ANNUAL REPORT concerning the financial year 1997 (98/C 349/01)

The report, together with the institutions' replies to the Court's observations, was transmitted to the authorities responsible for giving discharge and to the other institutions.

Bernhard FRIEDMANN (President)

John WIGGINS

Giorgio CLEMENTE

Barry DESMOND

Patrick EVERARD

Armindo de Jesus de SOUSA RIBEIRO

Antoni CASTELLS

Jan O. KARLSSON

Hubert WEBER

Aunus SALMI

Jørgen MOHR

Kalliopi NIKOLAOU

François COLLING

Maarten B. ENGWIRDA

Jean-François BERNICOT

CONTENTS

Page

General introduction 5

REPORT ON ACTIVITIES FINANCED FROM THE GENERAL BUDGET

Part I - Observations concerning the general budget

Chapter 1 - Own resources 7

Chapter 2 - The common agricultural policy 21

Chapter 3 - Structural measures 59

Chapter 4 - Internal policies 76

Chapter 5 - External aid 87

Chapter 6 - Administrative expenditure 108

Chapter 7 - Financial instruments and banking activities 110

Part II - Statement of assurance concerning activities financed from the general budget

Chapter 8 - The statement of assurance and supporting information 119

REPORT ON THE ACTIVITIES OF THE SIXTH AND SEVENTH EUROPEAN DEVELOPMENT FUNDS

Part I - Observations concerning activities under the sixth and seventh European Development Funds 149

Part II - The statement of assurance and supporting information concerning the sixth and seventh European Development Funds 161

ANNEXES

Annex I - Financial information on the general budget and the sixth and seventh European Development Funds (1*) I

Annex II - Reports and opinions adopted by the Court during the last five years XLI

THE INSTITUTIONS' REPLIES

REPORT ON ACTIVITIES FINANCED FROM THE GENERAL BUDGET

Page

Part I - Observations concerning the general budget

Chapter 1 - Own resources 18

Chapter 2 - The common agricultural policy 50

Chapter 3 - Structural measures 71

Chapter 4 - Internal policies 83

Chapter 5 - External aid 100

Chapter 7 - Financial instruments and banking activities 117

Part II - Statement of assurance concerning activities financed from the general budget

Chapter 8 - The statement of assurance and supporting information 139

REPORT ON THE ACTIVITIES OF THE SIXTH AND SEVENTH EUROPEAN DEVELOPMENT FUNDS

Part I - Observations concerning activities under the sixth and seventh European Development Funds 157

Part II - The statement of assurance and supporting information concerning the sixth and seventh European Development Funds 171

GENERAL INTRODUCTION

1. This annual report of the Court of Auditors sets out the results of its audits of the implementation of the general budget of the European Union and of the use made of Community funds through financial instruments and banking activities. It draws the attention of the institutions and the citizens of Europe to numerous important problems which the Commission and the authorities concerned in the Member States ought to set about solving. The report is an important component of the discharge procedure. The discharge is granted by the European Parliament, on the recommendations of the Council. The Commission gives an account of the steps it has taken to respond to the observations set out in the European Parliament's resolutions accompanying the discharge decisions for the general budget, the ECSC and the EDF and to the comments accompanying the Council's recommendations.

2. The observations set out in the report arise from the Court's audit of revenue and expenditure, including its audit from the point of view of sound financial management. These observations are followed by the statement of assurance as to the reliability of the accounts and the legality and regularity of the transactions underlying the general budget, and the related observations, which the Court submits to the European Parliament and the Council.

3. The contents of the annual report on the financial year 1997 differ from those of previous reports. The fact is that, over the years, the dimensions of the Court's annual report have expanded to the point of making the drafting and finalising of it unpracticable within reasonable time limits. Since the Treaty on European Union, moreover, the discharge procedure also applies to special reports. The Court has therefore decided to publish most of its audit findings in special reports, which also has the advantage of allowing it to spread its work out more evenly over the year. Thus, rather than enumerating detailed results of various audits, each chapter contains general observations and a summary of the conclusions of audits which have been adopted in the form of special reports during the period that has elapsed since the publication of the previous annual report.

4. The Court's external auditor's certificate in respect of the regularity and fairness of the revenue and expenditure account and of the financial balance sheet drawn up on 31 December 1997, and its report on the Court of Auditors' system of internal controls and sound financial management were published in OJ C 318, 15.10.1998.

5. The report on the European Development Funds and the related statement of assurance are presented separately after the report on the general budget.

Report on activities financed from the general budget

PART I Observations concerning the general budget

CHAPTER 1 (2*) Own resources

1.0. CONTENTS Paragraph reference

General introduction 1.1

Implementation of the budget 1.2

Traditional own resources 1.3 - 1.24

Financial management 1.3 - 1.9

Weaknesses in the internal control procedures for accounts kept by the Member States 1.4 - 1.5

Audit of the summary accounts drawn up by the Member States 1.6 - 1.7

Conclusion 1.8 - 1.9

Audit of the use of risk analysis techniques in customs control and the clearance of goods 1.10 - 1.24

Introduction 1.10 - 1.16

The Court's enquiry 1.17

Conclusion 1.18 - 1.24

Own resources deriving from VAT and the GNP 1.25 - 1.36

The system of resources based on VAT and the GNP 1.25 - 1.29

The VAT system in intra-Community trade 1.30 - 1.36

GENERAL INTRODUCTION

1.1. The Court's review of traditional own resources concentrated on the financial management by the Commission and the Member States in establishing and recovering Community entitlements and also examined the use of risk analysis techniques in Customs control. The observations concerning the latter have been published in greater detail in a special report (3). In the case of the resources accruing from value added tax (VAT) and gross national product (GNP), the Court particularly examined the nature and implications of the system for handling these resources, which provide approximately 80% of the Community budget, and also analysed various aspects of the potential losses that could occur in this area in connection with the system of VAT on intra-Community trade. The Court's observations on the above points are summarised in this chapter and are also the subject of two special reports (4).

IMPLEMENTATION OF THE BUDGET

1.2. Table 1.1 gives an overview of Community revenue for 1997 and Figure 1.1 shows that:

(a) the actual revenue for 1997 was 80 547,7 Mio ECU, or 97,8% of the revenue provided for in the final budget, and was 1,3% lower than the 1996 figure (81 275,1 Mio ECU);

(b) net traditional own resources, less collection costs of 1 574,7 Mio ECU, amounted to 14 172,3 Mio ECU, which was 17,6% of total actual revenue; these resources, which were 4,3% higher than in 1996, comprised:

- customs duties to a total of 13 607,7 Mio ECU gross, or 86,4% of gross traditional own resources (15 747,0 Mio ECU) (5),

- agricultural levies of 1 025,2 Mio ECU gross, or 6,5% of gross traditional own resources,

- sugar and isoglucose levies amounting to 1 114,0 Mio ECU gross, or 7,1% of gross traditional own resources;

(c) after taking account of balances and adjustments (- 567,5 Mio ECU), the VAT-based own resources amounted to 34 351,5 Mio ECU (6), or 42,6% of total actual revenue; the actual revenue from this resource was 6% less than in 1996 (36 535 Mio ECU);

(d) after taking account of balances and adjustments (- 544,9 Mio ECU) the GNP resource amounted to 26 891,7 Mio ECU (7)(including reserves of 286,9 Mio ECU), which was 33,4% of total actual revenue; this resource was 27,7% higher than the previous year (21 085 Mio ECU); the increase in the additional resources was to balance the decrease in last year's surplus and the negative adjustments and balances from previous years;

(e) the surplus available from the previous year (4 384,0 Mio ECU) and miscellaneous revenue (813,5 Mio ECU) accounted for 6,4% of total actual revenue, a decrease of 51,3% on 1996.

TRADITIONAL OWN RESOURCES

Financial management

1.3. The Court's observations are based on systems analysis, analytical reviews, tests of the procedures for centralising traditional own resources in order to make them available to the Commission and tests on sample transactions selected in the Member States.

Weaknesses in the internal control procedures for accounts kept by the Member States

1.4. In the annual report concerning the financial year 1995 the Court noted that before 1989 one Member State 'made available to the Commission all established amounts, including amounts that had not been recovered. On 1 January 1989, the amounts made available to the Commission that had been established and not recovered totalled 93,8 Mio ECU. Although this sum was not repaid with a view to being entered in a separate account, the Commission did not object to the national authorities deducting from current established amounts the amounts they had written off. Neither the Commission nor the national authorities has set up a monitoring system so as to make it possible to ascertain the cumulative total of these deductions` (8). The Court reviewed the deductions in question that have been made by the national authorities since 1989. The review showed that in the period between January 1989 and June 1997 an excess of 5,944 Mio ECU was deducted from the amount made available to the Commission. The Commission should take the necessary action to remedy the situation.

1.5. In another Member State, on 16 July 1996 the customs authorities deducted 5,67 Mio ECU, relating to four import declarations, from the separate accounts in order to transfer them to the accounts provided for in Article 6.2 (a) of Council Regulation No 1552/89 (9) so that this amount could be made available to the Commission. However, the 5,67 Mio ECU so deducted were made available in March 1997, instead of in September 1996. The result was a six-month delay in making these own resources available to the Commission.

Audit of the summary annual accounts drawn up by the Member States

1.6. As regards own resources the Court has regularly commented in its annual reports on delays in making the traditional own resources available, sums lost when debts lapse as a result of the three-year limitation, errors and irregularities in the establishment of customs duties on goods subject to customs preference and suspension schemes, as well as errors and omissions in incorporating Community regulations into national instructions. These comments are representative of the various types of recurrent irregularity that can be found in the information in support of the Statement of Assurance and which affect the sums entered in the accounts kept by Member States. The audit of the last financial year again revealed losses of own resources resulting from the same types of irregularity. In four Member States, for example, there were delays in making established entitlements available. In the sample of reviewed transactions the total amount of established entitlements was 7,3 Mio ECU and the delays ranged from one to six months. Under Article 11 of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 (10) the Member State concerned should have paid interest on the sums in question as a penalty for the delays in making the resources available.

