THE COURT'S OBSERVATIONS THE COMMISSION'S REPLIES

INTRODUCTION

4.1. Expenditure in 2004 on the common agricultural policy (CAP), i.e. the European Agricultural Guidance and Guarantee Fund (EAGGF Guarantee section), totalled 43 579 million euro (2003: 44 379 million euro). Graphs 4.1 and 4.2 show how the money was spent. Graph 4.1 shows the breakdown of expenditure by economic category (direct payments, export refunds, etc.). Graph 4.2 shows the distribution by main agricultural sector (beef and veal, olive oil, etc.).

4.2. Payments to farmers based on the amount of land they farm or the number of livestock on their farms constitute the greater part (59 %) of CAP spending. These payments are primarily intended to compensate farmers for reductions that have been made in CAP prices.

4.3. Virtually all CAP expenditure is effected by the paying agencies of the Member States. The process for payments to farmers is as follows: (a) farmers present claims to paying agencies in the year before payment is due, based on areas cultivated, number of eligible animals owned during a specified retention period, etc.; (b) the paying agencies subject all claims to administrative checks and a sample of claims to on-the-spot checks, mainly through the Integrated Administration and Control System (IACS); (c) each paying agency pays claimants, and reports expenditure made to the Commission which reimburses the paying agency; (d) the accounts and payments of the paying agency are examined by an independent auditor (certifying body) who reports to the Commission in February of the year following the budget year; (e) by 30 April of that year, the Commission must reach a decision (financial clearance) on whether to accept these accounts and audit reports; to ask for more work to be performed or information provided (1); (f) the Commission may then itself examine payments made by the paying agencies. If these were irregular, or if financial controls were weak, it may decide that some expenditure should be borne by the Member States concerned and not be charged to the EU budget (in Community jargon, the Commission makes a conformity decision which ‘disallows’ such expenditure as part of the ‘clearance of accounts’) i.e., it reduces the payments to the paying agency accordingly (see paragraph 4.22).

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE STATEMENT OF ASSURANCE

Scope of the audit

4.4. The objective of the audit was to contribute to the Court's Statement of Assurance on the general budget through a specific assessment for the agricultural area, in order to seek assurance on the functioning of control systems and on the legality and regularity of the transactions. For that purpose, the Court: (a) assessed the workings of IACS (the supervisory system for area aid and animal premiums); post-payment checks and physical checks on subsidised agricultural exports (the principal supervisory systems for other types of agricultural expenditure) (see paragraphs 4.6 to 4.14); (b) examined the Commission's financial clearance decision for expenditure in 2004 and conformity decisions taken in 2004, which relate to payments made to beneficiaries in earlier years (see paragraphs 4.15 to 4.25); (c) tested a sample of transactions directly (see paragraph 4.26); (d) examined the Annual Activity Report and Declaration by the Director-General for Agriculture and reviewed the implementation of internal control standards at the Commission (see paragraphs 4.27 to 4.34).

4.5. Paragraphs 4.35 to 4.54 set out the Court’s assessment of the legality and regularity of expenditure under the CAP, based on the above sources of evidence. Observations on the reliability of the accounts are set out in Chapter 1, paragraphs 1.12, 1.13, 1.15 and 1.16.

Supervisory and control systems

IACS

4.6. The Integrated Administrative and Control System (IACS) is the key management and control tool for area aid and animal premium schemes and covers 59 % of agricultural expenditure. IACS comprises a computerised database of holdings and aid applications, systems for identifying parcels of agricultural land and identifying and registering animals, and a coordinated set of administrative checks and on farm inspections. Claims for a number of other Community aid schemes must be compatible with the system.

4.7. In 2004, the Court continued its examination of the way IACS is functioning in a further five paying agencies in four Member States (4) as well as following up earlier findings in Portugal after the merger of two paying agencies. IACS checks in the five paying agencies visited other than in Greece are generally operational and satisfactory (see Annex 2 ); IACS functioning is comparable to that of the paying agencies audited in previous years, although there is still scope for improvement in risk analyses, administrative checks and on the spot inspections. 4.7. Although the Commission considers some of the Court’s assessments in Annex 2 to be too severe, its audit results generally concur with the Court’s own findings, and further enhancements are being achieved as from 2005 with implementation of the Geographical Information Systems obligatory as from 1st January. Regulation (EC) No 118/2004, amending IACS legislation as from 2004, will still further improve the already generally satisfactory situation.

