COURT OF AUDITORS

In accordance with the provisions of the Treaties (Article 45c(4) of the ECSC Treaty, Article 248(4) of the EC Treaty and Article 160c(4) of the EAEC Treaty) and the Financial Regulation of 21 December 1997 (Article 88), as last amended by Council Regulation (EC) No 2779/98 of 17 December 1998, as well as the corresponding provisions relating to the European Development Funds, the Court of Auditors of the European Communities, at a meeting on 14 and 15 October 1999, adopted its

ANNUAL REPORT

concerning the financial year 1998

(1999/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.

Jan O. KARLSSON

(President)

Bernhard FRIEDMANN

John WIGGINS

Giorgio CLEMENTE

Barry DESMOND

Patrick EVERARD

Armindo de Jesus de SOUSA RIBEIRO

Antoni CASTELLS

Hubert WEBER

Aunus SALMI

Jørgen MOHR

Kalliopi NIKOLAOU

François COLLING

Maarten B. ENGWIRDA

Jean-François BERNICOT

TABLE OF CONTENTS

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THE INSTITUTIONS' REPLIES

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General introduction

0.1. This annual report follows the format established last year with chapters dealing with revenue and each of the expenditure areas that fall under the headings of the financial perspectives. More emphasis is placed this year on following up the action that has been taken in response to the Court's previous reports, and the Court will continue to give particular attention to this aspect in its future annual reports. The chapters dealing with specific areas of revenue and expenditure include a specific appraisal in the context of the statement of assurance and are followed by a chapter containing and explaining that statement. Finally, the Court's observations concerning the activities of the sixth, seventh and eighth European development funds are presented separately.

0.2. The Court has continued its policy of placing more emphasis on publishing, in special reports, the results of audits which deal with specific subjects, especially from the point of view of sound financial management. Its purpose in doing so is to focus attention on specific areas in which the Community's financial management can be improved. The following reports have been published since the last discharge procedure:

- Special Report No 1/99 on the aid for the use of skimmed milk and skimmed milk powder as animal feed(1);

- Special Report No 2/99 on the effects of the CAP reform in the cereals sector(2);

- Special Report No 3/99 on the management and control of interest rate subsidies by the Commission(3);

- Special Report No 4/99 on financial aid to overseas countries and territories under the sixth and seventh EDF(4).

A full list of the reports and opinions adopted by the Court in the last five years appears in Annex III of this report.

0.3. Many of the audit findings that appear in this report confirm that, despite the reforms that have been made, the Commission all too often continues to use as the prime indicator of financial management performance the extent to which the appropriations allocated in the annual budget have been utilised. This cannot be the best indicator of performance. The Community institutions, and in particular the Commission, add value by implementing the Union's policies in favour of its citizens and the success of the Commission should be measured by the extent to which those policy goals are attained with the minimum of cost. Thus managers need to set their performance targets in terms of outputs, outcomes and the costs involved in achieving these. As a precondition, the objectives set for all Community activities must be as clear, as precise and as measurable as possible and appropriate tools must be put in place to measure their achievement. This change of culture and practice must be placed at the heart of the financial management reform process.

0.4. Where the Commission relies upon the Member States to manage its programmes on a day-to-day basis, the Commission has a responsibility arising from Article 274 of the Treaty to assure itself that this management is adequate. In such areas, the Court's annual and special reports regularly draw attention to serious and, on occasions, persistent weaknesses in Member States' management and control systems. In meeting the obligations imposed upon it by Article 274, the Commission must intensify its efforts to ensure that weaknesses are adequately addressed by the Member States.

0.5. It is not only in the Community institutions that the financial management culture needs to change. Despite the fact that Article 274 of the Treaty requires Member States to cooperate with the Commission to ensure that the appropriations are used in accordance with the principles of sound financial management and that Article 280 requires the Member States to take the same measures to counter fraud against the Community budget as are taken to protect the national financial interests, many serious weaknesses in the Member States' management and control of Community funds are mentioned in this report. Furthermore, there is evidence that Member States are often slow to react when these weaknesses are drawn to their attention by the Court or by their own auditors (for example, see paragraph 2.84).

0.6. In order to intensify the fight against fraud, the European Anti-Fraud Office (OLAF) has been established. As it did with its predecessor, the Court will continue to work closely with OLAF in the fight against fraud and in the protection of the Community's financial interests, whilst at the same time continuing to carry out its audit function with regard to OLAF (see the Court's Special Report No 8/98(5) on the Commission's services specifically involved in the fight against fraud). In its Opinion No 2/99(6) on the Commission proposal to establish OLAF, the Court drew attention to the fact that the proposal did not address a number of the weaknesses identified in its special report.

0.7. Ten years ago, in its annual report concerning the financial year 1988, the Court noted that the package of measures adopted by the meeting of the European Council of 11 and 12 February 1988 seemed to represent an important turning point, promising reforms in Community finances of which one of the most important was the introduction of a regime of budgetary discipline(7). The Court went on to state that the improvement of Community systems of internal control was an essential condition for the success of the reforms(8).

0.8. Now, as the Community settles its third multiannual expenditure plan, the Court again draws attention to the need, as an important part of the process of administrative reform, to make fundamental improvements in internal control. As the Court pointed out, in the relevant sections of its Opinion No 4/97 on the Commission's proposed revision of the Financial Regulation(9), this requires a change in the balance of responsibilities of authorising officers, financial controllers and accounting officers, so that authorising officers in the operational directorates-general will carry full responsibility for the execution of commitments and payments. In this context, the internal audit function also needs to be greatly strengthened, while the personal responsibilities of financial controllers and accounting officers should be clarified.

0.9. At the same time, the Commission should ensure that there can be no question of authorising officers accepting additional responsibilities without it having made available sufficient resources for their proper discharge. A better mastery of its human resources would allow the Commission to better redeploy and allocate its staff, taking account of its organisation and of the numbers and skills of staff needed for specific activities. It is also important that key policy and financial management tasks are carried out by officials who are fully answerable to the institution for their work. Whilst this report draws attention to specific staffing problems within the Commission in the areas of own resources (see paragraphs 1.39 - 1.40), EAGGF (see paragraphs 2.75 - 2.76) and external aid (see paragraphs 5.77 - 5.79), these are indicative of a general problem that needs to be addressed by the reform process.

0.10. In its statement of assurance on the 1998 accounts, the Court again draws attention to the problems associated with the Community's financial statements. On the one hand there are weaknesses in the accounting systems which result in the information presented being in some respects incorrect or incomplete. On the other hand, problems remain in the operation of management and internal control systems at each level of administration from the Commission, through intermediaries such as Member State authorities, down to the final beneficiaries. These give rise to a significant number of substantive and formal errors, so that the Court again declines to give a positive statement on the legality and regularity of the transactions underlying the Commission's payments.

0.11. The Court calls upon the Commission to rapidly continue and deepen the financial management reform process. In particular, the Court invites the Commission, in preparing a revised proposal for the revision of the Financial Regulation, to take full account of the recommendations made in its Opinion No 4/97, so as both to address the problems in the presentation of satisfactory financial statements, and to contribute to the strengthening of the management and control systems applicable to the Community's revenue and expenditure (see paragraph 0.8 above). Given that it will be a long time until a further fundamental revision of the Financial Regulation will be possible, it is important that the one currently being undertaken draws upon the necessary expertise, even if this means that the process takes longer.

(1) OJ C 147, 27.5.1999.

(2) OJ C 192, 8.7.1999.

(3) OJ C 217, 29.7.1999.

(4) OJ C 276, 29.9.1999.

(5) OJ C 230, 22.7.1998.

(6) OJ C 154, 1.6.1999.

(7) Annual report concerning the financial year 1988, paragraph 1.23.

(8) Annual report concerning the financial year 1988, paragraph 1.24.

(9) OJ C 57, 23.2.1998.

Report on the activities financed from the general budget

Chapter 1(1)

Own resources

1.0. CONTENTS

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GENERAL INTRODUCTION

1.1. In respect of traditional own resources, in addition to following up its previous observations, the Court's audit concentrated on the management of guarantees and securities in relation to the payment of customs debts and their utilisation in the context of customs control and the customs clearance of goods(2). With regard to the value added tax (VAT) and gross national product (GNP) resources, the Court followed up its previous observations by looking more specifically at the VAT own resource assessment bases in relation to national VAT revenue and the verification of the compliance of national legislation with Community law.

BUDGETARY IMPLEMENTATION

1.2. Table 1.1 summarises Community revenue for the financial year 1998 and Chart 1.1 shows the following:

(a) that revenue for the financial year 1998 increased by 4,9 % compared with the financial year 1997 (80547,7 Mio ECU), amounting to 84529,7 Mio ECU, or 101,05 % of the revenue provided for in the definitive budget;

(b) net traditional own resources (minus 1567,9 Mio ECU of collection expenses) amounted to 14110,7 Mio ECU, which represents 16,9 % of actual total revenue; these resources fell by 0,4 % compared with the financial year 1997 and can be broken down as follows:

Table 1.1 - Revenue for the financial years 1997 and 1998 - Analysis of budgetary implementation 1998

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(i) customs duties amounting to 13506,2 Mio ECU (gross), making up 86,1 % of gross traditional own resources (15678,5 Mio ECU)(3);

(ii) agricultural levies amounting to 1102,2 Mio ECU (gross), making up 7 % of gross traditional own resources;

(iii) sugar and isoglucose levies amounting to 1070,1 Mio ECU (gross), making up 6,8 % of traditional own resources;

(c) taking into consideration balances and adjustments (401,5 Mio ECU), own resources from VAT amounted to 33086,5 Mio ECU(4), or 39,1 % of total actual revenue; taking into account capping, actual revenue for this item fell by 3,7 % compared with the financial year 1997 (34351,5 Mio ECU);

(d) taking into consideration balances and adjustments (597,7 Mio ECU), the GNP resource amounted to 35026 Mio ECU(5) (of which 271,7 Mio ECU of

Graph 1.1 - Financing of the Community budget

>PIC FILE= "C_1999349EN.001101.EPS">

NB:

(x %, y %):

- x %: percentage of budget funds for the financial year 1998.