1.7. Following the adoption of Council Regulation (EEC, Euratom) No 1355/96 of 8 July 1996 (11) amending Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989, the summary annual account drawn up by each Member State in accordance with Article 7 of that Regulation may not be corrected after 31 December of the third year after the end of a given financial year. The Commission has also published a proposal (12) which would amend Article 17 of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 so that unrecovered amounts would be removed from the separate account at the latest at the end of the five-year period defined in the proposal.

Conclusion

1.8. The two amendments of Regulation (EEC, Euratom) No 1552/89 (see paragraph 1.7) ought to mean that, as with the procedures introduced as part of the procedure for the clearance of the agricultural expenditure accounts, the Commission is required, before the deadlines mentioned in paragraph 1.7, to audit the summary annual account presented by each Member State, or, at least, to have the accounts in question certified in accordance with the rules on the auditing of accounts.

1.9. In order to eliminate repeated irregularities, the Commission should also improve collaboration between itself and the Member States as regards the management and control of traditional own resources.

Audit of the use of risk analysis techniques in customs control and the clearance of goods (13)Introduction

1.10. Responsibility for the collection of traditional own resources (in 1997, 14 200 Mio ECU or approximately 17,7 % of the total Community budget) is devolved to the Member States.

1.11. The completion of the single market on 1 January 1993 was accompanied by the entry into force of the consolidated Community customs legislation. The consolidated legislation was intended to guarantee a uniform application of customs legislation throughout the Community. This, and subsequent amending legislation, lays down in specific terms the nature of the controls to be exercised by the customs authorities to protect the Community's financial interests.

1.12. The Ecofin Council approved, on 23 November 1992, the use of risk analysis to target financial controls. It asked the Commission to adopt, before the end of 1993, measures to introduce the principle of targeted-risk audits to all sectors subject to controls.

1.13. Subsequent Community Customs legislation only provides for the use of risk analysis techniques in the control of goods imported under simplified customs procedures by air or by sea (14). There is one additional legislative imperative on customs authorities to use risk analysis techniques in determining how and where to exercise their control mandates: Decision No 210/97/EC of the European Parliament and of the Council of 19 December 1996 adopting an action programme for customs in the Community (Customs 2000) (15)1.14. A number of documents adopted by the European Parliament, the Council or the Commission stress the need for using state-of-the-art customs techniques and more effective working methods such as information technology, risk analysis and targeted control using risk profiles, common and coordinated risk management policy, and advanced auditing systems. These institutions insist on the requirement that national customs services act as if they were one, and have invited Member States to cooperate closely and to coordinate their efforts with a view to attaining these common objectives.

1.15. The Commission notes that there is a lack of homogeneity in the inspection techniques from one Member State to another and expresses its belief that the development of risk analysis methods will remedy this state of affairs. Under the Customs 2000 programme it hopes to draw up Community-wide 'risk profiles`. For some customs regimes it will ask Member States to make systematic use of risk analysis methods in their control measures by implementing the guidelines issued on risk analysis to be used across the Community.

1.16. Non-binding guidelines, developed by the Commission with the cooperation of Member States, were definitively issued to Member States in October 1997. These guidelines are to be implemented on a pilot basis by the end of December 2000.

The Court's enquiry

1.17. The Court's enquiry carried out in eight Member States (Belgium, Denmark, Germany, Spain, France, Italy, the Netherlands and the United Kingdom) focused on the use of risk analysis in customs controls exercised in the physical inspection of goods and documentary checking of import declarations which affect the Community's own resources. The enquiry examined the controlling and coordinating role of the different services within the Commission. It also sought to focus in the Member States on the management and effectiveness of the techniques employed, the use to which sources of intelligence are put and the extent of feedback mechanisms in place. Where formal risk analysis techniques were not in use, the enquiry attempted to assess the effectiveness of alternative methods of protecting the Community's financial interests.

Conclusion

1.18. The aspirations of the European Parliament, the Council, the Commission and the Member States - namely, that the customs services of the Community will act as if they were one by taking coordinated action to achieve equivalent results in the Community customs territory, by the effective, efficient and homogenous application of Community rules - are far from having been achieved.

1.19. While there is a widespread willingness to further the use of risk analysis in the customs services, the lack of coordination, in particular in the determination of risky goods and circumstances, renders ineffectual a good deal of the control work being undertaken at local level.

1.20. There was sufficient evidence to confirm that much information on areas of risk is being passed on to the front line of the customs services. However, in the absence of really effective analysis of the potential effect of these risks for the individual frontier posts, the availability of this large mass of information does nothing to improve the direction of the control effort available.

1.21. In all the Member States visited, customs clearance systems have some filtering capability to determine according to pre-set risk profiles whether selected declarations are subjected to physical or documentary control. However, the effectiveness and efficiency of these filter systems is lessened by the lack of coordinated transnational profiles, the absence of real analysis of risks in many areas, the absence of feedback on the results of controls, the inadequacies of certain computer systems and, in some instances, the lack of understanding of the purposes and objectives of a targeting system.

1.22. There are as many manifestations of risk analysis methodologies as Member States visited on this enquiry. While there may be common agreement on the need for a risk methodology and while the Commission's guidelines give a good road-map for its implementation, present trends indicate an uncoordinated and uneven application of Community legislation.

1.23. Five years after the coming into being of the single market, and after six years of operation of the Matthaeus Programme (16), a greater amount of cohesion would be expected from the training and exchange programmes initiated. Alternatively, some integration of customs administrations by creating common specialized units or services at Community level e.g. planning and control activities, may improve coordination among Member States.

1.24. There is still a considerable amount of work to be done to ensure there is an effective, efficient and homogenous risk analysis system in operation in all the Member States. The Commission should initiate adequate regulatory measures and take the appropriate management decisions to improve the efficiency of the use of risk analysis throughout the Community.

OWN RESOURCES DERIVING FROM VAT AND THE GNP

The system of resources based on VAT and the GNP

1.25. Even though this system of Community financing has been reorganised on three occasions in the past 10 years, it poses problems of consistency and transparency and is also affected by operational problems. Despite the importance of statistical data in determining the assessment base, there is still no provision for measuring the quality of the data.

1.26. The manner in which this system of financing has developed has increased the role of the GNP, which also determines the maximum amount of the budgetary resources. A new system of integrated economic accounts (European system of integrated accounts (ESA), 1995 version) for calculating the GNP has been adopted by the Council and will be applied from 1999. However, the old ESA (1979 version) will still apply for the financing of the Community budget. The changes that the new ESA is expected to bring about are, however, important, both at the methodological level and from the viewpoint of more accurate comparison between Member States. The fact that the best economic aggregates available are not taken into account and that there is no means of measuring quality distorts the measurement of the Member States' contributive capacity.

1.27. Loss of tax revenue may affect not only GNP resources but also those based on VAT, especially as the GNP takes insufficient account of the 'black economy`. Although the extent to which the national accounts are full and complete will only be known at the end of 1998 (17), the magnitude of this loss when evaluated in the light of those accounts is nevertheless considerable. It is indicative of a much broader phenomenon that affects all taxation. An indirect calculation of the discrepancy between VAT collected and theoretical VAT for nine Member States revealed an average annual difference of 70 000 Mio ECU (1991-93). Comparison with a similar exercise carried out 10 years ago shows that the discrepancy has more than doubled.

1.28. The existence of a revenue correction that currently applies to one Member State only, but could be extended to several others, is a further anomaly in the system. The idea underlying this correction, namely the notion that the benefit that a Member State derives from its membership of the European Union can be quantified by balancing the amount it pays to the budget against the payments it receives from the Community, is questionable. A study carried out for the Court shows that the multiplier effect of an identical amount of Community expenditure may be very different from one Member State to another. It therefore follows that the impact of Community financing cannot simply be condensed into records of financial flows. As the Fontainebleau European Council pointed out, any readjustment must be achieved through expenditure policy, notably at the time when the budget is being adopted.

1.29. In conclusion, now that European Union enlargement is a definite prospect there is all the more need to give serious thought to the system of financing. The aims of any financing system must be spelt out clearly, and the nature of the resources selected and the means of collecting and controlling them must be mutually compatible.

The VAT system in intra-Community trade

1.30. The present transitional VAT arrangements for intra-Community trade were introduced on 1 January 1993, when the single market came into being and controls at the Union's internal borders were abolished. VAT is no longer paid at the time goods are imported, but at a later stage, on the evidence of periodic declarations by the taxpayer. In spite of the introduction of an a posteriori system of information exchange (VIES), the potential for fraud has thus been increased.

1.31. In the Member States the fight against fraud is usually synonymous with an absence of any integrated strategy and the risk that priority will be given to the national framework, which may result in a dispersal of effort and inefficient use of available resources. Differences between the national definitions of fraud and, therefore, between the penalties applied, may undermine their deterrent effect. Differences in the legal and administrative frameworks are further risk factors that can be fraudulently exploited.

1.32. The instruments for cooperation between Member States are not fully utilised. The slowness of the procedures and, sometimes, even the ignorance of existing instruments, especially at the level of local administrations, frequently provide the explanation for this under-utilisation.

1.33. The Commission's role is essentially limited to promoting exchanges of experience between national departments. It has not yet been able to identify the shortcomings of national systems in fighting fraud or to recommend solutions to the Member States concerned.

1.34. In the absence of a viable alternative, the current 'transitional` system will remain in place for several more years. Substantial improvements appear unlikely in the absence of a clear determination to give priority to fighting fraud in intra-Community trade.

1.35. The Member States and the Commission should set up systems that will enable them to measure the scale of anti-fraud measures more accurately and, above all, to evaluate periodically the effectiveness and the results of their controls and of the Community mechanisms.

1.36. Harmonising the performance of the national administrations is another area in which urgent action is needed. In this context harmonisation of national administrations' control methods and strategies would make it possible to fight an increasingly multinational phenomenon more effectively.