4.8. More than seven years after the deadline for full implementation IACS in Greece can still not ensure compliance with legality and regularity for area aid and animal premium payments (5) (see also paragraphs 4.28(b) on the Commission’s reservation in respect of the implementation of IACS in Greece and 4.44 on the results of the Court’s transaction testing). The major reasons for the deficiencies and failures are: (a) farmers’ unions control the input of all data into the computer system. None of the data in the system is secure and it can be and is modified by the farmers’ unions at any time before payment. The computer system does not record when and why changes to the original data are made. For 2004 expenditure, farmers’ unions changed data for more than 22 000 parcels more than five months after the claim period ended. Analysis shows that these irregular changes have an estimated financial impact of at least 10 million euro, and the impact over the whole claim period could be significantly more; (b) the quality of on-the-spot inspections is low. The inspection findings are very poorly, or not at all documented, or reporting of results is unreliable. Re-performance of inspections by the paying agency for quality assurance could not confirm the results for more than one third of initial inspections. Some reports do not seem to be based on genuine inspections (6). 4.8. Facing the IACS situation in Greece, the Commission has regularly applied important financial corrections (384 million euro from 1999 to 2004). In addition, in 2002 the Commission initiated an infringement procedure against Greece. The European Court of Justice found against Greece in 2004. Moreover, following the DG AGRI Director-General’s reservation to his annual declaration, a specific action plan was put in place in 2003 and 2004, consisting of an enhanced audit programme and other supervisory measures. In 2004, nine missions to Greece were carried out on IACS and IACS-related measures. These actions on the part of the Commission and the setting up of a new paying agency in Greece (Opekepe) have led to good progress, so that by the end of 2004 (2005 financial year) the different elements of the IACS system were in place. However the Commission will continue to identify and assess the remaining deficiencies in the functioning of the IACS in Greece, and to apply appropriate financial corrections. As regards the weaknesses mentioned by the Court, the Commission has repeatedly criticised the role of the farmer’s unions in the claim procedure and the weakness of supervision. By letter of June 2004, the Commission has formally required the Greek authorities to implement a new aid application procedure, reducing the dependence on farmer’s unions. This subject, as well as the insufficient quality of the on-the-spot inspections, already identified by the Commission, will be pursued through the ongoing clearance of accounts enquiries.

Post-payment checks under Regulation (EEC) No 4045/89 (7) — Backlogs and insufficient information on results of checks performed

4.9. Member States are required to carry out annual programmes of post-payment checks of commercial documentation for a range of CAP subsidies, including export refunds, processing and transformation subsidies, processing of cotton, olive oil and tobacco and some rural development expenditure, in total some 37 % of agricultural expenditure. Member States must satisfy themselves that transactions have taken place and been executed correctly; and must take steps to recover sums lost as a result of irregularity or negligence.

4.10. The Commission analyses the documents Member States provide on an annual basis and may visit some Member States in order to check the implementation of the Regulation on the spot. The Court examined the Commission's monitoring of Regulation (EEC) No 4045/89 checks and found that: 4.10.

(a) the analysis of the reports provided by Member States is of limited value as the existing regulation does not require coordination bodies to present statistics in a format which permits meaningful analysis (for example, reporting the rates of error for different categories of expenditure); (a) The Commission considers the reports provided by Member States to provide valuable information, although it accepts that reporting in respect of Regulation (EEC) No 4045/89 could be improved. It will introduce a proposal to amend Commission Regulation (EC) No 4/2004 to this effect. In particular, tables will be introduced for communication of findings so that their number, value and nature can be identified and analysed. Moreover, new ways of identification and reporting of the backlog are envisaged so that scrutinies not completed during the reporting period can be followed up in the reports in respect of subsequent reporting periods.

(b) in 2003, the Court examined the application of post-payment checks in 11 Member States and concluded that fewer than one in three were wholly satisfactory (8). In response, the Commission has visited three Member States in 2004, the first visits since January 2001 dedicated to the full examination of the post-payment checks. In addition the Commission regularly covers specific aspects of post-payment checks in the framework of its clearance of accounts’ audit of export refunds (which accounts for some 25 % of the expenditure to be covered by these checks); (b) Following the Court’s 2003 Annual Report where a similar remark was made, the Commission took further measures to improve the situation. Even if some of those checks are not to be considered as wholly satisfactory, the Commission considers that due to the complexity of post-payment checks, there might often be a margin for improvement without putting into question the value of the checks carried out. In 2004, DG AGRI carried out three missions (to Belgium, Greece and Portugal) on the application of Regulation (EEC) No 4045/89 to cover the general aspects, i.e. the annual report, risk-analysis and control programme. In 2005, six further missions are ongoing during which the specific findings of the Court will be followed up. In addition, the Commission has given added emphasis to Regulation (EEC) No 4045/89 controls in the framework of compliance audits in 2005.