- y %: variations in 1998 as compared with 1997.

NB:

(x %):

- x %: percentage of traditional own resources for the financial year 1998.

Sources:

1998 budget and 1997 and 1998 revenue and expenditure accounts.

reserves), or 41,4 % of total actual revenue; this resource increased by 30,2 % as compared with the previous financial year (26891,7 Mio ECU); the function of this resource is to balance the Community budget and it is only called up to cover the balance between expenditure to be carried out and the other resources available;

(e) the surplus available from the previous financial year (959,96 Mio ECU) and miscellaneous revenue (1259,04 Mio ECU) represent 2,6 % of total actual revenue, or a 57,3 % fall compared with the financial year 1997.

SPECIFIC APPRAISAL IN CONNECTION WITH THE STATEMENT OF ASSURANCE

Traditional own resources

Applicable regulations

1.3. The specific regulations for traditional own resources include:

(a) Council Decision 94/728/EC, Euratom of 31 October 1994(6) on the system of the European Communities' own resources, and Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989(7) implementing Council Decision 88/376/EEC, Euratom on the system of the Communities' own resources, as last amended by Council Regulation (Euratom, EC) No 1355/96 of 8 July 1996(8);

(b) Council Regulation (EEC) No 2913/92 of 12 October 1992(9) establishing the Community Customs Code and Commission Regulation (EEC) No 2454/93 of 2 July 1993(10) laying down provisions for the implementation of the Community Customs Code.

Scope of the audit

1.4. In the context of the statement of assurance, the audit of traditional own resources is based on the customs duties that are established and entered in the accounts (A accounts) of the Member States on the basis of the declarations submitted by the customs authorities for the release of the goods for free circulation in the Community. By definition, the audit of the legality and regularity of the underlying transactions cannot take into consideration imports that have not been declared at customs or which have escaped customs surveillance. As part of its work programme for the protection of the financial interests of the Community, the Commission prepares each year a report in which it takes stock of the irregularities and frauds that have been observed by the Member States during their own investigations. In its latest report(11), the Commission mentioned the figure of 1000 Mio ECU, corresponding to the cumulative amount of the customs duties at stake in cases of irregularity since the second half of 1993, the point at which the new anti-fraud strategy was introduced by the Commission.

1.5. The Court nevertheless takes into consideration the risk inherent in irregular imports. In the context of its other tasks, it has carried out specific audits centred on the evaluation of the procedures introduced by the Member States for collecting traditional own resources that are owed to the Community. The most recent audits were concerned with the application of risk analysis methods in customs checks(12).

1.6. In addition to the amounts entered as revenue in the revenue and expenditure account (see Table 1.2 and paragraph 1.3 above), the financial balance sheet shows amounts that have not yet been collected but have been entered in separate accounts (the B accounts). The Member States are responsible for keeping these separate accounts and are required to send quarterly reports on the subject to the Commission. Out of a total of 1812,9 Mio ECU in claims on Member States as of 31 December 1998 (Volume IV, Chapter 3, Item VII.B.2 of the consolidated balance sheet, p. 50), 1739,4 Mio ECU concerned customs duties, agricultural levies and sugar and isoglucose levies established by the Member States and entered in the separate accounts.

1.7. As of 31 December 1998, the balance of the B accounts (1739,4 Mio ECU) showed a net gain of 377,4 Mio ECU (+ 27,7 %) compared with the previous

Table 1.2 - Estimated and actual own resources in 1998, by Member State

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financial year (1362 Mio ECU). This net increase in the balance was due to the following:

(a) an increase in new entries in the separate accounts amounting to 671,5 Mio ECU, or 49 % of the balance for the previous year (1362 Mio ECU);

(b) recoveries during the financial year to the extent of 199,2 Mio ECU;

(c) cancellations or write-offs decided on during the course of the financial year to the extent of 94,9 Mio ECU.

1.8. As in the previous financial years, the Court also examined the procedures for the entry in the accounts and centralisation of traditional own resources.

Analysis of the findings

1.9. The Court's examination of the accounting and centralisation procedures for traditional own resources showed that certain established entitlements had not been made available to the Commission or had been made available with significant delays. Where the amounts were made available late, this should result in the payment of default interest by the Member States concerned.

1.10. As was the case in 1997(13), the separate accounts kept by the Member States were characterised here and there by significant errors. The Court's audits showed that certain established entitlements that should have been entered in the A accounts and made available were actually kept wrongly in separate accounts. Certain customs debts had also been entered late in the separate accounts or had been entered twice or more. The Commission and the Member States must ensure that all established customs duties and agricultural levies that are not covered by guarantees or are contested are entered in the separate accounts for an appropriate value. Whereas the gross amounts shown in the financial balance sheet are likely to be understated, it is certain that the amounts actually recoverable are overstated. In actual fact, on the basis of the experience of recent years, the Court considers that only around 10 % of the customs debts booked in the separate accounts are recoverable. The Commission, in application of the accounting principle of caution, should create a provision for part of the amount of the debts entered in the separate accounts so as to take into account the specific hazards related to their recovery.

Result of the audit

1.11. The checks carried out gave satisfactory overall results concerning the reliability of the accounts and the legality and regularity of the underlying transactions entered in the accounts (see paragraph 1.4). The errors found during the examination of the transactions underlying the revenue and expenditure account were generally minor and mainly concerned the legality and regularity of these transactions, but did not substantially affect the accuracy of the revenue and expenditure account.

1.12. The separate accounts kept by the Member States contained significant errors that affected the accuracy of the total amounts for claims given in the consolidated balance sheet.

VAT and GNP own resources

1.13. The VAT and GNP resources are affected by use of statistical data in the establishment of their assessment bases, which does not allow an audit, in the accounting sense, of the underlying data. In this connection, and on the basis of the VAT and GNP data used by the Commission, the Court's audit concentrated on the verification of the accuracy of the calculation of the contributions from each Member State during the various stages, from the initial budget to the final clearance, for the financial years concerned.

1.14. Taking into account this limitation, the Court obtained a reasonable assurance with regard to the reliability of the system for collecting the VAT and GNP resources set up by the Commission. Except for some problems with the monitoring of adjustments to the assessment bases, the effects of which have been rectified, the system enables the regular payment of own resources.

1.15. In spite of the initiatives taken by the Commission, it is still not able to know, with immediate effect, the position of its assets in the Member States. This may be at the origin of difficulties in cash management(14).

NATIONAL VAT REVENUE AND VAT OWN RESOURCE ASSESSMENT BASES

Introduction

1.16. The establishment of the assessment bases for the VAT resource depends on the amount of revenue collected by the Member States. A reduction in this revenue may result from a lack of effectiveness on the part of the national systems in their fight against tax avoidance. It may also be the result of differences in the application of Community law. As VAT is managed at a national level, it is up to the Member States to ensure that VAT is collected efficiently and in accordance with the regulations and within the required deadlines.

1.17. VAT is an important source of funding for both the national and Community budgets(15). Any differences in the application of the common VAT system may constitute one of the factors of distortion in the competition conditions faced by taxpayers in the various Member States.

1.18. The Court examined the Commission's monitoring of the development of VAT revenue in the Member States and the verification of compliance with Community law on the part of national VAT legislation. These are fields that have been the subject of observations on several occasions in the past(16).

Fall in VAT revenue in the Member States

The Court's findings

1.19. Following its work in respect of the regime governing VAT on intra-Community trade, the Court had noted a significant fall in VAT revenue in 1993(17). This fall could not be completely explained by technical or procedural factors. The question therefore was whether the new VAT regime for intra-Community trade was the direct cause of the fall in VAT revenue, in particular as the result of an increase in fraud and tax evasion.

1.20. In reply to the Court's observations(18), the Commission announced initiatives to enable it to monitor the development of revenue in the Member States more closely via a detailed examination of available information. In particular, it hoped to be able to go into the factors likely to explain this development in greater detail. On several occasions, the Council had also expressed a desire to examine VAT data in greater detail, in particular with regard to intra-Community trade(19).

1.21. The implementation of the monitoring of the trend of VAT revenue by the relevant Commission departments is neither complete nor coordinated. For this reason, it may happen that several Commission departments put forward requests of the same kind to the Member States.

1.22. In the context of this monitoring activity, the question of fraud and tax evasion was only tackled indirectly. Although it already had the necessary information, the Commission asked the Member States if they had carried out any studies on the discrepancies between theoretical revenue(20) and the revenue actually collected.

1.23. In actual fact, in respect of monitoring, the Commission did no more than take note of the data and comments forwarded by the Member States on the subject of the discrepancy between estimated and actual revenue. On their own, such comparisons cannot explain the fall in VAT revenue and even less can they be used to confirm a possible increase in fraud and tax evasion. Furthermore, any analysis that rests entirely on arguments and data supplied by the tax authorities of the individual Member States cannot produce comparable conclusions.

1.24. For example, the replies from the tax authorities of the Member States might have suggested that none of them had observed an increase in fraud in connection with the regime for VAT on intra-Community trade. If so, though, this should have resulted in requests for explanations, especially given the contrary information available to the Commission on the scale of the phenomenon. There also exists some worrying information concerning the rise in certain kinds of fraud in intra-Community trade. It has even been said that the VAT system as a whole is strongly affected by fraud. Other work(21), including that carried out by the Court(22), has shown that the problem of fraud and tax evasion requires particular attention.

1.25. This need for a more thorough investigation was expressed by a Commission department that is not directly responsible for monitoring VAT revenue. Thus, since the VAT regime on intra-Community trade was held by various sources to be the cause of increased fraud, this department did not exclude that non-cyclical (i.e. structural) factors might explain the fact that the level of revenue was lower than estimated. It did however also say that additional country-by-country analyses were needed to provide a more precise explanation of these structural factors. So far, no analysis of this kind has been carried out.