REPLIES OF THE COMMISSION

TRADITIONAL OWN RESOURCES

Weaknesses in the internal control procedures for accounts kept by the Member States

1.4. As it pointed out in its replies to the annual report concerning the financial year 1995, the Commission did not object to the deduction from current established entitlements of amounts from the period before 1 January 1989 considered irrecoverable. The Commission is continuing to monitor this affair and has asked the Member State concerned to confirm the data on which the facts noted by the Court are based. As soon as this information is received, the Member State will be asked, if necessary, to make the corrections and pay the interest due for late payment.

1.5. As soon as it had been informed of the Court's finding in April 1997, the Commission requested that 184 876 ECU be paid as late interest; the sum was paid in September of the same year.

Audit of the summary annual accounts drawn up by the Member States

1.6. The sum of 7.3 Mio ECU mentioned by the Court concerns irregularities caused by the incorrect application of Community legislation by four Member States. The Commission has now contacted the Member States concerned in order to remedy the situation and, if necessary, it will ask for interest to be paid as a penalty for the delays.

Conclusion

1.8. The procedure for implementing the budget in respect of revenue is significantly different from the procedure in respect of expenditure since it involves millions of underlying transactions and reflects the application of particularly complex legislation. In the third phase of the SEM 2000 initiative, the Commission examined the possibility of introducing a system of clearance of accounts for revenue operations of the kind used for agricultural expenditure. However, it concluded that it was impossible to pursue that idea any further owing to the particular nature of procedures on the revenue side. Nevertheless, it was felt that the financial interests of the European Union could better be defended if existing Community provisions were strengthened, and in particular those provisions governing the write-off by Member States of irrecoverable debts. This led the Commission in July 1997 to propose a new writing-off procedure whereby all Member States, after a certain time has elapsed, will be called on to account for their actions, in particular where sums have not been recovered, by being obliged to report cases which exceed a given threshold.

Regarding the reliability of the accounts presented by the Member States, it must be emphasised that the Commission's control activities in the area of own resources are equivalent, given the available resources, to verification of the kind which would be at the basis of any certification procedure. Moreover, in some Member States, own resources accounts may also be checked by the national audit offices. While it is true that an overall appraisal of all own resources accounts kept by the Member States cannot be made on the basis of the Commission's controls, because of their limited coverage, these controls are nevertheless effective and often result in significant financial corrections.

Audit of the use of risk analysis techniques in customs control and the clearance of goods

Introduction

1.11. While it is true that Member States have a general duty to carry out controls, it is also clear that they have the opportunity to assess the way in which controls are carried out in general and in specific cases.

1.12 1.13. The Customs 2000 decision defines the institutional environment within which national customs administrations are required to work. The decision's objective is to find the right balance between the respective roles of the Community institutions and the Member States and to maintain this balance while accepting the concept of unity in partnership. The Commission will shortly be presenting a first report on the implementation and impact of the Customs 2000 programme to the European Parliament and the Council.

Although in 1992 the Council (Ecofin) stressed the importance of risk analysis methods in financial controls, the framework for customs matters was set by the Customs 2000 decision in 1996. This decision covers all customs legislation, so that it is no longer necessary, although it is not ruled out, to insert references to such methods into the code. Regarding modern control methods, the Customs 2000 decision leaves no doubt as to the Commission's role: it is one of 'supporting` or 'encouraging` actions which it is the responsibility of the Member States to define and implement (first sentence of Article 9).

1.14 1.16. Within its scope for action as it is laid down, the Commission drew up guidelines for compiling risk profiles in 1997.

Drawing up these guidelines is the way to 'encourage` a process of convergence of working methods, which, as the Court noted in the factual section of its special report, is a matter for the future. The working methods practised in the Member States are still determined to a large extent by other factors, such as the way departments are organised, staff training, the availability of resources or the extent to which procedures are computerised.

Conclusion

1.19. Conditions ought to be most favourable for the achievement of closer coordination once customs procedures are computerised. The speed at which individual Member States are progressing on this front differs somewhat. The development of transnational customs procedures such as the NCTS (new com-puterised transit system), should contribute to the desired coordination, provided a goods identification system based on a classification code is adopted.

1.20. The intensive and unstructured transmission of all kinds of information to the outlying customs offices is admittedly a problem of method which must be looked at and solved. This matter could be addressed in future by the appropriate bodies whose task it is to implement the Customs 2000 decision.

1.21 1.22. The divergence of the control systems in the different Member States and absence of transnational structures is explained by the fact that the customs union is not administered by a single customs authority. This situation is reflected in the approach to the problem taken by the Customs 2000 decision of the European Parliament and of the Council (see 1.12 and 1.13 above).

A pilot project involving six Member States which is currently being implemented under the above decision should eliminate some of the differences in working methods.

1.23. The training programmes and exchanges of officials, such as those covered by the Matthaeus programme, promote a general openness of mind and convergence of behaviour. Furthermore, the implementation of a Community training policy in the customs field and of common core training (see Article 14 of the Customs 2000 decision), and the networking of national customs schools in the Member States provide an instrument which will be used, among other things, to ensure greater uniformity of national working methods. In the long run, this should also contribute to the harmonisation of methods, even if at present they are largely determined by a series of other factors (see paragraphs 1.14 to 1.16 above).

Creating specialised units at Community level would make sense only if they had an operational function. Such a function would doubtless mean the existence of a structure specific to a single system of customs administration, a concept which clearly goes beyond the objective of the management instrument based on partnership as recommended in Customs 2000.

However, it is conceivable that the Member States could set up between themselves a structure responsible for this operational function.

1.24. The Commission's actions take shape within the framework set by the Customs 2000 decision, which does not lay down a basis for general regulatory intervention in the area of how controls are carried out by the customs authorities in the Member States.

OWN RESOURCES DERIVING FROM VAT AND THE GNP

The system of resources based on VAT and the GNP

1.25. The Commission considers that research on the evaluation of the quality of macroeconomic aggregates is not entirely satisfactory, and partly in response to this it has launched a research project on an analysis and evaluation of the quality of national accounts aggregates. Two studies have been commissioned by Eurostat in this area, one conducted by the National Statistical Office of Italy (ISTAT) and one by the UK Office of National Statistics (ONS). The results of the former will be available in 1998; the results of the latter will be available in 1999.

1.26. The Commission fully agrees with the Court's criticism of maintaining, for budgetary purposes, the old ESA (1979 version). GNP calculated by the new ESA (1995 version) would give a better measurement of Member States' contributive capacity. The Commission views the situation with regret and has already expressed its position on this matter.

1.27. As pointed out by the Court, VAT fraud is only one aspect of a phenomenon which affects the whole area of taxation as well as all other kinds of statutory contributions and charges.

However, given the mechanism for paying by instalment which is part of the VAT system, this tax contains an intrinsic control element, which distinguishes it from other taxes. Regarding VAT, the Commission has already taken and will take in the future all appropriate measures in order to enable it to cooperate effectively with the Member States in the fight against VAT fraud.

1.28. The Commission also considers that the correction mechanism currently applied to one Member State only is an anomaly. It also agrees with the other comments made in this paragraph by the Court.

1.29. The Commission has already begun to reflect on the Union's system of financing; it will be taking the Court's observations into consideration.

The VAT system in intra-Community trade

1.31 1.36. The Commission shares the Court's view that it has a responsibility to identify the shortcomings of national systems in the fight against fraud and to suggest adequate remedies to the Member States. The Commission agrees that reinforcement of national control strategies with integrated risk analysis is necessary to make the fight against fraud successful and that it is necessary to improve the tools for administrative cooperation, which at present are underutilised.

The Commission is clear, however, that the chances of the Member States adopting its recommendations depend entirely on their real added value. The complexity of collection and control procedures in force in Member States, with different legal and administrative systems, should not be underestimated. Until recently the Commission did not have sufficient experience to make such a profound evaluation and recommendations as proposed by the Court. The experience built up over previous years now makes it possible for the Commission to assume the responsibilities the Court identifies. The third report under Article 12 of Regulation (EEC, Euratom) No 1553/89 already makes a number of recommendations for control and anti-fraud cooperation strategies.

The Commission agrees with the Court that it is necessary to put in place a system which continuously measures the efficiency of Member States' collection and control of VAT. The Commission will therefore undertake action to analyse and evaluate the control situation of each Member State in order to comply with the recommendations of the Court. The intention is that the Commission should be able to come up with more incisive proposals in the framework of the fourth Article 12 report and of the third report under Article 14 of Regulation (EEC) No 218/92.

Figure 1.1 - Financing of the Community budget

>START OF GRAPHIC>

Budget financing 1996-97 (Mio ECU)

VAT resources

GNP resources

Traditional own resources

Surplus from the preceding financial year

Miscellaneous revenue

NB:

(x %; y %)

x %: proportion of financing for 1997 budget;

y %: variations 1997 relative to 1996.

Traditional own resources 1996-97 (Mio ECU)

Customs duties

Sugar and isoglucose levies

Agricultural duties

Collection costs

NB:

(x %) - x %: proportion of traditional own resources.

Sources:

1997 budget and revenue and expenditure accounts 1996 and 1997.