(c) the delays in completion of Member States’ annual programmes of post-payment checks, highlighted by the Court in its 2003 Annual Report (9), persist. At the end of 2004 almost 40 % of the checks planned had not been completed according to the Member States’ annual reports. (c) The Commission acknowledges that there have been delays in the completion of post-payment checks in certain Member States. However, the number of scrutinies planned by most Member States exceeds significantly the minimum number required. On this basis the shortfall is less than 40 %. While some scrutinies are not completed at the end of the scrutiny period, they must be followed up and be completed in the following scrutiny period. The Commission is investigating the reasons for the failure to complete in due time control programmes in certain Member States and, where appropriate, will request clarification from Member States.

Graph 4.3 shows the number of checks carried out and the number of irregularities discovered for the last six reporting periods as presented by Member States. Given that the data does not provide for analysis by amount or by type of expenditure, it is not possible to draw conclusions on the significance and cause of the variation in the reported frequency of irregularity. Graph 4.3 Member States report the total amount of the irregularities detected by Regulation (EEC) No 4045/89 scrutinies which for the 2001/2002 control programme amounted to 23,4 million euro.

Physical checks of subsidised exports of agricultural products (10) — Value of transactions checked and irregularities unknown

4.11. Export refunds paid to exporters of EU agricultural products cover the difference between EU internal and world market prices and allow surplus EU production to be disposed of on world markets. In 2004, refunds accounted for some 3,6 billion euro, 7,5 % of CAP expenditure (8,3 % in 2003). Member States are required to physically check 5 % of exports to ensure that they are correctly described and entitled to the export refund claimed. The Commission monitors the quality and number of checks carried out by Member States.

4.12. In 2004, the Commission visited 7 Member States to evaluate the performance of physical checks. The Commission's main preliminary findings indicate weaknesses relating to: (a) quality and/or frequency; (b) procedures for selection of consignments; (c) prior notification; (d) statistics. These weaknesses of variable importance were not found in all Member States visited. 4.12. As the Court states, the remarks are of preliminary nature and the Commission can only finalise its position once the Member States have exercised their right of reply.

4.13. The Commission was unable to provide information on the value of transactions physically checked and the value of irregularities detected. During 2004, the Commission adopted a regulation requiring Member States to report this information with effect from the 2005 report. Table 4.1 summarises the numbers of declarations checked and of irregularities detected for the period 2001 to 2003. 4.13. Following the Court’s recommendation, made for the first time in its 2002 Annual Report, the Commission responded in timely fashion by adopting Regulation (EC) No 1454/2004, which stipulates that, as from 2005 the value of transactions checked, as well as irregularities exceeding the amount of 200 euro, have to be communicated by Member States. Until 2005, the information on the value of irregularities depended on the reliability of the communication of irregularities referred to in Article 3 of Regulation (EEC) No 595/91 delivered by the Member States to OLAF and did not comprise irregularities below 4 000 euro.

4.14. The Commission’s Annual Activity Report 2004 contains information on the number of export declarations lodged, the number checked by the Member States and the number of irregularities found. There is no reference to the results of the Commission’s evaluation of the performance of physical checks by Member States, nor of the extent to which assurance can be gained from them. 4.14. The assurance gained from Regulation (EEC) No 386/90 is an integral part of the overall assurance obtained by the Director-General as explained in the Annual Activity Report (section 4.2.2). See also reply to paragraphs 4.29 to 4.31.

Clearance of accounts

Financial clearance

4.15. The Court examined: (a) the reports of the certifying bodies on the 25 paying agencies (see Table 4.2 ) from which transactions were tested (see paragraph 4.26) and of all paying agencies whose accounts were qualified; (b) the Commission’s financial clearance decision; (c) the Commission’s clearance of accounts postponed from previous years (11).