Conclusion

1.26. The initial objective, of examining more closely the factors likely to explain the fall in VAT revenue in the Member States and identifying any structural problems, has not yet been achieved. As for the incidence of fraud and tax evasion, the Commission still needs to carry out an independent in-depth analysis on the basis of a coordinated effort by its departments.

Verification of the compliance of national legislation with Community law

The Court's findings

1.27. The Member States, the European Parliament and the Council have, on several occasions, declared that they consider it important for Community directives to be transposed into national law correctly and in a timely manner(23). They have requested the Commission to provide effective monitoring of this matter.

1.28. The Commission has stated that the detection of violations of Community law constitutes one of its priority tasks(24). Several internal provisions have been adopted to make the examination of national legislation systematic. In particular, it has been provided that "the examination of national transposing measures and provisions subsequently adopted by Member States shall be assessed for conformity with Community law, followed, where appropriate, by the opening of an ' own-initiative ' case "(25).

Examination of national legislation and the detection of violations of Community law in the taxation field

1.29. The Court's audit at the Commission showed that it only implemented individual analyses of national legislation as a result of complaints, in the context of disputes or during the preparation of legislative proposals.

1.30. National VAT legislation, whether the basic legislation or subsequent amendments thereto, is not subjected to a systematic and documented examination enabling the verification of compliance and the detection of any infringements. In contrast with what the Commission has said in the past(26), specific analyses entrusted to external experts have not been used for the detection of possible infringements in the national legislation adopted following the entry into force of the transitional scheme.

1.31. Those infringement procedures that have been opened are essentially the result of complaints from taxpayers, generally concerning double taxation or taxation that the complainant felt to be illegal.

1.32. An approach of this sort is liable to result in an incomplete intervention on the part of the Commission. It tends to stress individual situations and neglect infringements leading to no or lower taxation. In these cases, taxpayers have a less evident interest in coming forward, except where they wish to denounce a possible distortion of competition(27).

The appraisal of compliance

1.33. As in the past and in spite of specific internal instructions to the contrary(28), the Commission still fails to draw up appraisals of compliance of national legislation with Community law, even for internal purposes. In actual fact, all legislation that has not been the subject of an infringement procedure must, by default, be provisionally held to be compliant as long as no such procedure is tabled.

1.34. The VAT system is characterised by a large number of national regulations and legal and administrative provisions adopted at different levels. In practice, the Commission reckons that it is impossible to obtain, and therefore examine, all these provisions. In spite of the assurances given by the Commission in 1986(29), not all the Member States comply with the requirement that they should forward their legislation.

1.35. Nevertheless, the Commission could draw up an appraisal of the compliance of the basic legislation available and the subsequent amendments adopted by the Member States. This would enable it to direct and formalise its departments' examination of the various systems.

1.36. The fear expressed by the Commission to the effect that its future freedom of movement might be undermined by an appraisal of compliance is not justified(30). In actual fact, an appraisal of this kind would be limited to the provisions examined, thus allowing the case to be reopened where new information becomes available.

Delays in infringement procedures

1.37. The Court found a failure to comply with the deadlines provided in the internal rules on infringement procedures for around half of the files examined(31). The delays observed at the various stages of the procedures ranged between a few months and several years. New procedures were adopted in 1996 in order to solve this problem.

1.38. This was the result of a number of causes. The delays were due to sustained differences in the appraisals of the various departments involved, particularly long assessment procedures and the time limits granted to Member States.

Operation of the departments

1.39. The degree of adjustment of the VAT legislation to the requirements of the single market and the question of the interpretation and application of the legislation are matters that fall under the responsibility of a unit whose senior staff is nearly 50 % non-permanent. This percentage is noticeably higher than for the other units of the directorate-general responsible. This could result in a lack of continuity in the processing of files, in particular in respect of legislative proposals falling under multi-annual programmes.

1.40. A significant proportion of the non-permanent staff is made up of officials on secondment from national administrations for maximum periods of three years. The latter may be entrusted with tasks - if only for linguistic reasons - involving their own organisations of origin.

1.41. The Commission's responsibilities in such a sensitive field as taxation should be discharged via a structure enabling greater continuity and respect for its prerogatives.

Conclusion

1.42. The complete and accurate transposition of Community legislation into national law is an essential element of consistency and unity in the process of European integration, as the Member States, the European Parliament and the Council have not failed to point out. For this purpose, in accordance with the Treaties, the Commission possesses powers that must be exercised to the full if Community law is to be applied correctly.

1.43. However, in the field of VAT, there is no systematic examination of the national legal provisions and no appraisal of their compliance with Community law - not even for internal purposes. This means that, in the absence of a positive assurance, the application of Community law is essentially appraised through the reactions of private citizens.

1.44. This situation constitutes a weakness in view of the Commission's responsibilities. A prior examination of the relevant legal provisions would enable it to act in a more preventative and global fashion and adopt useful measures with a better knowledge of the subject. The uniform application of VAT legislation would thereby be improved.

1.45. The Commission is, moreover, aware that the current differences in the interpretation and application of the common VAT system are undermining the neutrality of the system(32). This is creating an extremely complex situation(33).

1.46. It would be useful for the Commission to revive its long abandoned practice of drawing up reports on the operation of the Common VAT system as such(34). It would, indeed, seem necessary for the individual analyses contained in the various different documents that it draws up to be periodically completed by means of an overall examination of the VAT system. This would provide a contribution to any discussion as to what corrective measures need to be taken.

(1) The Commission's replies are on page 19.

(2) Work on this audit is continuing.

(3) Net traditional own resources (14110,7 Mio ECU) + collection expenses (1567,9 Mio ECU) = Gross traditional own resources (15678,6 Mio ECU).

(4) VAT own resource (33086,5 Mio ECU) = VAT own resource for the financial year (32685 Mio ECU) + balances and adjustments for previous years (401,5 Mio ECU).

(5) GNP resource (35026 Mio ECU) = GNP resource for the financial year (34428,3 Mio ECU) + balances and adjustments for previous financial years (597,7 Mio ECU).

(6) OJ L 293, 12.11.1994, p. 9.

(7) OJ L 155, 7.6.1989, p. 1.

(8) OJ L 175, 13.7.1996, p. 3.

(9) OJ L 302, 19.10.1992, p. 1.

(10) OJ L 253, 11.10.1993, p. 1.

(11) Protection of the financial interests of the Community - the fight against fraud - Annual report on the financial year 1997, COM(1998) 276 final.

(12) Special Report No 13/98, OJ C 375, 3.12.1998.

(13) Statement of assurance concerning activities under the general budget for the financial year 1997, paragraphs 8.13 - 8.14 (OJ C 349, 17.11.1998).

(14) Special Report No 6/98 on the assessment of the system of resources based on VAT and GNP, paragraph 3.58 (OJ C 241, 31.7.1998, p. 68).

(15) The Berlin European Council (24-25 March 1999) decided on a reduction, as of 2002, of the VAT resource's share of the funding of the Community budget.

(16) Development of VAT revenue: Annual report concerning the financial year 1995, paragraphs 1.92-1.103. Audit of compliance of national legislation: Annual reports concerning the financial years 1983 (paragraphs 3.14-3.20), 1984 (paragraphs 3.19-3.22), 1986 (paragraphs 4.9-4.10), 1988 (paragraphs 4.4-4.15) and 1995 (paragraph 1.68).

(17) Annual report concerning the financial year 1995, paragraphs 1.92-1.103.

(18) Annual report concerning the financial year 1995, reply to paragraphs 1.95-1.97.

(19) Discharge recommendations concerning the financial years 1994 (Chapter 1, paragraph 4, subparagraph 3) and 1995 (Chapter 1, paragraph 2.2.1).

(20) Theoretical VAT is calculated on the basis of the national accounts that the Member States draw up in accordance with a common framework, to wit the European system of integrated economic accounts (ESA). The Court's work in this field is contained in Special Report No 6/98, paragraphs 4.8-4.19 (OJ C 241, 31.7.1998).

(21) The Commission is aware that the underground or black economy creates a significant problem for the taxation systems currently in force and that it seems to have increased in the course of the last decades (see COM(97) 559 final of 3 November 1997, p. 18 and COM(1998) 219 final of 7 April 1998, p. 5).

(22) Special Report No 6/98 on the Court's assessment of the system of resources based on VAT and GNP, paragraphs 4.16-4.19.

(23) Declaration No 19 of the Heads of States or Government attached to the Treaty of 7 February 1992. Resolution of the European Parliament of 9 February 1983 (OJ C 68, 14.3.1983). See also the resolutions of the European Parliament on the Annual Reports of the Commission on the control of the application of Community law in respect of 1994 (OJ C 65, 4.3.1996), 1995 (OJ C 55, 24.2.1997), 1996 (OJ C 56, 23.2.1998) and 1997 (OJ C 177, 22.6.1999, p. 56). The Council's recommendations concerning the discharge in respect of the financial years 1988 (Chapter 4, paragraph 1, subparagraph 2) and 1995 (Chapter 1, paragraph 2.1). The Amsterdam European Council of 16 and 17 June 1997, conclusions of the Presidency, Employment, competitiveness and growth, pages 9 and 10. The Cardiff European Council of 15 and 16 June 1998, conclusions of the Presidency, paragraph 17.

(24) Commission report on the follow-up to the comments accompanying the Council's discharge recommendations for the financial year 1995 (COM(97) 571 final of 21 November 1997, p. 50).

(25) Manual of operational procedures, seventh updating, March 1995, page 49.

(26) Annual report concerning the financial year 1995, reply to paragraph 1.68.

(27) In the draft Council directive concerning the transformation of the VAT committee into a regulatory committee, real possibilities of double taxation, or even no taxation, are mentioned (see COM(97) 325 final of 25 June 1997, pp. 4-5).

(28) See paragraph 1.28.

(29) Annual report concerning the financial year 1986, reply to paragraph 4.9.

(30) Annual report concerning the financial year 1988, reply to paragraph 4.8.

