The EC also uses another tool with national authorities called 'financial correction'. Gray explains: 'If a member state doesn't put into place an effective control system, we say: "I'm sorry but you have exposed us to a risk of irregularity and we've got to know exactly what the risk is because you didn't check things, so we think you should repay us for 5% or 10% of this aid because of the consequences of your lack of controls".'

The Commission can also suspend aid if it doesn't think the national authority has adequate controls to ensure it is being properly spent on its intended purpose.

Cash to accruals

But this is not the only gargantuan project. The EC has also made the move from cash to accruals accounting. The EC's accounting standards have been developed from International Public Sector Accounting Standards. A plan for this ambitious project was put forward in 2002, and the new system became operational in January 2005. It is intended not just to be a technical change, but also to change management and improve scrutiny over spending, reduce the risk of errors, and improve the day-to-day management of EU funds.

Gray hopes both these drives will lead to a cleaner 'audit opinion' of EU funds from the European Court of Auditors, which presents its findings to the European parliament and makes them public. In this 'declaration d'assurance' (DAS), the court gives its opinion on, firstly, whether the accounts of the EU fairly present its financial position, and secondly, on the 'legality and regularity' of the underlying transactions. On the first point - the reliability of accounts - the court has declared the EU accounts reliable - with reservations concerning cut-off procedures - since 1994.

But on the second issue, the court has found itself unable to give an unreserved positive opinion on all the underlying transactions, and it is this, according to the EC, that is wrongly interpreted as a negative opinion on the accounts as such.

As it released its findings this time last year on the Commission's 2005 accounts, the Court of Auditors highlighted deficiencies in internal control, particularly for funds under shared management. But it added: 'This does not mean that all, or even the majority of, payments from the EU budget are affected by errors, nor can they be interpreted as an indication of fraud.' It added that it hoped the EC's action plan would, if properly integrated, yield signficant benefits over the next few years.

In the meantime, Gray continues to be irritated by what he calls 'broadbrush assertions that are just not true', particularly from accountants who he feels should instead be offering support and encouragement. He was particularly irritated by criticism voiced by ICAEW chief executive Eric Anstee at an institute event last year. 'Not only are we doing something about the problems, but we are making strenuous efforts to publicise what we do,' he says.

Watching its figures

Gray points out that as the systems have tightened up, then more frauds and irregularities have arisen, so it suddenly looks as if the rate is increasing.

He emphasises that most of the problems are down to simple neglect, error and poor understanding of complex rules. 'In my career I haven't really found any signficant rate of outright fraud.' So can taxpayers be reasonably assured that most of the money given to the EU is being spent on the purpose it's meant to? 'Yes,' he answers.

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