Table 4.1 — Regulation (EEC) No 386/90: Number of physical checks and irregularities detected (12) 2003 2002 2001 Irregularities Physical checks Irregularities Physical checks Irregularities Physical checks Spain 23 4 786 59 6 816 12 7 965 Germany 20 6 644 61 8 476 63 9 713 France 8 3 459 19 3 642 12 4 290 Denmark 8 1 470 22 1 631 33 1 827 Ireland 6 872 3 724 6 707 Belgium 2 2 776 2 2 891 3 3 440 Portugal 2 494 2 363 3 505 Netherlands 1 7 229 0 8 192 0 7 857 Finland 1 668 0 689 0 742 Italy 0 4 618 0 5 491 0 5 513 Greece 0 1 418 0 2 570 0 2 987 United Kingdom 0 976 0 1 131 0 1 435 Austria 0 835 0 1 016 0 1 066 Sweden 0 242 0 254 0 286 Luxembourg 0 0 0 0 0 4 Total 71 36 487 168 43 886 132 48 337 Source:‘Summary of Member States annual reports on the year 2003’ and ‘Summary of Member States annual reports on the year 2002’, by the Commission, DG AGRI D03.

Table 4.2 — Paying agencies by expenditure declared in 2004 No Member State Paying agency Amounts declared in million euro % of total Qualified accounts Disjoined accounts (13) 1 France ONIC 4 413,80 10,19 2 Italy AGEA 3 835,46 8,86 × × 3 United Kingdom RPA 2 854,11 6,59 4 Greece OPEKEPE 2 781,44 6,42 × 5 France OFIVAL 1 897,26 4,38 6 Ireland DAF 1 820,73 4,20 7 Spain Andalucia 1 709,70 3,95 8 Denmark EU-direktoratet 1 215,85 2,81 9 Austria AMA 1 101,64 2,54 10 Germany Bayern, Landwirtschaft 1 074,15 2,48 × 11 France ONIOL 1 000,20 2,31 12 Spain Castilla-Léon 940,67 2,17 13 Finland MMM 869,36 2,01 14 Sweden SJV 844,25 1,95 15 Spain Castilla-La Mancha 810,45 1,87 16 France CNASEA 802,45 1,85 × 17 France ONILAIT 530,51 1,23 18 Germany Nordrhein-Westfalen 475,58 1,10 × 19 Spain FEGA 467,09 1,08 20 Germany Baden-Württemberg 440,92 1,02 × 21 Germany Brandenburg 380,94 0,88 22 Netherlands LASER 362,23 0,84 23 United Kingdom NAWAD 278,70 0,64 24 France FIRS 273,94 0,63 25 Belgium ABKL (Vlaamse Gemeenschap) 220,88 0,51 PAs covered by DAS 2004 Subtotal (14) 31 402,32 72,51 26 Germany Niedersachsen 795,90 1,84 27 Portugal INGA 754,26 1,74 × 28 Belgium BIRB 617,65 1,43 29 Spain Extremadura 616,27 1,42 30 United Kingdom SERAD 614,59 1,42 31 Spain Aragón 520,32 1,20 32 Netherlands PZ 448,82 1,04 33 Germany Hamburg-Jonas 439,64 1,02 34 Germany Mecklenburg-Vorpommern 407,74 0,94 35 Germany Sachsen-Anhalt 384,88 0,89 36 Italy Region Lombardie 359,66 0,83 37 Italy AVEPA (Veneto) 359,44 0,83 38 Spain Cataluña 349,54 0,81 × 39 Germany Schleswig-Holstein 341,16 0,79 40 Italy AGREA 323,79 0,75 41 Germany Sachsen 312,99 0,72 42 Netherlands HPA 297,38 0,69 43 France ONIFLHOR 282,90 0,65 × 44 Germany Thüringen 282,21 0,65 45 United Kingdom DARD 281,61 0,65 46 France ONIVINS 245,19 0,57 47 Belgium Région Wallonne 234,40 0,54 × 48 Germany Hessen 228,27 0,53 49 Germany BLE 222,59 0,51 50 Italy ARTEA (Toscana) 187,56 0,43 51 Germany Rheinland-Pfalz 187,44 0,43 52 Italy SAISA (ex DCCC) 185,47 0,43 53 Spain Canarias 164,13 0,38 54 France ODEADOM 143,58 0,33 × 55 Spain Galicia 139,30 0,32 56 Spain Valencia 138,36 0,32 57 Spain Navarra 116,35 0,27 × 58 Italy ENR 114,32 0,26 59 Spain Murcia 98,29 0,23 60 Portugal IFADAP 69,97 0,16 × 61 Spain Asturias 62,84 0,15 62 Netherlands PT 58,23 0,13 63 Spain País Vasco 57,73 0,13 64 Spain Madrid 57,02 0,13 × × 65 Netherlands DLG 56,18 0,13 66 Netherlands PVE 42,17 0,10 67 Spain La Rioja 41,24 0,10 68 Austria ZA Salsburg 40,19 0,09 69 Luxembourg Ministère de l'Agriculture 37,80 0,09 × × 70 Spain Cantabria 34,22 0,08 71 Spain Baleares 25,57 0,06 72 Germany Bayern, Umwelt 23,82 0,06 × × 73 Germany Saarland 20,23 0,05 × 74 United Kingdom FC 17,30 0,04 75 Poland ARR 11,42 0,03 76 France OFIMER 9,23 0,02 77 Ireland DMNR 9,20 0,02 78 Germany Hamburg 6,72 0,02 79 United Kingdom CCW 5,63 0,01 80 Germany Nordrhein-Westfalen LfEJ 4,99 0,01 81 Czech Republic SAIF 4,94 0,01 × 82 Germany Bremen 2,49 0,01 83 France ACCT/SDE 1,87 0,00 × × 84 Spain FROM 1,68 0,00 85 Slovakia APA 1,48 0,00 86 Germany Berlin 1,40 0,00 87 Estonia PRIA 0,55 0,00 88 Lithuania NPA 0,53 0,00 89 Hungary ARDA 0,51 0,00 × 90 Slovenia AAMRD 0,07 0,00 91 Latvia RSS 0,03 0,00 Subtotal 11 903,25 27,49 Total 43 305,57 100,00 11 507,17 3 955,97 NB: The exchange rates for Member States outside euro zone: Czech Republic: 30,031; Denmark: 7,4502; Estonia: 15,6466; Hungary: 247,25; Latvia: 0,6960; Lithuania: 3,4528; Poland: 4,0876; Slovakia: 38,75; Slovenia: 239,7; Sweden: 9,1687; United Kingdom: 0,6867. Source: Summary report of the Commission on the financial clearance of the EAGGF Guarantee Section accounts for 2004.