(31) These are all the files closed between 1995 and June 1998 and those that were still open at the latter date.

(32) COM(97) 325 final of 25 June 1997, pp. 1-2.

(33) COM(96) 328 final of 22 July 1996, p. 10.

(34) This obligation is provided for under Article 34 of Council Directive 77/388/EEC of 17 May 1977 (OJ L 145, 13.6.1977).

Commission reply

SPECIFIC APPRAISAL IN CONNECTION WITH THE STATEMENT OF ASSURANCE

Traditional own resources

Analysis of the findings

1.9. Whenever the Commission learns, either as a result of its own inspections or of audits carried out by the Court of Auditors, that there has been a delay in making available traditional own resources default interest is imposed in accordance with Article 11 of Regulation (EEC, Euratom) No 1552/89.

Result of the audit

1.10 - 1.12. The Commission shares the Court's view that the Member States need to improve the way they keep the separate accounts. As this is a high-risk area, involving a very large number of underlying transactions, the Commission makes the systematic control of accounting procedures a matter of priority in its annual inspection programmes. The inspections generally result in the Member States making corrections. While most errors are basically of a one-off nature, it must be said that the accounting treatment of guarantees by some Member States is characterised by systematic errors resulting from the misinterpretation of Community legislation, particularly Article 6 of Regulation (EEC, Euratom) No 1552/89. The Commission is responsible for administrative and financial monitoring and has already demanded payment of considerable sums. Germany, however, was adamant in its refusal to alter its accounting procedure and the Commission has taken steps to initiate infringement proceedings under Article 226 of the Treaty.

As regards the reliability of the separate account, the Commission confirms that it overestimates the amounts the EU is actually likely to receive because some amounts have been entered in it for a long time although there is little hope of recovering them. The amendment to Regulation (EEC, Euratom) No 1552/89 currently being examined by the Council aims to strengthen the procedure of writing-off non-recoverable debts and should remedy the situation. However, as there are no data available at the moment to identify all the individual amounts on the basis of objective criteria (the length of time the debt has been outstanding, etc.), the Commission is unable to calculate the impact of the overestimate with any accuracy. For this reason it would be inadvisable to make a provision in the balance sheet at this stage. The Commission believes that, in application of the accounting principle of caution mentioned by the Court, the accounts could indeed be made more transparent by inserting a note in the accounts alluding to the possible overestimate.

VAT and GNP own resources

1.15. As the Treasuries of the Member States are not members of SWIFT, statements are sent electronically only by the four Member States whose accounts pursuant to Article 9 of Regulation No 1552/89 are managed by their central banks.

One national Treasury sends files to the Commission electronically. The others send statements by post, fax or e-mail and time taken for them to be dispatched and to arrive varies greatly. In some cases, confirmation of the Commission's resources is fairly quick, while in others the statement of the current balance is not sent until after the end of the month.

We have learned that SWIFT is looking into the possibility of admitting national Treasuries as members, which would greatly simplify their transactions with the Commission.

NATIONAL VAT REVENUE AND VAT OWN RESOURCE ASSESSMENT BASES

Fall in VAT revenue in the Member States

The Court's findings

1.21 and 1.22. Monitoring developments and interdepartmental coordination

The Commission will present its initial report on the development of VAT revenue by the end of 1999; it will be drawn up in coordination with the departments concerned.

1.23 - 1.25. Incidence of fraud and tax evasion

Fraud and tax evasion are both complicated issues.

The Commission is aware of this situation and has taken a number of steps to make the Member States, the main parties concerned, more aware of the gravity of the situation, in particular for national budgets but also for operation of the single market.

Boosting cooperation between the Member States is still one of the Commission's priority objectives, as shown by the reports based on Article 14 of Regulation No 218/92 and Article 12 of Regulation No 1553/89 which the Commission has sent to the Council and Parliament and by discussions with the Member States within the SCAF and at the Fiscalis seminars.

Conclusions

1.26. The Commission has examined movements in VAT receipts and is aware that there are virtually no reliable and relevant sources of information outside the Member States. Its departments have made information visits to the Member States to hear their opinion and then identify the likely causes of these movements.

Following these visits, a working paper was presented to the working party consisting of the deputy directors-general for indirect taxation. The working party then adopted a procedure for monitoring revenue movements. Before the end of 1999 the Commission will present a report to this working party analysing changes in VAT receipts in the Member States.

The verification of the compliance of national legislation with Community law

The Court's findings

Examination of national legislation and the detection of violations of Community law in the taxation field

1.29 - 1.32. An ad hoc working party conducted a systematic review of some national VAT provisions between 1990 and 1993. This exercise was repeated to check the transposition of Council Directive 92/77/EEC of 19 October 1992 supplementing the common system of value added tax and amending Directive 77/388/EEC. It was found that the Member States have usually transposed Community provisions correctly. These operations also demonstrated that the systematic review of national legislation is a cumbersome process demanding considerable human resources and that the results, in terms of supposed infringements being detected, are usually negligible.

The Commission is also continuing its consideration of their impact on the budget.

Most infringement procedures are the result of complaints from taxpayers. This is because they are best placed to ascertain the practical application of legislation. However, this does not mean that the Commission's approach has been "incomplete" but rather that, basically, infringements of Community law in this field consist of charging more tax than allowed by Community law.

The appraisal of compliance

1.33 - 1.36. When preparing its VAT controls, the Commission has to examine the main changes in the law to identify any cases of non-compliance. With the current state of the Commission's resources, it is unrealistic to consider appraising compliance systematically.

In practice, infringements concern secondary legislation or implementing measures (administrative instructions) which Member States are not legally obliged to report to the Commission.

Conclusion

1.42 - 1.46. It should be noted that VAT, as a tax which covers the consumption of virtually all goods and services, may, in view of its general nature, lead to differences in application.

Moreover, an ad hoc working party conducted a systematic review of national provisions between 1990 and 1993 in connection with the general provisions applicable in the VAT sector such as the sixth directive; this exercise was repeated when the transitional arrangements were introduced.

These operations demonstrated that the systematic review of national legislation is a cumbersome process demanding considerable human resources and that the results, in terms of supposed infringements being detected, are usually negligible.

The Commission is also continuing its consideration of their impact on the budget.

Given the size of the task they face in framing, interpreting and applying VAT legislation, the departments concerned, which have only limited human resources, are unable to conduct a systematic examination of all national legislation.

It should be noted that, in 1994, the Commission presented a report on the operation of the transitional arrangements for charging VAT(1) which identifies the main problems of application for both operators and the national tax authorities.

In another Commission report published two years later in 1996 ("A common system of VAT - A programme for the single market")(2), Annex B appraises operation of the transitional VAT arrangements. As there has been no basic change in the situation since, the Commission does not intend to present a further report in the near future.

(1) COM(94) 515 final, 23.11.1994.

(2) COM(96) 328 final, 22.7.1996.

Chapter 2(1)

The common agricultural policy

2.0. CONTENTS

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INTRODUCTION

2.1. This chapter concerns the "Guarantee" Section of the European Agricultural Guidance and Guarantee Fund (EAGGF-Guarantee) and the expenditure charged to Chapter B2 - 51. It consists of four parts:

(a) the implementation of the budget for the financial year 1998;

(b) the specific audit of this area carried out in the context of the statement of assurance for the financial year 1998;

(c) the clearance of the accounts for the financial years 1994 and 1997;

(d) the follow-up to an earlier report on fruit and vegetables.

IMPLEMENTATION OF THE BUDGET FOR THE FINANCIAL YEAR 1998

Appropriations and expenditure for the financial year

Available appropriations

2.2. Initial appropriations for the EAGGF-Guarantee in the budget for the financial year 1998(2) amounted to 40737 Mio ECU, including 500 Mio ECU for the monetary reserve. In addition, 200 Mio ECU earmarked for budget headings under sub-section B1 (see Table 2.1) appeared under Chapter B0 - 40 (provisional appropriations).

2.3. Supplementary and amending budget No 1/98(3) reduced the appropriations initially provided for the four main titles under sub-section B1 by 900 Mio ECU, and increased Chapter B1 - 31 (Food aid) by 400 Mio ECU.

2.4. During the financial year, there were a number of transfers from one item to another (597,9 Mio ECU), from one article to another (264,5 Mio ECU) and from one chapter to another (1234 Mio ECU(4)) (see Table 2.2). In absolute terms, these amendments amounted to 2096,4 Mio ECU(5), or 5,2 %(6) of the initial budget (against 11,8 % in 1997). This significant fall in the amounts transferred in 1998 was due to the fact that, for most budget headings, the expenditure turned out to be far lower than the allocations (510,9 Mio ECU in appropriations, excluding the monetary reserve, had to be cancelled).

2.5. Final appropriations (excluding the monetary reserve) amounted to 39659 Mio ECU (a fall of 578 Mio ECU compared with initial appropriations), which was below the ceiling provided in the agricultural guideline (see Table 2.3).

Amount of expenditure

2.6. Expenditure committed under sub-section B1 amounted to 38748,1 Mio ECU (see Table 2.1). Neither the monetary reserve nor the provisional appropriations were used.

2.7. The table below shows the breakdown of this expenditure and the corresponding measures into three tranches:

Table 2.1 - EAGGF-Guarantee 1998: initial appropriations, supplementary and amending budget, transfers and expenditure

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Table 2.2 - EAGGF-Guarantee 1998: amendments to the amounts of the initial appropriations resulting from a supplementary and amending budget and from transfers

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Table 2.3 - Main financial data concerning the EAGGF-Guarantee for the financial year 1998

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2.8. For the first time since 1994, net expenditure under sub-section B1 fell (4,1 %) compared with the previous financial year (see Table 2.4). Gross expenditure even fell by 5,3 %, as the two main sources of revenue, Chapter B1 - 37 (clearance of previous years' accounts) and Item B1 - 2071 (supplementary milk levy) also fell significantly (212,8 Mio ECU and 333,3 Mio ECU respectively).