>END OF GRAPHIC>

>REFERENCE TO A FILM>

>TABLE>

CHAPTER 2 (18*) The common agricultural policy

2.0. CONTENTS Paragraph reference

Introduction 2.1

TITLE I - Budgetary management 2.2 - 2.25

Implementation of the budget 2.2 - 2.23

Appropriations for the financial year 2.2 - 2.10

Advances 2.11

Accounting for expenditure 2.12

Expenditure and negative amounts 2.13 - 2.16

Direct expenditure 2.17 - 2.18

How agricultural expenditure is incurred 2.19 - 2.22

Trends 1993-97 2.23

Computerised management systems 2.24 - 2.25

TITLE II - Durum wheat 2.26 - 2.54

Introduction 2.26 - 2.29

Evolution of the aid scheme 2.30 - 2.49

Aid per tonne 2.30 - 2.33

The 1976 reform 2.34 - 2.40

The MacSharry reform of 1992 2.41 - 2.46

The 1997 adaptation 2.47 - 2.49

Economic evolution of durum wheat since the 1992 reform 2.50 - 2.52

Conclusion 2.53 - 2.54

TITLE III - Summaries of Court special reports concerning the EAGGF and fisheries policy adopted since the publication of the last annual report 2.55 - 2.92

Special Report No 2/98 on the clearance of accounts for the financial year 1993 2.55 - 2.57

Special Report No 21/98 on the accreditation and certification procedure as applied to the 1996 clearance of accounts 2.58 - 2.65

Special Report No 4/98 on the importation at reduced rate of levy into the Community and disposal of New Zealand milk products and Swiss cheese 2.66 - 2.69

Special Report No 19/98 on Community financing of certain measures taken as a result of the BSE crisis 2.70 - 2.81

Special Report No 18/98 on Community measures to encourage the creation of joint enterprises in the fisheries sector 2.82 - 2.86

Special Report No 20/98 on the audit of physical checks of agricultural products receiving export refunds 2.87 - 2.92

INTRODUCTION

2.1. This chapter deals with the Guarantee Section of the European Agricultural Guidance and Guarantee Fund (EAGGF) and with the expenditure charged to Chapter B2-51. It consists of three titles: Title I covers the budgetary management of the financial year 1997, including observations on the examination of the implementation of the budget for the financial year 1997 and on the computer systems used to manage agricultural expenditure; Title II deals with durum wheat and Title III contains a summary of the Court special reports on the EAGGF that have been adopted since the publication of the last annual report.

TITLE I - BUDGETARY MANAGEMENT

IMPLEMENTATION OF THE BUDGET

Appropriations for the financial year

2.2. The initial appropriations for the EAGGF Guarantee Section (sub-section B1) for the financial year 1997 (19) came to 41 233 Mio ECU, of which 500 Mio ECU were for the monetary reserve.

2.3. Supplementary and amending budget No 1/97 (20) did not concern appropriations entered under sub-section B1 (see Table 2.1). However, a number of transfers between items (1 327,4 Mio ECU), articles (1 212,2 Mio ECU), and chapters (2 320 Mio ECU) occurred during the financial year (see Table 2.2). These amendments totalled 4 859,6 Mio ECU, which represents 11,8 % of the initial budget.

2.4. The total appropriations (not including the monetary reserve) under sub-section B1, before and after these amendments (40 733 and 40 709 Mio ECU respectively), remained below the amount (41 805 Mio ECU) budgeted for in the agricultural guideline (21) (see Table 2.1).

2.5. Although the implementation of the budget respected the upper limit established by the agricultural guideline, there were nevertheless major amendments to the initial sums allocated and the extent to which the budget was implemented varied from case to case.

2.6. 40 423,1 Mio ECU were spent under sub-section B1 (see Table 2.1) and expenditure overall was kept below the appropriations finally made available (\ 0,7 %). The monetary reserve was not used. However, for 24 budget items, spread over almost all the budget, the implementation rate was less than 50 % of the initial appropriations and the total under-spending reached 973,5 Mio ECU.

2.7. Conversely, for 13 budget items the level of implementation was over 150 % of the initial appropriations; in total this over-implementation came to 2 061,8 Mio ECU. Thus, for item B1-2320, 'Exceptional market support measures`, expenditure (407 Mio ECU) was equal to 41 times the initial allocation. For item B1-1052, 'Aid for producers of soya beans, colza seed and sunflower seed`, expenditure exceeded the initial allocation of 1 276,1 Mio ECU by 1 136 Mio ECU.

2.8. Finally, 27 budget headings initially awarded a 'p.m.`, or token entry, (to cover the main storage costs) received allocations via transfers (162,1 Mio ECU).

2.9. The expenditure is listed by type and Member State in Tables 2.3 and 2.4. A summary of the EAGGF-Guarantee accounts is presented in Table 2.5.

2.10. On 31 December 1996, i.e. two and a half months after the beginning of the EAGGF 1997 financial year, approximately half the expenditure for the financial year (20 700,0 Mio ECU) had already been committed and disbursed. Of this amount, 13 821,8 Mio ECU, representing 66,8 % of the expenditure for the financial year, concerned eight measures linked to arable crops, set-aside land, olive oil and the suckler cow premium.

Advances

2.11. The Court detected no anomalies in the procedure for determining the advances paid to Member States. However, it is difficult to verify the Commission's decisions on the basis of the accounting documents alone: examination of the authorising officer's files is essential as they are the only source of the necessary data. The financial regulation (22) in fact, exempts commitments for advances from the checks usually made by the Financial Controller. Furthermore, the management of advances, which is not included in the AGREX system (see paragraph 2.24), continues to be cumbersome. Finally, because 13 Member States do not send the necessary data electronically, they have to be recorded in the computer manually.

Accounting for expenditure

2.12. The financial regulation (23) stipulates that the commitments in respect of expenditure declared by the Member States shall be entered into within two months following receipt of the statements submitted by the Member States. This time limit is never respected: as an annual average, the commitments are registered 17 days late, which hinders the use of the Sincom accounting system to monitor agricultural expenditure. These delays are attributable in particular to the time taken up by the various operations to verify and authorise the expenditure required by the legislation, and also to the procedures associated with transferring appropriations.

Expenditure and negative amounts

2.13. The practice of making so-called negative expenditure and the numerous corrections make a very detailed analysis of the accounts necessary in order to be able to interpret them correctly. Thus, the accounts for subsection B1 (40 674,9 Mio ECU) include 4 329,6 Mio ECU of negative entries which are not recorded in accordance with generally accepted accounting principles and which it is very difficult to reconstruct (see Table 2.6).

2.14. Because of the legal framework and the declaration process (and in particular because of the fact that the amounts declared by the Member States are global amounts) it is not possible to arrive at a concrete evaluation of these negative entries, which include:

(a) corrections made to statements, at the initiative of the Member States or the Commission;

(b) recoveries of sums paid out without justification;

(c) revenue items, incorrectly termed 'negative` expenditure, such as the supplementary milk levy (440,7 Mio ECU in 1997);

(d) the consequences of the clearance decisions in respect of the financial years 1993 and 1996 (996,8 Mio ECU in 1997).

2.15. The Commission should ensure that the legal requirements, which allow expenditure to be refused if certain time limits have passed, are not evaded by applicants submitting corrected versions of earlier statements for expenses which have already been refused.

2.16. The budget headings to which 'negative` expenditure is charged - i.e. credited - in the budget are not always covered by specific budget estimates and are only given a token entry. In the light of the amounts available, the Commission withdraws appropriations from these headings in order to make transfers to other headings (641,8 Mio ECU in 1997). This concept of 'negative` expenditure, however, does not figure in the financial regulation, as the Court has already pointed out in its Opinion No 4/97 on the amendment of the financial regulation (24). Furthermore, the procedure used for topping up budget headings, resulting from an appropriation of revenue, is contrary to the budgetary principles laid down in the financial regulation and does not make for the necessary budgetary transparency.

Direct expenditure

2.17. Certain areas of expenditure (the agricultural survey, financial control and preventive actions, etc.) do not follow the usual declaration process as they are generally co-financed by the Member States and coordinated by the Commission. The commitments and payments for the financial year 1997 related to such areas of expenditure amounted to 528,5 Mio ECU and 215,6 Mio ECU respectively (see Table 2.7).

2.18. The Court's audit at the Commission of a representative sample (40 commitments and 40 payments corresponding, respectively, to 75 Mio ECU and 30 Mio ECU) of a few Articles (B1-360, B2-510, B2-512, B2-513, B2-517 et B2-518) showed that the follow-up of this expenditure is not sufficiently rigorous, which confirms the Court's previous observations (25). Of the 80 operations examined, 80 % could not be considered to conform to the regulations (failure to observe time limits for the procedures to obtain Community finance and for the submission of the implementation reports) and thus constitute formal errors for the statement of assurance (see paragraphs 8.49-8.50). Furthermore, as the legal requirements are not very binding, the Commission does not always have sufficient supporting documents to justify this expenditure and show that the actions undertaken achieved their objectives. The Commission should therefore improve its follow-up of this expenditure.

How agricultural expenditure is incurred

2.19. The EAGGF Guarantee section accounts for the financial year 1997 include both 'direct` expenditure by the Commission and, also, expenditure by the Member States between 16 October 1996 and 15 October 1997. The Member States declare the latter expenditure according to a sub-nomenclature for implementation that relates to a particular regulatory framework and/or marketing year.

2.20. However, almost 20 % of the amounts committed during 1997 cannot be related, using the AGREX computer system and the existing sub-nomenclature, to any particular marketing or financial year (this is true in particular of accompanying measures amounting to 2 064,8 Mio ECU, milk products, at 1 878,1 Mio ECU, beef, at 1 809,4 Mio ECU, and fruit and vegetables, at 550,2 Mio ECU). Especially when aid is paid in several instalments, the declaration process does not always provide information with which to check which instalment is which and does not ensure observance of the principle of annuality. It is, however, essential to be able to compare actual expenditure with the estimated cost of each measure in order to keep expenditure under control.

2.21. Finally, over 3 300 Mio ECU concerns expenditure arising from decisions taken during the 1995 marketing year or earlier. For one and the same measure, the entries in the accounts often concern amounts disbursed under three or more successive marketing years. Included among these expenses are export refunds, the potential financial cost of which could be assessed at the time of export.