Work of the certifying bodies

4.16. A certifying body must be operationally independent of the paying agency (15). It must base its certificate on an examination of procedures and on a sample of transactions. The certificate must state whether the accounts are true, complete and accurate and whether the internal control procedures have operated satisfactorily. This certificate must be supported by a report on the certifying body's findings. Work on legality and regularity is limited to ensuring that the paying agency is able to demonstrate that it has the necessary administrative structures to ensure that claims are checked for compliance before they are paid. Claims submitted by beneficiaries of EU aid are not usually checked on the spot by the certifying body.

4.17. The Commission seeks to ensure that the certifying bodies properly audit expenditure managed by the paying agencies. It issues guidelines for the certifying bodies (including on the sampling of transactions), and reviews their reports to ensure that its guidance has been followed.

4.18. In its summary accompanying its financial clearance decision, the Commission states that it is generally satisfied with the quality and content of the certifying bodies’ reports, but mentions the following areas where certifying bodies need to pay more attention: advances and securities; debts; follow-up of financial errors detected during previous certification audits; sampling and error evaluation; checking maximum guaranteed quantities and the audit of rural development. The Court endorses these conclusions.

Financial clearance decision for 2004

4.19. The Commission took its Financial Decision on 13 May 2005 (16). For the financial year ending 15 October 2004, 71 paying agencies managing 32 billion euro received an unqualified audit opinion from their certifying bodies (see Table 4.2 ). The remaining 20 agencies received a qualified or negative opinion albeit for limited amounts. Reasons included: overpayments and ineligible expenditure found by the certifying bodies; missing supporting documents; weaknesses in the arrangements whereby paying agencies delegate some functions to other bodies; or incomplete, incorrect or misleading information about debtors. 4.19. The qualifications and negative opinions refer, in the great majority of cases, to particular aspects and particular measures within the 20 paying agencies concerned. The Commission has already initiated a procedure to recover any material undue payments (see also paragraph 4.20).

4.20. The Commission approved the accounts of 86 of the 91 paying agencies, and postponed its clearance of the accounts of five paying agencies (representing 4 billion euro, 9 % of the total expenditure declared) because of imprecise or insufficient work by the certifying bodies concerned (17). It intends to make financial corrections, totalling some 7 million euro, in respect of 14 paying agencies (18).

Paying agency accounts not approved (disjoined) in previous years

4.21. In 2004, the Commission completed work on the accounts it had not cleared in the financial decision of 2001 and 2002, in most cases because of inadequacies in the work performed by certifying bodies or because of the need to clarify some information. It cleared the accounts of four paying agencies which were not accepted for 2001 and 17 which were not accepted for 2002.