2.9. Tables 2.5 and 2.6 show breakdowns of the expenditure by type and by Member State. A summary of the EAGGF-Guarantee accounts is given in Table 2.7, and Graph 2.1 shows the development of EAGGF-Guarantee expenditure over a period of 10 years.

Budgetary rules

2.10. The budget must be drawn up and implemented in accordance with a series of rules in order to guarantee compliance with the wishes of the Budgetary Authority and transparency in budgetary implementation. In the management of the EAGGF-Guarantee, several of these rules(7), in particular the general principles governing the Community budget, are not sufficiently observed.

The principle of universality

2.11. According to this principle(8), revenue may not be allocated to particular items of expenditure, and

Table 2.4 - EAGGF-Guarantee 1998: comparison between initial appropriations and implementation from 1994 to 1998

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Table 2.5 - EAGGF-Guarantee 1998: expenditure committed by chapter and type

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Table 2.6 - EAGGF-Guarantee 1998: expenditure committed by type and Member State

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Table 2.7 - EAGGF-Guarantee 1998: summary accounts

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revenue and expenditure must be entered without any adjustment against each other. However, although they diminished considerably during the financial year 1998 (- 2498,8 Mio ECU as against - 4329,6 Mio ECU in 1997), a large number of negative amounts were entered in the EAGGF-Guarantee accounts (see Table 2.8). Of this sum of 2498,8 Mio ECU, 1290,1 Mio ECU corresponds to revenue (outside clearance) and 438,6 Mio ECU to corrections made by the Commission to the Member States' declarations. If any of these amounts are anything other than accounting adjustments, they must be treated as budget revenue. The Commission should, therefore, consider this matter in its entirety in relation to the redrafting of the Financial Regulation.

2.12. The Member States are also obliged to record on their monthly declarations any corrections they have made to a previous declaration. These corrections are not always clearly identifiable, in particular because of the off-settings made against the expenditure of the month. That makes it more difficult to check the declarations and therefore does not guarantee that the advances are paid correctly. The Commission should require the Member States to make their monthly declarations more transparent and should, if need be, propose that the regulation concerned be reformed.

The principle of annuality

2.13. According to this principle, expenditure is authorised for one financial year only and all the expenditure for a given financial year must be booked to the corresponding budget. However, EAGGF-Guarantee expenditure is subject to a number of derogations from this principle.

2.14. Firstly, the agricultural financial year (from 16 October of the year n to 15 October of the year n+ 1) does not coincide with the general budget financial year (from 1 January to 31 December). Conversely, sub-section B1 also contains expenditure, implemented directly by the Commission, that falls under the financial year lasting from 1 January to 31 December (40,3 Mio ECU in commitments and 24,8 Mio ECU in payments in 1998).

2.15. Furthermore, EAGGF-Guarantee expenditure is covered by non-differentiated appropriations, which are authorised for a period that may not exceed the duration of the financial year. These appropriations are therefore not suited to measures that are carried out over several financial years, such as accompanying measures, promotional measures and the (forthcoming) rural development measures. The effect of this practice is to underestimate the Community's long-term financial obligations.

Graph 2.1 - Evolution of EAGGF expenditure by type (1988 - 98)

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Cross-checks with the columns in Table 2.5 are to be made as follows:

(1) Intervention - direct payments: countervailing price aid (columns 5 and 6) plus the withdrawals for arable crops (line B1.10 of column 4).

(2) Export refunds: column 3.

(3) Structural measures: guidance premium (column 7) plus the accompanying measures (line B1.50 of column 17).

(4) Intervention - storage - withdrawals: private storage (column 8) plus public storage (columns 11 to 14) plus withdrawals other than the arable crop withdrawals (column 4 minus line B1.10) and minus milk levies (column 9).

The other measures (food aid (column 16) and the expenditure minus accompanying measures (column 17 minus line B1.50 of the same column)), amounting to only 556.6 Mio ECU, are not shown in the above graph. Because of the scale chosen, they would not be legible.

Source:

Commission accounts.

2.16. Lastly, the management of the appropriations itself has also involved derogations from the principle of annuality. Thus, Supplementary and Amending Budget No 1, adopted on 14 December 1998, included an increase of 400 Mio ECU in the appropriations under Chapter B1 - 31 for the supply of food aid to Russia. However, this could not be implemented during the financial year 1998 because:

(a) the relevant legislation was not adopted by the Council until 17 December 1998;

(b) the corresponding expenditure - which was subject to the declaration procedure - ought to have been carried out before 15 October 1998 and the stocks should have been mobilised before 31 August 1998.

2.17. As no amounts could be committed and, therefore, disbursed in 1998, the Budgetary Authority decided to carry these appropriations forward to the financial year 1999, thus transferring this expenditure from one financial year to another and taking advantage of the considerable room for manoeuvre offered by the under-utilisation of appropriations in 1998.

2.18. By contrast, in the case referred to further on (clearance of accounts relating to the financial years 1994 and 1997, paragraph 2.66), an item of expenditure that was executed and declared in 1994 was considered to be chargeable to 1995 owing to a lack of sufficient appropriations under the budget headings for the financial year concerned.

Deadlines for charging expenditure

2.19. The agricultural regulations do not always provide precise deadlines for the implementation of expenditure. In that case, the act of payment and declaration by the Member State determines the financial year under which the expenditure is to fall and not the event giving rise to the item (harvest, exportation, etc.). The charging of such expenditure thus depends to a large extent on how conscientious Member States are.

2.20. Among the expenditure declared in October 1997 (falling under the financial year 1997), one Member State included 47,1 Mio ECU in costs for the public storage of alcohol for the 1990 - 95 period. As the Commission did not have sufficient grounds for refusing this expenditure, but nevertheless wished to examine it, an advance was indeed granted during the financial year

Table 2.8 - EAGGF-Guarantee 1998: expenditure committed by chapter and item

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1997. However, although the Commission has only two months to make the detailed booking, this was not done until the end of December 1998.

2.21. In 1997, the Member States implemented various control and prevention measures in the absence of an entire legal basis (absence of two implementing regulations(9) allowing Member States to declare expenditure paid and permitting the Commission to refund it). The amounts (9,2 Mio ECU) were covered by a commitment during the financial year 1997, which was itself carried forward to the financial year 1998 and, unlike the previous case, the payment of the advance was carried over to February 1998 and the detailed payment booked in October 1998.

2.22. All these practices led to entries of expenditure that were not consistent enough to guarantee the transparency and comparability of EAGGF-Guarantee expenditure over time.

Budgetary management

Advances and expenditure

2.23. EAGGF-Guarantee expenditure is executed by the paying agencies of the Member States. The following month, this expenditure is then included in a monthly declaration, on the basis of which the Commission refunds the Member States by means of advances. After the end of the financial year, the clearance of the accounts (see paragraphs 2.60 - 2.102 below) makes it possible to establish the definitive amount of expenditure to be charged to the Union.

2.24. The Member States can obtain an advance only if the expenditure has actually been disbursed (by cheque - payment is considered to have been made when the cheque is issued, which is favourable to the Member States - or by transfer) during the month of the declaration. At this stage, no checks are carried out as to whether the total for payments is justified. However, the Court sometimes found that the paying agencies were not able to produce an exact list of transactions in support of the amounts declared.

2.25. There were only limited checks on some aspects of the declarations (the reliability of estimates, quantities declared) which enable expenditure to be monitored to a certain extent. In practice, it was difficult to implement a partial or total rejection of the expenditure declared after the deadline by the Member States because of the complexity of the rules. In 1998, the Member States declared 38744,2 Mio ECU in expenditure, of which financing was refused for 36,1 Mio ECU.

2.26. Moreover, for 35,7 % of the expenditure, there is no payment deadline. Delays were nevertheless found in implementing these measures (promotion activities or accompanying measures, for example). The Commission is also unable to ascertain that the Member State in question has answered a beneficiary's application within the deadline provided or has complied with the implementation timetable (food aid).

2.27. The Commission needs the Member States' estimates so as to be able to be ready for these financing requirements. But the estimates provided by certain Member States were not reliable enough, particularly at the end of the financial year, i.e. when the need for accuracy is greatest. The regulations currently make no provision for any penalty, however.

2.28. The positive effects of changes in dollar/ECU exchange rates (278 Mio ECU) helped to boost the monetary reserve by 78 Mio ECU (after deduction of the neutral margin of 200 Mio ECU). However, this amount of 78 Mio ECU was transferred from Chapter B1 - 15 (fruit and vegetables) and not from the budget headings actually affected by the changes in the exchange rate (cereals and sugar).

Management framework

Agricultural regulations

2.29. The agricultural regulations are complex and cover several hundred measures. The EAGGF-Guarantee managers therefore have to apply a large number of provisions that do not always belong to a clear or codified hierarchy and are sometimes even in contradiction with the general Financial Regulation. The consolidation of the agricultural regulations and the Commission's desire for simplification are a step in the right direction, but greater efforts still need to be made.

Budgetary nomenclature

2.30. Expenditure under sub-section B1 is organised in titles, chapters, articles and items in accordance with a nomenclature adopted in the context of the budgetary procedure(10). Given the lack of synchrony between the financial year and the EAGGF-Guarantee financial year, expenditure between 16 October and 31 December is implemented and even declared before the actual adoption of the budget for the financial year under which it falls, which sometimes causes practical difficulties.

2.31. The 1998 budgetary nomenclature (191 items) has for the most part remained much the same as the 1997 version. It is very unbalanced because 93,8 % of the expenditure was booked to just 59 items, 40 % under five items and 0,3 % under 41 items of expenditure, whereas 29 items involve more revenue than expenditure.

2.32. The agricultural Financial Regulation provides for a more detailed sub-nomenclature for accounting purposes. This sub-nomenclature (movements on 979 sub-items in 1998) should be improved in the following respects:

(a) there is no systematic mention of the underlying legal basis;

(b) it is not always possible to distinguish between the payment of an advance and a final payment or provide a breakdown according to the marketing year concerned. This renders comparisons between one financial year and another difficult.