2.22. Commission Regulation (EC) No 296/96 (26) created machinery for limiting the acceptance of expenditure declared by Member States in respect of previous financial years. Approximately 60 % of expenditure declared in 1997 was thus examined by the Commission (24 056,9 Mio ECU). The expenditure that was declared late amounted to approximately 668 Mio ECU. After applying a provision allowing a delay for 4 % of the expenditure already accepted, a Commission report (27) revealed that the strict application of the rules would have led to the rejection, at the end of August 1997, of 129,1 Mio ECU of expenditure. In the end the Commission refused only 25 Mio ECU, by using its discretionary powers.

Trends 1993-97

2.23. An examination of the EAGGF Guarantee section budget and its implementation over the period 1993-97 (see Table 2.8) shows that:

(a) while the agricultural guideline increased by only 14 %, expenditure increased by 6 290 Mio ECU (18,9 %) compared with 29 % for the budget overall. Most of this increase was accounted for by 'Arable crops`, 'Beef`, and 'Accompanying measures`; conversely, expenditure on 'Milk products` decreased sharply;

(b) the budget has been in constant surplus since 1994, even if this surplus has decreased from 9,3 % to 0,7 %;

(c) the discrepancies per heading, between forecast and implementation, decreased slightly in 1997 compared with 1996 but still remain above those for 1993.

COMPUTERISED MANAGEMENT SYSTEMS

2.24. EAGGF Guarantee Section expenditure is accounted for using two computer systems: the AGREX system, managed by Unit G2 of DG VI, which dates from 1988, and the Sincom system established in 1990 and managed by DG XIX. Comparative checks carried out on the data in these two systems confirmed their consistency and therefore the reliability of the accounts. Nevertheless, the current organisation is not satisfactory. The problems are that

(a) the two systems cannot communicate and the data they contain cannot be transferred between systems (in particular because one system uses national currency and the other ECU);

(b) AGREX has a number of shortcomings:

- it is technically out of date, difficult to check, and has become extremely complex as a result of the constant updates which have proved necessary to adapt it to a regulatory framework which has changed greatly since 1988

- it is used exclusively by one Unit within DG VI and is not sufficiently used as an alarm system

- the absence of any accounting terminology means that authorising officer's decisions cannot be fully clarified

- lastly, it cannot cope with dates starting from the year 2000

(c) the official Sincom accounting system does not offer facilities sufficiently tailored to the EAGGF's specific regulatory framework. The imminent introduction of a new accounting system (Sincom 2) will not change this situation at all.

2.25. The Commission should therefore acquire an integrated computer system which will allow the authorising officer, the Financial Controller and the accountant all to use it, will be compatible and will communicate easily with Sincom 2 and give all users access to its data.

TITLE II - DURUM WHEAT

INTRODUCTION

2.26. Durum wheat is a special type of wheat with hard, vitreous, translucent grains, principally used for human consumption as pasta, groats and semolina. In 1996, durum wheat accounted for 8,7 Mio tonnes (4,2 % of the Community's total cereal production, rice excluded (28)). The main producer countries are Italy which accounts for more than half of total production, Greece, Spain and France. The Community is the largest producer, its production being 25 % of the world market.

2.27. From the outset (1967) (29), when Italy produced about 90 % of Community durum wheat, it was included in the common market organisation (CMO) for cereals. Table 2.9 shows that aid for durum wheat has considerably increased since then. Concerned about this development, the Court reported on durum wheat in 1989 (30), when the special aid was 365 Mio ECU and some 400 Mio ECU was spent on export refunds and intervention.

2.28. In 1993, total support for durum wheat stood at 830 Mio ECU (excluding some 14 Mio ECU of revenue from sales of previously depreciated stocks) and in 1997 at 1 743,4 Mio ECU distributed between Germany, Greece, Spain, France, Italy, Austria, Portugal and the UK (see Table 2.10). Durum wheat is one of the most subsidised products in the Community with subsidies amounting to 182 ECU/tonne in 1996 that is 113 % of its production value.

2.29. The Court has reviewed the market management at Community level for the purpose of:

(a) analysing the reasons for the major increase in expenditure, while production did not show such huge increases;

(b) examining to what extent the level of aid is consistent with the objectives for supporting the production of durum wheat.

EVOLUTION OF THE AID SCHEME

Aid per tonne

2.30. From the very beginning, durum wheat was treated differently from other cereals in that a double support system was set up. As for other cereals, the Council fixed annually target (31) and intervention prices (32) for durum wheat. The ratio between the intervention price for durum wheat and that for common wheat should reflect their price ratio on the world market. This ratio was fixed at 120 % and led to an intervention price for durum wheat of 110,24 units of account (UA) per tonne.

2.31. In 1967, the intervention price for durum wheat was considered to be too low to guarantee sufficient income to farmers, owing to the small size of most of the farms and the low yield in the main production regions. Therefore, in addition to price support, a special aid to producers was introduced for each tonne of durum wheat harvested. This aid covered the difference between the intervention price and a higher 'minimum guaranteed price` determined in the marketing centre of the region with the largest surplus of durum wheat (at that time Palermo in Italy).

2.32. In 1974 the Commission wanted to create a unique system in order to simplify administration and control. High prices on the world market allowed the intervention price to be increased and thus the special aid could have been abolished. The Council accepted the increase of the intervention price, but kept the aid as well, though at a lower level. In total, producers' receipts were increased by 27 % with the intervention price increasing by 48,73 UA/tonne, while the aid was only reduced by 7,23 UA/tonne (see Table 2.11). The durum wheat intervention price rose to 163 % of that for common wheat thus losing touch with the world market. When the market prices went down again, intervention prices were left at their high level.

2.33. Since the regulation did not limit the granting of aid to traditional production zones, the attractiveness of the support scheme led to an extension of durum wheat production into northern areas where, moreover, higher yields and good quality were achieved.

The 1976 reform

2.34. In 1976/77 (33) an attempt was made to correct this development by transforming the aid per tonne into an area aid per hectare and by limiting its application to a set number of 'traditional` zones or regions. However, criteria by which a 'zone` could be considered traditional were not prescribed.

2.35. In addition, by including disadvantaged agricultural zones (34) among the 'traditional production regions` listed in an annex to the new regulation, a social and structural objective was introduced to the scheme. This objective, however, was never made explicit in a regulation, nor was it ever specified how it should be taken into account when determining the aid rate.

2.36. The consequence of the modifications was that both intervention price and aid rate became subject to a compromise at Council level each year rather than resulting from a precise calculation based on criteria reflecting the objectives set. Intervention prices for durum wheat increased faster than those for common wheat and aid rates increased as well. Table 2.12 shows that by 1985/86 the ratio of the intervention price for durum wheat to that of common wheat had risen from 162 % in 1975/76 to 174 %. The intervention price for durum wheat was then 312,08 ECU/tonne and the aid 101,31 ECU/hectare.

2.37. Furthermore, the number of regions eligible for aid continued to increase. Although not specified in the regulation, the criterion applied in practice for determining traditional production regions was originally that the production of durum wheat had to be more than 50 % of total cereal production in this region. With the entry of Greece, Spain and Portugal into the Community this unwritten criterion diminished progressively. When Greece joined the Community this threshold was sharply reduced to 8 %, and with the accession of Spain and Portugal to 1,5 %.

2.38. Thus the 1976 reform failed to limit the support of durum wheat to traditional zones. The intervention price was set so high that the production of durum wheat became attractive even without aid. The higher yields obtained in 'northern` Member States more than compensated farmers for the lack of aid. For example, in 1985, the average yield reached in Germany was 5,8 tonnes/ha compared to 1,94 tonnes/ha in Greece (see Table 2.13).In 1981/82, the Community became self-sufficient in durum wheat and production rose to 221,6 % of internal demand in 1991/92 (see Table 2.14).

2.39. By the end of the 1980s, the Community was faced with increasing expenditure for cereals in general, caused by structural surpluses. The intervention price of common wheat was therefore frozen and the intervention price for durum wheat was progressively decreased with the objective of bringing the durum/common wheat relationship down. However, in 1992/93 the intervention price was still 135 % of that for common wheat.

2.40. The decrease in the intervention price from 312 ECU in 1985/86 to 221 ECU in 1992/93 was accompanied by an increase in area aid from 101,31 ECU to 181,88 ECU during the same period (see Table 2.12). The increase in aid offset on average, half of the decrease of the intervention price (35). Because of high levels of export refunds and increasing intervention stocks, total budgetary expenditure rose steadily from 1986 reaching 1 337,8 Mio ECU in 1992.

The MacSharry reform of 1992

2.41. With the entry into force of Regulation (EEC) No 1765/92 of 30 June 1992 (36) establishing a new support system for the producers of certain arable crops, all institutional cereals prices were put at the same level. Producers of durum wheat outside traditional production zones receive the basic compensatory payment for cereals and those within traditional zones receive a supplementary area-based special aid. The aims of the new support system are:

(a) to discourage the production of durum wheat outside the traditional zones, and

(b) to compensate durum wheat producers for the loss in income due to the alignment of the institutional price of durum wheat on the prices of other cereals.

2.42. In line with the compensation objective, the amount of the special aid was determined on the basis of the 1991/92 support, when the scheme had long since lost touch with the initial economic objective (see paragraph 2.30). The relation between the intervention prices for durum and common wheat no longer reflected that on the world market (see Table 2.15). The new special aid which no longer took this relationship into account was set at 297 ECU/hectare for the marketing year 1993/94. In 1995 after the decrease of the 'green` rate by 20,6 %, the aid increased correspondingly to 358,6 ECU/hectare, remaining constant in national currency and thus having no budgetary impact.

2.43. The full amount of the special aid was granted from the first year of the reform. There was no transitional period with a three-step progressive application of the aid rate, as was applied to the basic compensatory payment.

2.44. The scheme increased the area of the traditional regions eligible for the special aid in respect of Greece (Thrace), and Spain (the Autonomous Region of Navarre and the Provinces of Salamanca, Toledo and Zamora).

2.45. The special aid payment was based on 'individual rights` recorded in official registers. The individual rights are expressed in hectares and represent the maximum area eligible for each beneficiary. They are fixed as being the highest number of hectares which were sown with durum wheat and eligible for the aid during one of the four reference marketing years (1988/89 to 1991/92) which the producer could choose.