Conformity decisions taken in 2004

4.22. Conformity decisions usually relate to several years of expenditure and are taken a few years in arrears. Thus, corrections made in the conformity decisions taken in 2004 do not relate to CAP payments to final beneficiaries in 2004. 4.22. The audits leading to conformity decisions primarily concentrate on the management and control systems set up by Member States. Where those audits do not reveal any deficiencies or lead to subsequent improvements of the systems, they are also relevant for the legality and regularity of related expenditure in subsequent years. They are the proof that the existence of a clearance of accounts procedure contributes to the reasonable assurance sought.

4.23. In 2004, the Commission took three conformity decisions in respect of expenditure declared from 1998 to 2003 (19), refusing to finance 406 million euro (20). As in previous years, most of them (71 %), are flat-rate corrections (21). The corrections mainly relate to animal premiums (186 million euro), fruit and vegetables (70 million euro) and arable crops (67 million euro) and mainly concern France (213 million euro), Italy (63 million euro), Greece (46 million euro) and Spain (34 million euro). The principal reasons quoted by the Commission for the corrections were weaknesses in the system of identification and registration of cattle and deficiencies in the number and/or quality of on the spot inspections.

Conformity decisions in recent years

4.24. Table 4.3 shows the results of the Commission’s clearance decisions in respect of 1991 and subsequent years. As at the end of 2004, clearance was not complete for any year later than 1998. The total corrections represent the Commission’s view, for the budget headings and Member States it has examined, of the amount of expenditure which, mainly because of weaknesses in Member States’ systems for managing and controlling expenditure, should not be borne by the Community budget. 4.24. The Commission would like to finish with the past and the most longstanding cases still pending were closely examined when the audit work programme relating to agricultural expenditure for 2005 was drawn up. The situation in June 2005 is that 94,3 % of the audits carried out in 2001 (which allow financial corrections back to 1999) and 78,7 % of the audits carried out in 2002 (which allow financial corrections back to 2000) have been closed.

4.25. Graphs 4.4 and 4.5 set out the distribution of corrections in decisions taken by the Commission during the period 1999 to 2004 (22), by Member State and market sector. These decisions relate to items of expenditure from the Community budget years 1996 to 2003.

Table 4.3 — Corrections in clearance of accounts decisions in respect of budget years 1991 to 2003 (million euro) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Expenditure declared 31 255,9 30 480,2 34 008,0 33 592,8 35 654,4 39 062,5 40 884,3 38 857,4 40 726,2 40 410,6 41 593,8 42 710,8 44 212,0 Total amount of corrections –1 504,1 – 788,2 – 736,6 – 307,8 – 572,8 – 790,0 – 481,4 – 329,3 – 275,6 – 380,4 – 251,7 – 147,5 –37,0 of which: (a) Milk super levies – 979,2 – 419,7 – 230,6 –2,7 –15,1 – 215,0 – 110,2 0,0 0,0 0,0 0,0 0,0 0,0 (b) Disallowed expenditure – 524,9 – 368,5 – 506,0 – 305,1 – 557,7 – 575,0 – 371,2 – 329,3 – 275,6 – 380,4 – 251,7 – 147,5 –37,0 Disallowed expenditure as a percentage of expenditure declared 1,7 % 1,2 % 1,5 % 0,9 % 1,6 % 1,5 % 0,9 % 0,8 % 0,7 % 0,9 % 0,6 % 0,3 % 0,1 % Source: Clearance of accounts decisions in respect of budget years 1991 to 2003.

The Court’s sample of transactions

4.26. The Court examined a representative sample of payments drawn from the expenditure of 25 paying agencies (which were collectively responsible for 72,5 % of CAP expenditure) as well as from the direct expenditure of the Commission. Through these tests, the Court sought to obtain direct evidence that payments were properly made for an eligible activity. Such tests provide good evidence of whether expenditure on area aid is legal and regular (see paragraphs 4.35 to 4.38) and, to a lesser extent, animal premiums (see paragraphs 4.39 to 4.42) where physical evidence is usually available to the auditor. By contrast, in areas such as export refunds (see paragraphs 4.49 and 4.50) or aids paid on the basis of the quantity produced (see paragraph 4.43), the auditor can only check documents. The extent to which such documents provide reliable evidence is influenced by both the nature of the transaction (see paragraph 4.48) and the control system concerned (see paragraph 4.54).

Annual Activity Report of the Director-General for Agriculture for the year 2004

Some improvement from last year

4.27. The Annual Activity Report (AAR) contains a declaration by the Director-General that control procedures give him assurance that CAP transactions for 2004 are legal and regular.