Computer systems

2.33. In its report concerning the financial year 1997(11), the Court criticised the organisation of the AGREX and Sincom computer systems. Although the year 2000 problem has actually been studied, the shortcomings in the systems have nevertheless not been dealt with. This explains why incorrect information (dates or amounts) was once again found in AGREX. For example, according to the documents made available to the Court, the total for adjustments for payment deadline overruns amounted in some cases to 7,4 Mio ECU and in others to 13,9 Mio ECU. AGREX gives yet another amount for rejections and it is not possible to establish the reason for these rejections.

2.34. The Commission should therefore provide itself with a computer tool that is truly geared to analysing and checking agricultural expenditure.

Conclusion

2.35. Regarding the budgetary implementation of the EAGGF-Guarantee, the main features of the financial year 1998 were the numerous changes made to the initial budget allocations, the variable level of utilisation (but usually below the initial allocations) and various infringements of the budgetary rules. Because the accounts lack transparency and the possibilities for effectively checking Member States' monthly declarations are limited, the whole framework for the budgetary management of agricultural expenditure (computer systems, procedures, and even the regulations) needs to be improved. In view of the future enlargement of the Union and the transfer of structural measures to the EAGGF-Guarantee, the need for this improvement becomes all the more pressing.

SPECIFIC ASSESSMENT OF THE FIELD IN THE CONTEXT OF THE STATEMENT OF ASSURANCE

Introduction

2.36. Almost all expenditure relating to the common agricultural policy is implemented by the Member States' paying agencies. The Commission pays them a monthly sum, the amount of which is determined on the basis of the total payments declared two months beforehand. These payments are entered in the accounts as expenditure, subject to possible adjustments when the accounts are cleared, after the end of the financial year.

2.37. Pursuant to Commission Regulation (EC) No 1663/95 of 7 July 1995, which lays down the implementing procedures for the clearance procedure, the Member States must send to the Commission, not later than 10 February of the following year, the annual accounts of each paying agency, together with a certificate as to their completeness, accuracy and truthfulness. This certificate must be issued before 31 January by a competent body that is independent of the paying agency on the basis of an examination of procedures and of a sample of transactions, implemented in line with internationally accepted auditing standards. On the basis of this certificate, the Commission clears, before 30 April, the accounts for the financial year that ended on 15 October the previous year. Notwithstanding this clearance, the Commission may subsequently exclude any expenditure that is not in line with Community rules. However, it may do so only within 24 months, except where there are irregularities or procedures related to Articles 88 (State aid) and 226 of the Treaty of Amsterdam (proceedings for failure to fulfil an obligation).

2.38. CAP expenditure essentially corresponds to appropriations under sub-section B1 of the Union's general budget. Payments totalled 38810 Mio ECU for the financial year 1998 (see paragraphs 2.2 - 2.35).

Reliability of the accounts

2.39. An examination of the Commission's expenditure management systems did not uncover any information capable of calling into question the overall reliability of the accounts. However, identifying negative expenditure within the accounts is almost impossible as the latter is grouped together with movements that correspond to adjustments made by the Member States. Lastly, an examination of the items related to the EAGGF- Guarantee did not reveal any major anomalies, except in the case of the revenue and expenditure account (concerning the depreciation of agricultural stocks) and off-balance sheet commitments reflected in the balance sheet. Thus:

(a) the depreciation of agricultural stocks, which was included in the revenue and expenditure account, was not calculated on the basis of the quantities actually held, but on that of an estimate. The Commission ought to base its calculations on the actual quantity of the stocks (for the same problem as for off-balance sheet commitments, see paragraph 2.39 (b) (iii));

(b) In the case of off-balance sheet commitments (assets):

(i) the amount entered under "potential assets relating to fraud and irregularities observed in the field of EAGGF-Guarantee" (1747 Mio ECU) has not been correctly evaluated, due to a delay by UCLAF in updating the information;

(ii) similarly, the amount of 862,5 Mio ECU listed under "potential claims on EAGGF-Guarantee beneficiaries", which concerns sums to be recovered from the paying agencies, does not provide a reliable picture of the total amounts owed as those in Germany concerning 1998 were not registered (as the Member State had not submitted the data in good time). Furthermore, the amounts were valued using the conversion rate applicable on 10 November 1998, whereas the parity applicable on 31 December (which would have increased this heading by approximately 0,2 Mio ECU) ought to have been used. Conversely, a significant number of claims which have been listed under this heading for several years are clearly irrecoverable and should therefore be subtracted from this balance (see paragraph 2.94);

(iii) lastly, the "net potential gain on disposal of agricultural stocks" (307,9 Mio ECU) was not estimated on the basis of the actual quantities held on 30 September but on the basis of information obtained in August and at the beginning of September (for a similar problem concerning the revenue and expenditure account, see paragraph 2.39 (a)).

(c) In the case of off-balance sheet commitments (liabilities):

(i) "potential liabilities connected with the clearance of the EAGGF-Guarantee accounts, pending judgment by the Court of Justice" (350,4 Mio ECU) include 15,8 Mio ECU which should have been subtracted from this balance (as the judgment was given before the close of the financial year), but not the potential liability relating to a disputed sum of 0,3 Mio ECU;

(ii) the amounts still awaiting a recommendation by the conciliation body or the adoption of a position by the Member States should be mentioned under a heading entitled "potential liabilities relating to the clearance of the EAGGF-Guarantee accounts".

2.40. The Court therefore reiterates its previous observation on the need to transfer to the balance sheet off-balance sheet commitments corresponding to debts or to definite amounts owed which can be recovered(12).

Legality and regularity of the transactions

Substantive errors

2.41. The rate of error likely to affect the value of all agricultural expenditure is once again too high. Half of the errors concern final beneficiaries. In most cases, the errors involve a slight over-declaration of surface area or of the number of heads of cattle. Over-declarations of this kind were detected in almost all the Member States.

2.42. The other substantive errors detected in respect of final beneficiaries concern cases of inconsistency or cases of insufficient evidence that the conditions for granting the aid had been observed, as the following cases demonstrate:

(a) differences between quantities paid for and volumes pressed for olive oil (Portugal);

(b) storage of alcohol (Italy);

(c) aid for the processing of concentrated butter (France);

(d) beef special premium (United Kingdom).

2.43. Certain substantive errors were also uncovered within the paying agencies. For the most part, these errors concern the incorrect application of Community legislation, as the following cases demonstrate:

(a) the failure to observe fixed percentages for the payment of an advance by way of aid for organisations of producers of fruit and vegetables (Italy);

(b) failure to apply a penalty to an irregular declaration relating to the suckler-cow premium (Spain);

(c) quantities of food aid distributed to the poor which differed from the amounts indicated (Portugal and Greece);

(d) the rejection without an obvious reason of part of the declared surface area, even though the application is correct in terms of aid for the upkeep of vines, as part of the Poseican programme (Spain);

(e) over-estimation of the value of an animal slaughtered under the programme to eradicate bovine spongiform encephalopathy (United Kingdom).

Systematic substantive errors

2.44. Systematic substantive errors are substantive errors which have a generalised effect on all or part of a category of expenditure.

2.45. As regards the 1997/98 marketing year, which comes under the 1998 budgetary year, Italy did not send to the Commission by the stipulated deadline the data where milk quotas are exceeded that would have enabled the additional levy due to be calculated. As a result, the Communities forwent negative expenditure totalling approximately 220,6 Mio ECU. This amount, which should have been charged as a reduction in the EAGGF advances paid to Italy in respect of milk production, will not be recovered until the following financial year, a delay which is prejudicial to the principle of the specification of each financial year's appropriations. Finally, the fact that some farmers are exempt from the obligation to pay the levy gives them a competitive advantage.

2.46. Two systematic errors stem from Community legislation being incorrectly transposed or misinterpreted. Thus, in France, the circular on aid for small maize producers (in the maize base in separate areas) took as the average yield to be remunerated the regional average set-aside yield instead of the regional average cereals yield. Consequently, expenditure for the 1998 financial year was overestimated by 0,3 Mio ECU. In Greece, a law established a compulsory deduction to provision an insurance fund (2 %, rising to 3 % as from 1 January 1998) which is levied on Community aid disbursed by way of aid for the production of tobacco, olive oil and cotton. Although this levy is systematic in nature, no regulation applicable to these markets makes provision to this effect. Thus, 29,5 Mio ECU was deducted in error from Community aid for these three markets.

2.47. Similarly, as regards local management, a systematic error was uncovered in the region of Messinia (Greece). Deductions are made and then paid to the local cooperative, the local Union of Cooperatives and the Producers' Confederation(13), even though the regulations make no provision to this effect.

Formal errors

2.48. Formal errors have no effect on the value of the transactions examined. They stem from a failure to observe the terms of the regulations and often lead to shortcomings in the management systems. More than one transaction in seven is affected by a formal error.

2.49. As regards the management of payments at the Commission, an analysis of the monthly payment orders showed that in half of the cases (accounting for a total of 278000 Mio ECU) these payment orders had been approved outside the deadlines laid down in the regulations.

2.50. At Member State level:

(a) compulsory registers were non-existent or non-compliant as regards the animal premium (Portugal and Ireland) or the storage of wine and grape must (Portugal) due to delays in implementing national application circulars;

(b) checks were inadequate when compared with the required minimum level for export refunds (Belgium) or for cotton production (Greece);

(c) the implementation of the rules governing the inspection and valuation of stocks was inadequate and the computerised accounting for alcohol stocks was not operational (Italy);

2.51. In terms of local management, these errors essentially concerned:

(a) export documents which were non-compliant as regards refunds (Sweden);

(b) vague identification of declared plots as regards aid for the production of olive oil (Spain);

(c) payments made directly to farmers even though aid must be paid only to a producer organisation in the case of aid for the upkeep of vines in the Canary Islands (Spain);

(d) the possibility of over-declaration in connection with aid for cotton production due to the use of outdated topographical surveys (some of which date from 1938) which take no account of recently established structures (Greece).

