Neophyte Club: The European Union's 10 Newest Members Had to Submit to Stringent Financial Control Assessments before Gaining Entry. but Have These Countries Continued Their Reforms Now That They Have Passed the Initiation Test?

By Hodge, Neil | Financial Management (UK), December 2004 | Go to article overview

Neophyte Club: The European Union's 10 Newest Members Had to Submit to Stringent Financial Control Assessments before Gaining Entry. but Have These Countries Continued Their Reforms Now That They Have Passed the Initiation Test?


Hodge, Neil, Financial Management (UK)


Given the media's frequent mauling of the European Commission's accounting record and history of funding embarrassing projects such as the riding school in Spain that turned out to be a brothel, it's little wonder that some people are wary of the accounting capabilities of the EU's 10 newest members.

Bodies such as Transparency International, which campaigns for openness in democracy' and business, have historically ranked some of these latest entrants high on the corruption index, so it's widely expected that funds will "go missing". Yet no scandal has emerged so far. In fact, some experts think that the newcomers could teach the older members a thing or two about effective financial management.

On 1 May the EU's ranks swelled to 25 when Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia were welcomed into the fold. With the exception of Cyprus and Malta, they have had only a decade's experience of actively managing their own economies and budgets--with mixed results. Cynics and supporters alike had serious doubts about the ability of these countries to manage their public funds soundly, and about whether they would continue with financial reform once the EC approved their entry.

The candidate countries had to meet the terms and commitments of 30 chapters laid down by the commission before they could join. Chapter 28 deals specifically' with internal financial controls in the public sector and establishes the need for functionally independent internal auditing. The commission's main system for achieving this is its concept of public internal financial control (PIFC).

Because the financial management structures of the accession countries differed so much from those of the existing members, the commission created a framework under which the candidates could be helped to develop a modern style of management and audit. This included guidance on following the Institute of Internal Auditors' international standards. PIFC stipulates that candidate countries must develop adequate financial management and control systems. They should establish independent internal audit facilities in most--if not all--of the public spending authorities assessing the economy, efficiency and effectiveness of the mechanisms to be audited.

PIFC also makes it clear that the activities of the financial control function and of the internal auditor should be based on objective risk analysis techniques, and that the methods for financial control and internal audit systems should be based on internationally accepted and EU-compliant standards. Lastly, it provides for a central harmonisation unit that is responsible both for the development of control and audit methods and for ensuring consistency throughout the public sector.

The introduction of PIFC in 1997 was the first time that the commission told candidate countries what financial management and audit procedures they needed to have in place before they could join. These measures are directed only at the control of funds coming from the EU and have no bearing on any other area of public spending. But hopes are high that the principles of financial control will be adopted by all government bodies.

"During previous accession negotiations there were never specific negotiation chapters on financial control. The general idea was that prospective member states already had well-developed control and audit structures," explains Robert Gielisse, head of the EC unit responsible for the control of resources and support given to candidate countries. "In many respects, the stance that the commission is now taking will probably result in a much more coherent approach to audit methods and financial management throughout the EU in the long run. …

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Neophyte Club: The European Union's 10 Newest Members Had to Submit to Stringent Financial Control Assessments before Gaining Entry. but Have These Countries Continued Their Reforms Now That They Have Passed the Initiation Test?
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