4.28. The report states that: (a) Directorate-General for Agriculture (DG AGRI) is in overall compliance with the internal control standards although further work is required in some areas (23); (b) IACS provides, except in Greece, an excellent means of ensuring the proper use of Community funds; (c) post-payment checks provide reasonable assurance that the expenditure concerned complies with Community legislation; (d) the certification procedure provides assurance about the completeness, accuracy and reliability of the accounts of the paying agencies and a certain degree of assurance about the functioning of their internal control systems and their ability to ensure that payments are legal and regular; (e) for the 2004 expenditure, the audit work on control systems will be concluded, and final financial corrections decided, at the earliest, in 2006; (f) there is a risk that ineligible expenditure has been financed, but this expenditure may be audited in subsequent years under the conformity procedures and may be subject to financial corrections (24); (g) the financial corrections under the clearance procedure along with the recoveries in Member States cover the ‘global financial risk’.

4.29. The sources of information on which the Director-General bases his declaration provide limited coverage of, and assurance on, the legality and regularity of 2004 expenditure. IACS inspection results address the legality and regularity of payments to farmers, but these are insufficiently verified and validated by an independent body. The work of certifying bodies may bring to light problems at the level of paying agencies, but cannot be relied upon to provide assurance on claims by farmers and traders. 4.30. In order to obtain reliable information on the legality and regularity of payments to final beneficiaries, the Director-General would need: (a) either to make arrangements for certifying bodies to extend their work to final beneficiaries, through extending their sample tests to the level of farmers or by doing more work to verify and validate IACS inspections statistics and post-payment checks (25); or (b) to require his own staff, on the basis of an appropriate sampling method, to verify the legality and regularity of transactions for the year at the level of final beneficiaries. 4.29 and 4.30. The Commission takes the view that the Director-General already has sufficient information to have reasonable assurance of the legality and regularity of agricultural expenditure. As already indicated in response to the Court’s annual report 2003 the set-up and accreditation of the Member States' paying agencies, the annual certification procedure and the application of the various management and control systems, including IACS, permit a great deal of reliance to be placed on the control over expenditure declared. In order to further improve the overall system the new basic regulation on the financing of the common agricultural policy provides that the heads of paying agencies shall henceforth sign an ex post declaration of assurance on the legality and regularity of their expenditure. The information on which the Director-General relies is derived from a system which is based on a multi-annual approach. The Commission therefore does not support the options set out by the Court.

4.31. The fact that the Director-General’s declaration relates to expenditure which may subsequently be the subject of financial corrections, and does not indicate to what extent expenditure might be affected by such corrections, limits the assurance which the Court can derive from his declaration (26). The declaration should distinguish, on the one hand, expenditure which has been verified (and has been or will be the subject of corrections where necessary) for which the Director-General can give reasonable (or no) assurance and, on the other hand, expenditure which is the subject of further verification (and possible correction). 4.31. The Commission is of the opinion that it would not be appropriate in the AAR to distinguish, as the Court suggests, between expenditure which has already been verified and expenditure which will be subject to further verification. Given the multi-annual nature of the conformity clearance process, such a distinction would be largely arbitrary; it would also prejudice the Member States' right of defence in the context of the clearance of accounts procedure. The Director-General’s declaration and the accompanying AAR need to be placed in the broader regulatory framework for the clearance of the EAGGF accounts set out in Article 7 of Regulation (EC) No 1258/1999. The whole process is divided into an annual financial clearance on the one hand and a multi-annual conformity clearance on the other, which allows the Commission to exclude expenditure from Community financing that has been effected less than 24 months prior to the Commission’s written communication of the results of its audits to the Member State concerned. Against this background, reasonable assurance as regards the legality and regularity of agricultural expenditure carried out under shared management cannot be obtained on an annual basis, in particular in the context of the Director-General’s AAR, from the audit work of the Commission services alone, but must be predicated on the premise that Member States fulfil their management and control obligations. Where Commission audits subsequently identify deficiencies, the risk of ineligible expenditure will be determined and appropriate financial corrections applied. The fact that the clearance of accounts decisions are usually taken some years after the year of the expenditure concerned is an integral part of the procedure, which includes the right of Member States to respond to the findings, and this fact is explicitly acknowledged in the Director-General’s 2004 AAR.