2.52. At the final beneficiary stage, errors are due to:

(a) inadequate keeping of livestock records, especially as regards beef and veal (Spain, Ireland and the United Kingdom);

(b) the late submission of production documents (Spain), inconsistency of pressing registers or the lack of output documents in the case of olive oil production (Portugal).

Other errors

2.53. In another category, there are some general errors of an accounting nature which were detected in Ireland and the United Kingdom. In the case of Ireland, two errors stem from poor accounting treatment of adjustment entries as a result of charging errors. At the same time the monthly declaration was not corrected, the balances on certain budget headings notified to the Commission are inaccurate and do not tally with the Member State's accounts, even if the overall amount of expenditure is still correct. Furthermore, it was noted that the Irish authorities charged recoveries to be made under beef premiums to the nearest payments of this chapter of the budget, irrespective of the budget heading concerned. As a result, the balances of the budget headings are inaccurate even if overall expenditure regarding the chapter remains correct. Furthermore, in the United Kingdom, account entries which were not justified in respect of export refunds were generated automatically in the accounts due to computer problems, although the total amount of expenditure remains correct.

Clearance of 1998 accounts

2.54. Accounts in respect of five paying agencies (SOAEFD (United Kingdom), Ofival and ACCT (France), Bremen (Germany) and Denmark) were submitted after the 10 February deadline. Nevertheless, the Commission was able to take the financial clearance decision in respect of 1998 on the deadline of 30 April 1999. The value of the financial corrections applied was 1,5 Mio ECU. Deductions made from advances during the year and late payments totalling 37 Mio ECU will be subject to a subsequent compliance decision under Article 5 (2)(c) of Council Regulation 729/70(14) as will further amounts found not to comply with Community regulations.

2.55. The Commission considered that the accounts of 13 paying agencies were initially subject to reserves or qualifications but later lifted them, except in the case of four paying agencies (Denmark, Lower Saxony (Germany), Cantabria (Spain) and Ofival (France) for which expenditure of 2452 Mio ECU declared has been disjoined from the financial clearance decision. Denmark has been informed that the internal audit service will no longer be accepted as a certifying body. In Lower Saxony, the certifying body detected a high number of monetary errors, which are subject to further investigation. The expenditure for Cantabria has been disjoined for the second consecutive year partly because of the poor quality of the certifying body's report. The certifying body for Ofival found a large number of deficiencies in relation to export refunds, calf premium schemes and the beef special premium which will be followed up by the Commission.

Conclusion

2.56. Except for the cases noted in paragraph 2.39, it is the Court's view that the EAGGF-Guarantee accounts are generally reliable. As regards the legality/regularity of the underlying transactions, the Court notes that the rate of error noted for the 1998 financial year is still significant and easily exceeds the acceptable maximum rate (see paragraphs 2.41 - 2.43) This excessively high rate of error shows once again that improvements are called for.

2.57. In order to improve the reliability of the accounts, the Commission should:

(a) enter all probable debts and all claims (the principle of which is certain and which have become liquid and have fallen due) in the balance sheet (and not off-balance sheet);

(b) make the necessary checks so as to ensure that income such as the additional milk levy is not omitted.

2.58. In order to reduce the number of errors which affect the legality/regularity of the underlying transactions, the Commission should ensure that the incorporation of Community regulations into national implementing circulars is correct and should see to it that the documents and reports which are required of the Member States are submitted to it in time for the necessary checks to be properly carried out.

2.59. Lastly, the number and nature of the substantive errors detected in respect of final beneficiaries should serve as an incentive for the Member States to step up inspection measures.

CLEARANCE OF THE ACCOUNTS FOR THE FINANCIAL YEARS 1994 AND 1997

Introduction

2.60. During the course of 1998 the Commission took clearance decisions in respect of 1994 and 1997. The former falls under the old system of annual clearance decisions including conformity, which has, with effect from 1996, been replaced by a new procedure whereby a financial clearance decision is taken each year and conformity decisions are taken on an ad hoc basis covering several years(15). By the end of 1998, the Commission had not taken any conformity decisions under the new procedures. Details of the new procedure are set out in the Court's Special Report No 21/98 verifying the 1996 clearance(16).

2.61. The Court has examined the decisions relating to the EAGGF years' 1994 and 1997. For 1994, clearance audit work was confined to the Commission. For the latter clearance, seven Member States were visited (Denmark, Germany, Greece, Spain, France, Portugal and the United Kingdom), in some cases together with the Commission services. The work of the certifying bodies was the primary focus of these visits but some paying agencies were also visited. The Court continues its programme of visits in the context of an appraisal of the new clearance procedures introduced under Council Regulation (EC) No 1287/95(17).

2.62. The objective of the Court's audit was to determine whether these clearance decisions were soundly based and whether appropriate action had been taken to address the weaknesses identified by the certifying bodies and to recover any sums unduly paid.

Clearance of accounts 1994

Corrections and other adjustments

General

2.63. The Commission's clearance decision for 1994, under the old system, was taken on 6 May 1998(18). Some 308 Mio ECU was disallowed (Table 2.9) relating primarily to public storage, arable crops, export refunds and meat sectors (Table 2.10). Three Member States (France, Italy and the United Kingdom) accounted for 75 % of the total disallowed.

Table 2.9 - Summaries of the Commission's clearance decision for 1994 and 1997

Summary of the Commission's clearance decision for 1994

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Summary of the Commission's clearance decision for 1997

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Table 2.10 - Corrections and disjunctions by category (1993 and 1994)

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2.64. The amount disallowed for 1994 was less than half of that disallowed in respect of each of the years 1992 and 1993 (788,2 Mio ECU and 754,7 Mio ECU respectively). This was due primarily to lower corrections in the milk sector. Because there were fewer breaches of milk quotas, corrections amounted to 27,9 Mio ECU in 1994 compared with 263,7 Mio ECU in the previous year(19). Corrections in the olive oil sector were also significantly lower: 2,2 Mio ECU in 1994 compared with 112,7 Mio ECU in 1993 but 426,8 Mio ECU of expenditure was disjoined(20). Corrections for export refunds fell from 216,5 Mio ECU in 1993 to 68,2 Mio ECU in 1994 due to fewer large ad hoc corrections.

2.65. Some 6 % (1876 Mio ECU) of the amounts declared by Member States were disjoined, most of which relates to oilseeds advances which are cleared when the final amount is paid in the following EAGGF year. In relation to this procedure, adopted by the Commission in respect of 1993, the Court maintains the view stated in its special report on the clearance of accounts for that year(21), on the grounds that expenditure proper to a given year should be cleared in the decision that relates to it.

2.66. In addition, due to insufficient appropriations on the budget lines for 1994 for various wine measures, the Commission deducted some 46 Mio ECU declared by France and Italy for the 1994 financial year and charged it to the 1995 EAGGF year thereby breaching the principle of annuality.

The use of flat rates

2.67. As the Court has noted in its previous reports(22) recourse to flat-rate corrections is only necessary in cases where the actual financial impact of systems weaknesses cannot be established. Flat rates of 2, 5, 10 or 25 % are used by the Commission to determine an amount of correction when systems weaknesses are detected during an audit. For example, the 2 % rate is applied when key controls are satisfactory but secondary controls are partly or totally ineffective and the 25 % rate is applied when there is no system of controls for a measure in the Member State, or one of its regions and there are signs of frequent irregularities and frauds (see Table 2.11). They can be applied to successive years until the situation improves. The determination of the rate to apply was inevitably somewhat subjective.(23) Flat-rate corrections are often referred by the Member States to the Conciliation Body. Of the 28 cases relating to 1994 expenditure submitted to the Conciliation

Table 2.11 - Corrections: use of flat rates

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Body between February 1997 and March 1998, 18 dealt with flat-rate corrections amounting to 136,5 Mio ECU, six of which resulted in reductions amounting to 8,9 Mio ECU.

2.68. For the 1994 EAGGF year, the 25 % rate was only applied in three instances for confined geographical areas (Corsica, Sicily and Calabria) or to small schemes such as production aid for fibre flax in the United Kingdom and the amounts involved did not exceed 10 Mio ECU. Italy and the United Kingdom submitted their cases to the Conciliation Body who concluded that the 25 % rate was excessive but the Commission maintained its position.

2.69. The flat-rate corrections of 10 % for Spain and Greece in respect of production aid for olive oil, applied in 1993 and 1994 for campaigns up to 1992/93, were reduced by the Commission for later campaigns to 5 % on the basis that in its view there had been improvements in the work of the olive oil agencies. For Spain, the Commission accepted figures provided by the national authorities showing that the total quantity milled exceeded that on which aid was paid to producers. The figures supplied by Greece for the 1993/94 and 1994/95 years were accepted by the Commission even though they regarded them as unreliable. They also accepted Spain's point of view that the primary control is that performed by the olive oil agency at the mills and that there was a lower risk to the Fund.

2.70. Moreover, the Commission's summary report for 1994 points out that serious weaknesses persist, such as:

(a) failure by national authorities to apply sanctions;

(b) significant discrepancies between the number of trees counted by the olive oil agency and the number of trees declared (on-the-spot controls of producers by the olive oil agencies are still limited, 0,37 and 0,23 % of the total number of producers for 1993/94 in Greece and Spain respectively);

(c) the absence or ineffectiveness of the olive cultivation register and of a computerised data system. In the Court's opinion, the arguments accepted by the Commission, and presented in their reply, were not, in the light of the continuing weaknesses in the system, adequate justification for the application of a reduced flat rate.

Corrections made for delayed recoveries

2.71. Up to the year 1992/93 the amount of the milk super-levy paid over by Member States to the EAGGF did not include sums under litigation. With effect from the 1993/94 year, the Commission decided to make corrections for all the amounts not recovered as of April 1997 by Member States. A total of 20 Mio ECU was corrected in the 1994 decision, 86 % of which related to France for the years from 1988/89 to 1991/92.