2.46. After the introduction of the reform the following modifications were made, leading each time to an increase in area and expenditure:

(a) the 1992/93 marketing year was added as a fifth reference year for Spain but with a national upper limit of 570 000 ha; it is worthwhile to note that before Spain's accession to the EC only some 150 000 ha were cultivated with durum wheat;

(b) the marketing years from 1988/89 to 1990/91 were added as reference years for Portugal but with a national upper limit of 35 000 ha;

(c) the Umbrian region (Italy) was accepted as a traditional production zone with an upper limit of 5000 ha;

(d) the French departments of the Ardèche, the Drôme and the Midi-Pyrénées region were also recognised as traditional production regions with an upper limit of 63 355 ha.

(e) zones were established 'where durum wheat production is well established`, with a specific, reduced rate of aid: France and Austria thus obtained respectively 50 000 and 5 000 ha; the aid amounts to 138,9 ECU/ha.

The 1997 adaptation

2.47. In 1996, the Commission made a proposal to convert the 'individual rights` into maximum guaranteed areas (MGA) (37). It was only after more than a year's discussion, in October 1997, that an agreement was reached at the Council (38). The MGAs will apply from the marketing year 1999/2000.

2.48. The MGAs proposed by the Commission were increased by 4 % and the special aid for traditional zones was reduced by 4 % (for more details see Table 2.16). A further traditional zone for Austria was accepted and further non-traditional zones were created for Germany, the United Kingdom, Italy and Spain. The reduction of the aid rate represents a pure compensation of the increase in the MGAs rather than being based on a precise determination of the need for aid and, again, no precise criteria were given for justifying the selection of a region within the MGAs as 'traditional` or as a region where durum wheat production is well established.

2.49. The modifications of 1997 were retained in the Commission's proposals made in Agenda 2000 (39).

ECONOMIC EVOLUTION OF DURUM WHEAT SINCE THE 1992 REFORM

2.50. In the period since Spain and Portugal joined the Community, durum wheat production grew from 7,2 Mio tonnes in 1986 to its historical peak of 11,2 Mio tonnes in 1991 (see Tables 2.9 and 2.17). In 1992, it fell to 9 Mio tonnes. Since the MacSharry reform, it has fluctuated between 7 and 8,5 Mio tonnes. Leaving aside the record harvests of 1991 and 1992, on average, there has been an increase of about 1 Mio tonnes in annual production since the reform.

2.51. For the years 1991/92, the record production was accompanied by the largest area sown. The announcement of the reform might have contributed to this extension.

2.52. Table 2.14 shows that internal consumption of durum wheat has increased since the MacSharry reform. This together with tight world markets for cereals in the 1992-95 period permitted not only the absorption of increasing production but also the liquidation of existing stocks. In 1995/1996 there was a shortfall of EC supply. The rise in consumption of durum wheat has been accompanied by the virtual disappearance of the 35 % market price differential over common wheat in the years before the MacSharry reform (see Table 2.18).

CONCLUSION

2.53. Although the special subsidy for durum wheat was originally based on actual production and on a defined price differential between durum and common wheat, this arrangement was soon replaced by a different system in which the intervention price for durum wheat and the rate of area aid in respect of its cultivation were settled by negotiation rather than by reference to objective factors. During the later 1980s about half the impact on growers' minimum returns from reductions in the intervention price for durum wheat was offset by increases in the area aid. At the time of the MacSharry reform in 1992 the halving of the intervention price was fully compensated by increases in the rate of area aid. Since the mid 1980s an increasing part of producers' total returns has come through area aid payments falling on the EU budget rather than from market sales, resulting in continuously increasing EU expenditure. Although the sale of surplus stocks during the period of world shortage of cereals interrupted this trend in 1993-94, it has subsequently resumed. Area aid accounts for well over half of aggregate returns to durum wheat producers.

2.54. There is no clear justification for the special treatment of durum wheat producers. In the case of other arable crops, area aid payments are adjusted to reflect the average relative yields of different crops (e.g. maize and oilseeds). If assistance to durum wheat producers were to be set with the same philosophy as for maize and oilseeds, the current rate per hectare would fall by about 30 % to 250 ECU from 1995/96 onwards (see Table 2.19). Had this approach been followed from 1993 onwards, expenditure from the EU budget would have been reduced by more than 3 000 Mio ECU for the four-year period 1994-97.

TITLE III - SUMMARIES OF COURT SPECIAL REPORTS CONCERNING THE EAGGF AND FISHERIES POLICY ADOPTED SINCE THE PUBLICATION OF THE LAST ANNUAL REPORT

SPECIAL REPORT No 2/98 ON THE CLEARANCE OF ACCOUNTS FOR THE FINANCIAL YEAR 1993 (40)2.55. Council Regulation (EEC) No 729/70 (41) stipulates that the Commission must clear expenditure declared by the Member States before the end of the year following the financial year in question. In 1997, the Commission took two decisions (42) on the clearance of the accounts relating to the expenditure for the financial year 1993 (which require corrections of 647,8 Mio ECU to this expenditure). These decisions were therefore taken in 1997, three years late.

2.56. In its Special Report No 2/98 (43) on the clearance of the accounts for the financial year 1993, the Court criticised in particular certain inconsistencies in the approach or the corrections decided upon (insufficient cover of the measures or the Member States; absence of clear criteria for the choice of the levels of the flat-rate correction; different treatment of comparable situations; reduction of the corrections for future improvements to the systems; postponement of the recovery of ineligible expenditure).

2.57. The accounts for the financial year 1995 are still awaiting clearance. As from financial year 1996, following the modifications made by Council Regulation (EC) No 1287/97 of 22 May 1995 (44) and Commission Regulation (EC) No 1663/95 of 7 July 1995 (45), a different procedure applies. In 1997, the Commission took two decisions (46) concerning the clearance of the accounts relating to the expenditure for the financial year 1996.

SPECIAL REPORT No 21/98 ON THE ACCREDITATION AND CERTIFICATION PROCEDURE AS APPLIED TO THE 1996 CLEARANCE OF ACCOUNTS (47)2.58. New procedures were applicable for the first time to the accreditation of paying agencies and the clearance of accounts concerning EAGGF-Guarantee expenditure for the budget year 1996. The Court reviewed and evaluated the work carried out by the Commission's services and checked whether the new rules had been applied properly. The new procedures should not be evaluated only on its results for the first year, taking into account the efforts made in the meantime by the Commission and Member States to improve the situation.

98Y1117(01).1

2.59. Although Member States were required to accredit their paying agencies by 16 October 1995, at the beginning of the 1996 financial year only 50 out of 66 paying agencies had been accredited. 90 paying agencies were finally accredited in 1997, some of them being responsible for very little expenditure. Greater efforts should be made by some Member States to limit the number of paying agencies.

2.60. The Court's audit in 1997 revealed weaknesses at many of the paying agencies visited. Weaknesses in internal control, lack of security for EDP systems and shortcomings in the monitoring of delegated services by the paying agencies, as well as in the accounting, were identified, shortcomings that should have led the Member States concerned to take appropriate action.

2.61. Certified accounts were supposed to be forwarded by 10 February 1997, but in many cases the Commission found that the certified accounts were submitted late or were unsatisfactory. Two Member States (United Kingdom and Greece) did not present any certified account on time. In the case of Spain the certifying body did not manage to express an opinion concerning most expenditure incurred at regional level on time, and it was later audited by private external auditors.

2.62. To assist certifying bodies with their work the Commission made guidelines concerning certification of the accounts available to the certifying bodies, but that was done too late (in September 1996, when most of their audit work should have commenced). If they had been communicated in time, a number of misunderstandings and delays could have been avoided.

2.63. Because of the weaknesses and delays in some Member States, the clearance decision of 5 May 1997, which should have been taken by 30 April 1997, according to the regulation, covered only 33 % of the expenditure. The rest was cleared under the decision of 30 July 1997, after supplementary auditing work had been carried out by the various certifying bodies.

2.64. In the end all of the certified accounts were cleared by the Commission, in spite of the varying quality of the accounts presented. However, in this decision, the Commission did not take into account most of the qualifications in the certificates totalling a minimum of 43,3 Mio ECU. Furthermore financial corrections of 77,3 Mio ECU previously made by the Commission's finance division in the context of its daily management of EAGGF- Guarantee expenditure were reduced to 55,1 Mio ECU in the clearance decision.

2.65. The decisions of clearance of accounts taken by the Commission on 1996 expenditures do not prevent the Commission from disallowing amounts at a later date on the basis of subsequent compliance audits. Appropriate internal-control procedures at the Commission must ensure that corrections are adequately documented and that weaknesses identified will be systematically followed up during the subsequent compliance audit.

SPECIAL REPORT No 4/98 ON THE IMPORTATION AT REDUCED RATE OF LEVY INTO THE COMMUNITY AND DISPOSAL OF NEW ZEALAND MILK PRODUCTS AND SWISS CHEESE (48)2.66. Following the United Kingdom's accession to the EEC, quotas were introduced for the importation of New Zealand butter and cheese at reduced rates of levy, subject to special criteria being met, notably as regards their fat content. Reduced import levies also exist for Swiss cheese, for which the European Union has traditionally provided the largest market. The audit revealed major weaknesses in the control arrangements intended to ensure compliance with the conditions for eligibility. The Commission and the British customs authorities relied unreservedly on the import certificates (IMA1) issued by the New Zealand bodies concerned, which failed to honour some of their obligations. Under these circumstances, there can be no assurance that the terms and conditions stipulated in respect of importation at reduced rates of levy have ever been respected. The observed failure to abide by the quotas and quota criteria, in particular the fat content, has resulted in failure to collect own resources amounting to approximately 410 Mio ECU, some 118 Mio ECU of which is recoverable, the remainder being out of time.

