A new stage of reform: the European Commission's recently appointed internal audit chief says his organization must continue to work toward modernization and progress

Internal Auditor, Dec, 2004 by Neil Baker

IT HAS BEEN FIVE YEARS SINCE AN UNPRECEDENTED financial scandal led to the mass resignation of all 20 members of the European Commission (EC)--the executive arm of the European Union. In the wake of this chastening experience, a new commission led by former Italian Prime Minister Romano Prodi embarked on an ambitious program of reform. Its aim was to transform an organization with a reputation for financial irregularity and management incompetence into a world-class public administration.

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A key part of this reform was an effort to revolutionize the commission's approach to corporate accountability and internal control. In 2001, troubleshooting Dutchman Jules Muis was called in from the World Bank as the first director general of the commission's then newly formed Internal Audit Service (IAS). Muis resigned in April 2004 and handed the reigns to Walter Deffaa, a 53-year-old German with 20-years of experience at the commission.

In his most recent role as finance director of the commission department responsible for regional policy, Deffaa was managing one of the largest audit teams in the EC. Now, he is bringing that experience to his new role: consolidating the progress made by Muis and steering the commission's growing army of internal auditors through the next stage of reform.

Deffaa recently spoke with Internal Auditor from his office in Brussels, Belgium.

When the EC announced your appointment, it said you would be "consolidating" reform. Does that imply the pace of reform is slowing?

No. The reform is a continuous process. In the Prodi Commission, we made a quantum leap by redesigning the EC's financial management and control systems and putting in place new planning, programming, and performance management systems as well as modern human resources policies. Now that the new systems are in place, we have to make them work efficiently. In any organization, it is important and necessary to modernize. So it is my vision and the EC's that we consolidate and move forward in modernizing our organization--that is, continuously improve efficiency and effectiveness and keep up with technology and management innovation.

When Jules Muis left his post, he told Internal Auditor he had achieved 50 percent of what he thought he could have done if the EC's apparatus had been a more willing partner. Is there a lack of willingness to cooperate with internal auditing?

Now that I have taken office, I am meeting all of the other director generals and, partly thanks to the work of Jules Muis, I find there is a growing understanding of what internal auditing is. The top management is very open to internal auditing.

Of course, in an organization as complex as the commission, there is more than one attitude toward internal auditing. But from my own experience as a finance director in the EC's Regional Policy Directorate General, I can witness that attitudes have changed over the last year or so.

Clients in general often used to have a more defensive attitude toward auditors because they thought auditors might want to trap them. But now, we have a kind of cultural change that is happening, and people are opening up. I think they realize that it is better to identify problems at an early stage, when you can still do something about them, rather than taking a wait-and-see approach and having the problems become really difficult.

When I look at the recommendations that the IAS is giving and the reaction of management, I see that we are rather successful--the bulk of the recommendations are accepted by management, which indicates a positive attitude. Auditing is a process, and we all learn from it.

Also, when we talk about internal auditing at the commission, we don't just talk about the IAS at the central level. We have a second layer of internal auditing, which is what we call the Internal Audit Capabilities (IACs) in the directorate generals. In terms of resources, they are even more important than the IAS. The IACs provide assurance and consultancy services to the director generals of the directorate generals.

Internal auditing now has become widespread in the organization. It took some time for the IACs to take off, and at the moment, one of my priorities is to make these two layers work together and try to develop synergies between them.

Having two layers seems a bit of an odd way to structure the EC's internal audit resources. If you could reorganize internal auditing, would you rather have a much bigger central IAS?

That is a theoretical question that we are no longer faced with. We are in an organizational setup that corresponds with the unique structure of the EC. Moreover, it has occurred during the historical development of the EC's reform, which was very much driven by the idea of decentralizing responsibility. Once you have decentralized responsibility and established a high degree of accountability at the level of director generals, it is natural that they want to have some audit assurance for themselves. I would agree that our approach is probably something that you would not find elsewhere, but it is something that, to a certain extent, flows from the special architecture of the commission.