Lack of or inadequate corrections

2.72. A correction was not made for weaknesses in the management of the olive oil production aid scheme in Portugal, whereas for comparable failings significant corrections were made for Spain and Greece (21,2 Mio ECU and 14,5 Mio ECU respectively).

2.73. In Italy, the authorities had used the wrong green rate in the calculation of the amounts to be paid for the permanent abandonment of wine production. Because the Commission had previously approved the application of this rate, it was unable to recover the estimated 8 to 10 Mio ECU at stake.

2.74. The amount disallowed by the Commission in response to the findings of the Court concerning exports of feta cheese from Denmark(24) is inadequate. The Court's observations related to the decision of the Danish authorities not to take account of the results of laboratory tests on feta carried out under national procedures during the period 1990 - 94. Although these were designed for purposes other than export refunds, they relate to the same parameters of fat and water content used to determine eligibility for export refunds and failure to meet the parameters could and did result in the application of fines which were credited to the national budget. The Court considers that the determination of the characteristics of the product during checks before exportation should be taken into consideration when deciding whether the product satisfies the conditions for granting an export refund. The Commission agrees but has decided to disallow only on the basis of specific instances where the tests have revealed non-compliance (0,5 Mio ECU) and not to use the minimum error rate (3,3 % representing some 16 Mio ECU for the years 1990 to 1994), as described in the Annual Report 1995. The Commission contends that the individual results provide a more solid basis for a correction than an extrapolation. The 3.3 % error rate, however, was established from the results of a system which was designed to provide assurance to the customer that all of the feta supplied complied with the chemical and biological specifications. It has been corroborated by the results of tests carried out under two independent systems, both of which had higher error rates. The Commission's contention that this error rate is distorted because it includes samples which have failed the national minimum fat content parameter of 40 % but which would not have failed the EC minimum of 39 % is misleading because the overwhelming majority of failures relate to water content.

Notification of corrections

2.75. The determination of corrections was a long process involving several inspections per market and spanning two or three years. This was partly due to a lack of staff resources within the clearance unit and was the primary reason for the four-year delay between 1994 EAGGF year-end and the clearance decision. In April 1996 the lack of staff was one of the reasons why the European Parliament withheld the discharge for 1992. The Parliament demanded that the Commission increase its staff by 15 posts; 11 had been filled by the end of 1998. The remaining 4 posts should be allocated during 1999. Consistent staffing weaknesses are not acceptable and the Commission must put in place a workable strategy that will resolve the problem.

2.76. Given that the unit did not have sufficient staff to perform all the necessary work, private audit firms were contracted to perform audits, comprising evaluations of the systems and internal controls operating within the paying agencies. Of the 29 audits that took place in 1995, 20 were performed by private audit firms. Some of the audits relating to 1993 and 1994 were not performed until 1996. The Commission's legal service advised that the flat-rate corrections proposed in respect of the expenditure declared by three paying agencies(25) (192 Mio ECU) for systematic weaknesses identified during the audit were without a legal basis.

2.77. For five cases (corresponding to 27,7 Mio ECU of corrections and 295,7 Mio ECU of disjunctions) out of a sample of 20 examined by the Court, there have been delays of up to 12 months between the date of the Commission's visit to a Member State and the issuing of the letter of observations and up to 17 months between the letter of observations and the notification of corrections. These situations are partly caused by delays in the responses from Member States.

Clearance of accounts 1997

Financial analysis

2.78. The 1997 clearance of accounts decision was taken within the 30 April 1998 deadline(26), although expenditure for three small Spanish paying agencies (2 % of the total declared by Spain) was disjoined pending further work by the certifying bodies. These amounts were cleared by the Commission decision in February 1999(27). All the certifying bodies' met the deadline, except for the United Kingdom, which was a few weeks late.

2.79. Since 1996, corrections in the financial decisions distinguish between reductions/suspensions and amounts disallowed. Reductions and suspensions are adjustments to Member States' advances resulting from checks carried out by the Commission's accounting service. In 1997, these adjustments amounted to 329,6 Mio ECU, compared to 55,5 Mio ECU in 1996. This increase is primarily due to the inclusion of milk super-levies for Spain (65 Mio ECU) and Italy (232 Mio ECU).

2.80. The amounts actually disallowed as a result of the clearance unit's audit of the certifying bodies are minimal, indeed the net position is in favour of the Member States (Table 2.9). Under the new system the signs are that all significant disallowances will be made in the conformity decisions. No conformity decisions had been taken by the end of 1998.

Certification of accounts

Qualified certificates

2.81. The accounts for 17 paying agencies were qualified - seven small paying agencies (< 100 Mio ECU) and 10 large ones. A number of reasons for qualification were common to several paying agencies, regardless of their size, such as incomplete debtor ledgers or lack of supporting evidence. The accounts of eight of the paying agencies concerned were also qualified for the financial year 1996(28).

2.82. Concerning two of the larger paying agencies whose accounts were qualified in 1997, the Directorate- General for the Administration of Purchases of Agricultural Produce (Gedidagep) (Greece) and the Intervention Board Executive Agency (IBEA) (United Kingdom), the accounts of the former were qualified primarily for lateness regarding its IACS controls and the latter for reconciliation problems. Although according to the certifying bodies neither met the accreditation criteria, no action was taken at that time by the authorities of the Member States concerned to call their status as paying agencies into question. The situation with regard to IBEA has since improved, key personnel have been replaced and much remedial work has been undertaken. As far as Gedidagep is concerned, despite a number of improvements the situation remains one of concern, since key accreditation criteria have still to be met. The Commission has no authority to rescind its accreditation and the Member State has not proposed a viable alternative. However, the Commission is empowered to open procedures under Article 13 of Council Decision No 729/94/EC(29) on budgetary discipline, under which it may reduce or provisionally suspend monthly advances to Member States where information supplied is deemed unsatisfactory or indicated manifest non-compliance, although no such action was taken during 1998 in the context of the new clearance procedures. In 1998, legal provisions have been adopted to restructure the organisation of the paying agency. It is too soon to say what impact this will have in Greece.

Internal audit

2.83. In the context of certification of accounts, Denmark and Germany continue to use internal audit departments of the paying agencies as the certifying body. The Court has already criticised this practice on the grounds that internal audit does not have the degree of independence necessary to fulfil this function.

2.84. Significant weaknesses raised in internal audit reports should be met with appropriate management action and any errors found by internal audit should be taken into account in the preparation of the opinion on the accounts. In some Member States, until these weaknesses are drawn to the attention of the paying agency in the certifying body's report, the problems persist. For example, in 1996, the Court informed Portugal about a systematic error concerning the calculation of bovine headage factors and in the certifying body's report reference was made to the same finding by internal audit in 1997; as at February 1999 no recoveries had taken place. During 1997, in the United Kingdom the certifying body for MAFF found errors in the application of penalties for the late presentation of claims for the arable area payments scheme. Internal audit had reported on this in October 1996 and the paying agency had not taken any corrective action. The Commission should follow up these matters in the relevant conformity inspections.

Number of paying agencies

2.85. The number of active paying agencies has increased from 78 in 1996 to 91 in 1997 (Table 2.12). This is almost entirely due to the fact that paying agencies within the autonomous communities in Spain have become operational. On the other hand, the number of paying agencies was reduced in three Member States. One small paying agency transferred its operations to a larger one in the United Kingdom, one in Austria and one in Italy were closed in early 1998. The lowest amount declared by a paying agency was just 24500 ECU (Austria - Vorarlberg) in 1997(30). As can be seen in Table 2.11, seven paying agencies declared less than 1 Mio ECU, 16 less than 5 Mio ECU. At the other end of the scale, nine paying agencies account for more than 21000 Mio ECU, some 50 % of the total declared for 1997.

2.86. Given the size of the smaller paying agencies, there is scope for more rationalisation, particularly in Austria where four of six paying agencies declared less than 1 Mio ECU and in Germany where seven declared less than 10 Mio ECU and a single Land has four paying agencies (Table 2.12). There is a risk that the cost of accreditation compliance may be disproportionately high for such paying agencies(31).

Accreditation criteria

2.87. Commission Regulation (EC) No 1663/95(32),

Table 2.12 - Amounts declared by paying agencies (1997)

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and in particular the annex thereto, sets out a number of criteria that the paying agency should meet before it is accredited by the Member State. In addition, the Commission has provided the Member States with a series of guidelines. The certifying body, in its annual report, must comment upon the fulfilment of these criteria during the financial year but has no remit to recommend whether or not the paying agency should retain its accreditation status. It is clear from an examination of these reports and recent visits made by the Court that certain weaknesses persist in numerous paying agencies as illustrated in the following paragraphs.

Delegation of functions

2.88. Certain functions of the paying agency may be delegated to other bodies, provided that the conditions stipulated in the regulation are fulfilled. Delegation to some extent exists in all Member States and most paying agencies. As stipulated in the guidelines annexed to the regulation, under no circumstances must the payment function be delegated, which was the case for some measures in Denmark and Greece.

2.89. With regard to export refunds, the paying agencies are required to ensure that payments are in conformity with EU legislation. In general the customs authorities of the Member States are responsible for the physical checks(33) that provide evidence of compliance or otherwise. The customs authorities are independent of the paying agencies. It is therefore essential that procedures are put in place to ensure adequate cooperation between the two entities including ensuring that the required number of controls of the required quality has been carried out. The Commission's guideline issued in 1998 emphasises the need for a formal agreement (protocol) between both parties.

2.90. In some Member States (France, Italy, United Kingdom) the information obtained by the paying agencies was inadequate to ensure that the required controls had been carried out. For example, in the United Kingdom no attestation was provided by Customs and Excise before the certificate was signed by the certifying body. Similar problems exist with regard to other delegated functions.

2.91. At the request of the Commission, the certifying body (CCCOP) for France produced a specific report on the role of the DDAF with particular regard to the main Integrated Administrative and Control System (IACS)(34) measures, all of which are managed at local level. The audit of the DDAF is the responsibility of Coperci (a c