2.67. The observed failure to abide by the quota quantity limits, quota eligibility criteria and licensing requirements has resulted in underpayments of own resources estimated by UK customs in July 1998 to exceed 400 Mio ECU. On that date, UK customs, also taking into account matters not covered by the Court's report, had issued recovery orders for some 226 Mio ECU.

2.68. With regard to imports of Swiss cheese, enquiries made at the Court's suggestion by the French and Italian authorities and independent bodies in Germany have revealed serious irregularities. The Council has since amended the rules concerning imports of Swiss cheese and the Swiss authorities' authorisation to issue IMA1 certificates for imports at reduced rates of levy has been cancelled.

2.69. The Court calls upon the Commission to take appropriate action to recover the amounts involved and to cancel the New Zealand organisation's authorisation to issue IMA1 certificates. In addition, the applicable rules should be clarified, the regulatory framework should be strengthened and the number of controls on imports at reduced rates of levy should be increased. Lastly, the validity of the system involving IMA1 certificates for imports at reduced rates of levy should also be reviewed.

SPECIAL REPORT No 19/98 ON COMMUNITY FINANCING OF CERTAIN MEASURES TAKEN AS A RESULT OF THE BSE CRISIS (49)Introduction

2.70. Regulations were adopted by the Council to finance, out of the EAGGF, specific measures to deal with the 1996 BSE crisis. They provided for the swift transfer of 1996 and 1997 EU budget funds to the Member States, allowing them a wide range of choices for the implementation of those measures. About 25 % (550 Mio ECU) of the total amount (2 149 Mio ECU) was made available to the United Kingdom for the over 30 months scheme (OTMS) and selective cull scheme (SCS), the rest being distributed to all Member States, roughly in accordance with the size of their national bovine herds. The Council's declared aim was to act quickly to protect human and animal health and to support beef producers. At the time, the latter were already facing an imbalanced market which was near the peak of its production cycle.

2.71. In this report, the Court examines the measures taken to eliminate certain cattle/beef deemed to pose a risk to public health and those taken to support producers and limit production with a focus on Community expenditure.

Elimination measures

2.72. These measures are, for the most part, veterinary in nature (normally co-financed at 50 %) but have nevertheless been co-financed by the Community at 70 % and charged to market support under the European Agricultural Guarantee Fund.

2.73. Concerning the implementation of the elimination schemes considerable weaknesses were found:

(a) the OTMS, created serious logistical problems for the United Kingdom; cross checks for duplicate claims were not performed; as a result of the failure to ensure a complete audit trail there was no guarantee that all animals claimed for were disposed of in the manner prescribed by the regulations;

(b) the decision of the Belgian authorities to take the option not to slaughter and destroy calves imported from the United Kingdom reduced the impact of the measure to restore consumer confidence in beef. Although all such calves were slaughtered in France and the Netherlands there is no evidence that all carcasses were properly disposed of;

(c) the deadline set by the Commission for the repurchase of former intervention beef in the United Kingdom was not compatible with the objective of buying back meat that might have come from animals aged over 30 months at the time of slaughter;

(d) some scientific research suggests that to the United Kingdom's selective cull scheme will have only a marginal effect on the eradication of BSE; it has not been possible to trace 65 000 of the animals concerned, all of which were born before July 1993.

Market measures

2.74. The proposals put forward by the Commission prior to the adoption of Council Regulation No 1357/96 provide exclusively for top-up payments to producers within the framework of the eligibility for the beef special premium and suckler cow premium. The decision taken by the Council to also grant lump sums to Member States enabled them to extend the aid to other categories of producer. Council Regulation No 2443/96 went even further in this direction in that it allocated 500 Mio ECU to Member States on the basis of the size of their national beef herd and allowed them to compensate producers in respect of animals not normally entitled to premiums and for which no reliable databases exist. Groups of producers who derive their principal income from sources other than beef production, notably from milk and veal production, also received Community support.

2.75. The degree of flexibility allowed to Member States resulted in substantial variations in the level of compensation paid for the same category of animals. To the extent that recoveries fall short it may not be possible to pay in full all producers whose entitlement to premiums in respect of the calendar year 1996 relates to more animals than in 1995.

2.76. Concerning the measures taken to control production, the calf processing scheme can be justified on economic grounds, whereas some 40 % of the expenditure incurred under the early marketing premium scheme constitutes a gratuitous payment to producers. Whilst it is too soon for the effects of the calf processing scheme to be felt, the impact of the early marketing premium on red meat production is limited and has been achieved at a high cost.

Conclusion

2.77. The degree to which the Community budget should bear the financial costs of such emergencies merits further consideration, given the quasi-veterinary nature of many of the measures taken in such circumstances.

2.78. The failure adequately to monitor the feed ban in the UK meant that a large number of animals which developed BSE (36 000) were born after the ban had been introduced. Different approaches were adopted with regard to the culling of BSE infected herds and the slaughter of British calves which were exported before the export ban.

2.79. The controls performed by the clearance of accounts unit focused primarily on the United Kingdom and payments made under Council Regulation (EC) No 1357/96. In addition, numerous visits by the Commission's veterinary officers were made to the Member States. Nevertheless, there was a lack of rigour and consistency in the implementation of measures within and between Member States, in areas such as the slaughter of British calves exported before the ban, the repurchase of ex-intervention beef, cull schemes, compensation to farmers under Regulation (EC) No 2443/96, and the calf schemes.

2.80. The inconsistencies in approach undermined the measures taken to compensate farmers equitably. This was due primarily to the fact that the two main measures (Council Regulations (EC) No 1357/96 and No 2443/96) enabled Member States to make payments not linked to the traditional beef special and suckler cow premium schemes and therefore outside the scope of IACS controls.

2.81. The occurrence of BSE and its aftermath have underlined the urgent need for the EU to design and to adopt a strategy (i.e. an action plan) to deal, in a coordinated, effective and timely manner with this kind of crisis.

SPECIAL REPORT No 18/98 ON COMMUNITY MEASURES TO ENCOURAGE THE CREATION OF JOINT ENTERPRISES IN THE FISHERIES SECTOR (50)2.82. The joint enterprise scheme was introduced in 1990 by the Council to contribute towards the reduction of the Community fishing fleet, total capacity of which amounted to 2,3 million tonnes at the time, by helping to seek viable alternatives for the affected fishing vessels. To date, 188 projects have been approved resulting in the removal from the Community fishing register of 290 vessels representing a capacity of 113 710 tonnes, at a cost of 298 Mio ECU.

2.83. Implementation of the scheme has been characterised by the following failures:

(a) aid has been miscalculated because vessels have been measured according to different methods;

(b) deadlines for carrying out repairs and adaptations were not established in the decisions approving the aid;

(c) aid was approved for vessels which were not active and were therefore ineligible;

(d) Community aid previously paid for the construction or modernisation of the vessels included in the joint enterprises was not always recovered as required, due either to the refusal of the Member State to apply the provisions of the regulations or to weaknesses in the monitoring procedures;

(e) in certain cases, the viability of the joint enterprise projects was not supported by adequate agreements between the partners;

(f) aid was paid in respect of vessels sunk without investigation, either by the Member States or the Commission, of the circumstances surrounding the accidents; despite the non-compliance by the beneficiaries with their obligations, no procedure has been launched with a view to recovering or canceling the aid;

(g) Community aid for joint enterprise projects is equivalent to twice the aid for the export of the vessel concerned. Therefore, the fulfilment by the beneficiaries of their obligations to keep the vessels in activity and to supply fish to the EU market for a minimum time period should have been secured by appropriate guarantees.

2.84. To sum up, the audit revealed that more rigorous management of the scheme by the Commission and the Member States is necessary to ensure sound financial management.

2.85. The Commission should review its monitoring and control procedures and proceed to the recovery of misused EU grants.

2.86. Concerning the effectiveness of the measure it was noted that:

(a) of the overall reduction of the fleet capacity since the measure was adopted, one third (113 710 tonnes) can be attributed to the measure. However, it has had practically no effect on the overall fishing activity in Community waters as evidenced by the stability in annual fish landings;

(b) about 90 % of the vessels relating to the projects examined were already fishing in third-country waters; nevertheless, the consequences of redeployment for the international fisheries agreements (IFAs) negotiated by the EU were not evaluated.

SPECIAL REPORT No 20/98 ON THE AUDIT OF PHYSICAL CHECKS OF AGRICULTURAL PRODUCTS RECEIVING EXPORT REFUNDS (51) (52)Context of the audit

2.87. In the 1996 EAGGF year, export refunds paid to exporters of agricultural products to compensate them for the difference between the internal EU price and the lower world market price amounted to some 5 600 Mio ECU (13 % of EU expenditure on agriculture). Their rates of export refund vary according to the nature of the products concerned and are applied to the quantities exported. Though financed by the EU budget, Member States are responsible both for making the payments and for carrying out the checks to confirm the legality and regularity of export refunds.

2.88. Member States' customs authorities are faced with the difficult problem of protecting the EU budget by means of physical checks without creating undue obstacles to the flow of trade. In the 1996 EAGGF year and across the whole of the EU, Member States' customs authorities carried out 100 000 physical checks in implementation of the 5 % minimum rate of physical verification fixed by the legislation. A substantial proportion of these laboratory tests were also compulsory. The administrative costs of these checks both to customs authorities and to traders are significant. It is therefore imperative that checks are well targeted and effectively executed. In 1994, Regulation No 386/90 was amended principally to introduce the possibility of risk analysis for the selection of consignments for physical checks. The Court's audit in Member States concentrated on the use of risk analysis and the evaluation of the effectiveness of procedures for the selection of consignments for physical checks.

Main observations

2.89. In the general context, physical checks are an essential tool for customs services, but, depending upon the measure, they may not always be the most effective and appropriate method of control. Because risk analysis is not obligatory and is insufficently defined by regulation there are considerable differences between Member States in the procedures for selection of consignments for physical control. Optimum use of risk analysis is hampered by the mandatory requirement set out in the legislation to carry out fixed rates of physical control at every customs office and by inadequate information databases in Member States. There has been no evaluation of the effectiveness of the procedures for selection of consignments for control either by Member States or the Commission. There is a lack of coordination of the a posteriori controls carried out by the Member States under Regulation (EEC) No 4045/89.

Main recommendations

2.90. The Commission should consider creating a legal framework which provides for a balanced combination of physical controls (at the point of export) and a posteriori controls.

2.91. Member States should be encouraged to place more emphasis on the quality and effectiveness of physical checks rather than just ensuring that the rates of checking fixed by regulation are met. To improve the effectiveness of the procedures for the selection of consignments for physical check, the Commission is encouraged to consider a number of recommendations. Above all the Court suggests that the use of risk analysis by Member States should be made obligatory. The legislative requirements relating to physical checks should be made more flexible whilst at the same time making Member States more accountable for the effectiveness of those checks.

2.92. In more general terms, risk analysis is an effective resource management tool. To limit it to export refunds is too restrictive. To manage effectively their resources Member States need a broader legislative framework for risk analysis which would permit them not just to target transactions within measures but to allocate resources to measures on the basis of the comparative risks to the EU budget.

REPLIES OF THE COMMISSION

TITLE I - BUDGETARY MANAGEMENT

IMPLEMENTATION OF THE BUDGET

Appropriations for the financial year

2.5 2.8. The Court draws attention to the gaps between forecast and actual expenditure on agriculture. The Commission would stress the difficulties of forecasting agricultural expenditure; a problem to which the Court itself drew attention in its annual report for 1996 (OJ C 348, 18.11.1997, point 2.15, p. 58).

The Commission has, however, noted that the forecasts relating to direct aid, which accounts for a large part of agricultural expenditure, have improved substantially. By contrast, the situation with regard to market intervention measures is less clear-cut, since the factors on which the forecast is based (production, world prices, etc.) are very variable. In order to improve forecasts, Parliament and the Council have agreed that the Commission can present a letter of amendment up to 31 October to incorporate the latest movements on agricultural markets. Furthermore, the Commission has incorporated into its forecasts in the PDB for 1999 the results of a study by an outside expert whose statistical analysis of past data revealed systematic bias in some lines of the agriculture budget.

The differences between forecasts and out-turn in 1997 were subjected to a detailed analysis, the results of which were published by the Commission in the Revenue and expenditure account and financial balance sheet for the 1997 budget (Volume I, Section 2 'Analysis of financial management`, SEC(98) 519, pp. 29-135).

With regard to the sectors specifically referred to in point 2.7, the Commission would point out that:

- Overconsumption at item B1-2320 reflects the market measures taken to combat the outbreak of swine fever and, in particular, the compensation, of which the EAGGF Guarantee Section pays 70 %, paid to producers for loss of income caused by the slaughter of healthy animals in protection and surveillance zones. The extent of this outbreak was not foreseen when the budget was drawn up.

- In the case of item 1052 'Aid for producers of soya beans, colza seed and sunflower seed`, appropri-ations were exceeded because of the payment of advances for 1997, for which the budgetary authority had entered no appropriations in accordance with the Commission's proposal to carry over these advances to 1998. However, the Council followed Parliament's opinion and took no decision on this proposal. Accordingly, the advances (1 313 Mio ECU) were paid from the 1997 budget.

Advances

2.11. The notification referred to in Article 3(3) and (4) of Regulation (EC) No 296/96 includes the supporting documents required to determine the advances. That notification, to be sent by the 10th of each month, concerns expenditure by chapter paid during the previous month. This amounts to some 25 to 30 items of information per Member State.

However, in accordance with the decision on budgetary discipline of 31 October 1994, the Commission looks at the circumstances in which payments have been made, and in particular their compliance with the rules and time limits for payment. Commitment of doubtful expenditure or expenditure outside the time limits is suspended until it is justified by the Member State. When that justification has been considered, a decision is taken either finally to accept the expenditure or to refuse it totally or in part and so to reduce future payments to the Member State accordingly.

Adjustments and improvements to the system to enable basic data to be entered by computer and automatically transmitted to Sincom are being developed and should come into operation in 1999.

Accounting for expenditure

2.12. As stated in the previous point, the introduction of budgetary discipline has considerably increased the checks on expenditure under the EAGGF Guarantee Section, requiring detailed examination of several hundred budget lines every month. These more extensive checks are one of the factors which explain the delays to which the Court refers; they are exacerbated by the procedures associated with the transfer of appropri-ations. Although the Commission does not deny the importance of compliance with the deadlines for the charging of expenditure, the Commission regards prior checks on EAGGF expenditure as an essential condition for the sound financial management of Community funds while respecting the prerogatives of the budgetary authority.

The monitoring of agricultural expenditure under the early warning system is not based on accounting data. For month n it is based on the notifications of expenditure by chapter in that month sent on the 10th of month n + 1 and the detailed declarations for month n - 1 sent on the 20th of month n. Entry in the accounts for month n takes place during month n + 3, which is too late for proper monitoring.

Negative expenditure and amounts

2.13 2.14. The declarations of expenditure use a very detailed nomenclature. This has permitted the reconstitution for 1997 of negative accounting entries totalling 1 720,77 Mio ECU (out of the 4 329,6 Mio ECU referred to by the Court). These relate to the categories of expenditure referred to in subparagraphs (b) (recoveries of sums paid out without justification), (c) (negative expenditure) and (d) (clearance of accounts). The difference of 2 608,83 Mio ECU reflects the corrections made to the declarations of expenditure as a result of errors in charging by the Member States. Making the correction gives rise to two accounting entries, one negative, reducing expenditure under the budget line wrongly used, and one positive, increasing by the same amount expenditure under the line which should have been used. These entries are the only way of correcting the errors in charging.

With regard to the remarks on revenue items in point (c), in the Court's view incorrectly termed negative expenditure, the Commission would point out that this term is in accordance with the Union's agricultural and budgetary rules. In any case, in a working document on the recasting of the financial regulation the Commission has suggested how negative amounts should be entered in the budget (Commission working paper of 22 July 1998, SEC(98) 1228 final, pp. 19-21). In the months to come, this working document will provide an opportunity to look at this question as a whole.

In this connection, it should be remembered that most of what is called negative expenditure concerns the recovery of amounts already paid from EAGGF Guarantee Section appropriations.

In the case of recoveries following the discovery of irregularities or fraud and those resulting from the clearance of accounts, a payment had obviously been made in earlier months or years, otherwise there would have been nothing to recover.

In the case of profits on sales from public storage, the recovery either concerns expenditure on the depreciation of stock during an earlier year or is the consequence of an accounting entry to determine the value to be entered in the accounts for the line for expenditure on the needy in the Community. In any case, since the entries are made during the same month, this operation results in no movement of funds.

In the case of the milk levy, the overproduction which is the reason for these revenues entails extra expenditure in the sector.

2.15. The complexity of agricultural support measures is demonstrated by the number of sub-items (about 1 700) that the Member States have used each month for their declarations of expenditure to the EAGGF. This inevitably means that there may be errors in charging expenditure, which is first declared under certain lines and then corrected to others.

The Commission monitors these corrections carefully, particularly when they concern the overrunning of deadlines, since they may conceal an attempt to escape corrections through charging to another sub-item with a later deadline. Article 4 of Regulation (EC) No 296/96 requires these corrections to be subjected to thorough checks under the clearance of accounts procedure and, perhaps, under the conformity procedure to ensure that they are well-founded.

2.16. A forecast is made in the budget in respect of some lines which may give rise to negative expenditure. These include:

- clearance expenditure;

- storage costs;

- the co-responsability levy in the milk sector. It is true that, until 1998, it was difficult to make any forecast other than full compliance with milk quotas, resulting in a token entry, since the forecast was made before the beginning of the milk year. Since 1998, now that the Commission is authorised to produce a letter of amendment up to 30 October, it is possible to have a better idea of likely milk production since half the milk year has already elapsed.

Since other lines concern recoveries following the discovery of irregularities or fraud (all of items B190), no forecast can be made in the budget so they have a token entry. This is because it is difficult to know in which sector fraud may be detected and how much it will amount to.

The Commission therefore considers that a token entry does not necessarily mean that no forecast has been made. With regard, for example, to expenditure on storage, the assumptions made about stocks (opening stocks, purchases, sales, etc.) result in some cases in insignificant expenditure giving rise to a token entry.

Direct expenditure

2.17 2.18. The replies to the comments made may be found in the statement of assurance 1997.

Operative event for agricultural expenditure

2.19 2.21. The detailed nomenclature is an evolving instrument subject to constant revision to take account of management problems and the monitoring of agricultural measures while also having to pay attention to the aim of simplification and the administrative burden which its management imposes on the Member States.

The budget forecasts which provide a basis for the entry of the appropriations for a particular year take account of the staging of payments for various types of aid and the detailed nomenclature is determined in a way which allows this staging to be monitored. If some expenditure cannot be allocated to a specific marketing or financial year, this is because the rules or the management of the measure in question do not require this level of detail (e.g. the supporting measures referred to by the Court).

In the case of refunds, the assessment of the financial burden as advocated by the Court, to be determined at the point of export, could lead to incorrect results. In several sectors, advances may be paid without it being known at the point of export whether the operator intends to benefit from them or not.

2.22. Account should be taken of the fact that, of the 668 Mio ECU referred to by the Court as the total expenditure paid late during the year in question, some 385 Mio ECU was paid after the deadline because the Commission required checks on certain measures which went well beyond the figure of 5 % laid down by Community rules (on average 25 %) and which justified acceptance of the whole of this expenditure.

After Article 4 of Regulation (EC) No 296/96 had been strictly applied to the remaining 283 Mio ECU, it was found that the Commission had discretion over only 129 Mio ECU. Examination of the supporting documents submitted by the Member States resulted in the refusal of 25 Mio ECU under the procedure for advances, an