4.32. At present, the level of irregular payments financed by the CAP is not known to, or estimated by, the Director-General (27). He has no reliable basis on which to assert that a sum equivalent to the total sum of irregular payments is likely to be recovered through the clearance of accounts (28) procedure and through the recovery procedures in the Member States. The conformity decisions are in most cases flat-rate corrections for weaknesses in the control systems rather than an assessment of the impact of the individual errors. 4.32. The Commission considers the total financial corrections in respect of a given year, together with the sanctions imposed on final beneficiaries at national level, to give a valuable estimation of the overall level of irregular payments.

Internal Control Standards — Some standards are not fully implemented

4.33. One of the innovations introduced in the framework of the reform of financial management in the Commission services was the requirement to meet 24 Internal Control Standards which were made more concrete in the form of 71 baseline requirements. DG AGRI’s 2004 self-assessment concluded that all standard and baseline requirements had been met (see paragraph 4.28(a)).

4.34. The Court examined the implementation of eight standards (29), and found that four of them showed room for improvement (30). DG AGRI’s Internal Audit Capability (see Chapter 1, paragraph 1.81) reports issued during 2004 confirmed this. 4.34. The Commission must emphasise that DG AGRI by the end of 2004 was in compliance with all the baseline requirements laid down by the Commission for the 24 ICS. This does not exclude that improvements in some areas are still possible and desirable, which DG AGRI also indicated in its assessment of the situation at the end of 2004.

The Court’s assessment of areas of CAP spending

Area aid schemes

4.35. Spending on arable crop subsidies paid on an area basis amounted to 17 475 million euro in 2004, 39 % of CAP expenditure. All of this expenditure is covered by IACS.

4.36. The IACS inspection results on declarations of area for 2003 (for payments in 2004) are set out in Table 4.4 .

4.37. Member States reported to the Commission that they checked 8,1 % of claims on the spot, representing 11,4 % of the total area claimed. For the 14 Member States that have implemented IACS satisfactorily, their random checks showed an error rate of 1,6 %. This provides a reasonable estimate of the likely error in claims paid. For on-site inspections, areas not found in the claims inspected (31) (see Table 4.4 and Graph 4.6 ) include both the results of checks on claims selected at random and selected on the basis of an analysis of risk. As in previous years, in certain Member States, risk-based transactions proved to have a lower rate of error than randomly selected transactions. 4.37. It should first be noted that the overall on-the-spot inspection levels are well in excess of the minimum requirements. It is correct to say that in some Member States random checks appear to be more effective. As explained previously, this is largely due to some Member States' reporting of remote sensing controls as ‘random’, when in fact they are also at least partly risk-based. As of 2004, with the introduction of Regulation (EC) No 118/2004, there is a regulatory requirement for Member States to review the results of inspections and to improve their risk analysis procedures accordingly, which will resolve the issue. However, it is pointed out that there are to some extent ‘diminishing returns’. Because of the quality of the IACS system, including 100 % administrative checks, the frequency of anomalies detected on the spot is low, so that the difference in results achieved between random and risk-based inspections is marginal, and possibly explained by the difference in sample sizes. Furthermore, the Court bases its calculations on discrepancies in terms of areas, whereas the same comparison in terms of frequency of farmers with irregularities gives a different result for several Member States.

Table 4.4 — Area Aid, forage areas and other crops — Results of IACS field inspections and remote sensing in 2003, relating to claims paid in 2004 Member State Applications submitted Applications checked Applications with errors Number Area (ha) Average size (ha) Number % Area (ha) % Average size (ha) Number % Area (ha) % Belgium 41 618 1 019 389 24 4 172 10,0 151 209 14,8 36 1 422 34,1 1 326 0,9 Denmark 49 574 2 319 081 47 2 611 5,3 137 759 5,9 53 716 27,4 647 0,5 Germany 305 315 14 008 476 46 18 467 6,0 941 989 6,7 51 7 878 42,7 5 731 0,6 Greece 328 200 3 897 336 12 37 088 11,3 1 913 787 49,1 52 11 375 30,7 29 326 1,5 Spain 429 069 17 889 474 42 44 994 10,5 2 077 268 11,6 46 19 972 44,4 60 579 2,9 France 409 976 23 777 964 58 27 990 6,8 1 870 383 7,9 67 11 293 40,3 10 593 0,6 Ireland 127 532 4 686 612 37 9 092 7,1 529 153 11,3 58 1 408 15,5 1 745 0,3 Italy 588 069 7 068 768 12 45 678 7,8 1 270 819 18,0 28 20 731 45,4 43 759 3,4 Luxembourg 1 953 121 680 62 106 5,4 8 292 6,8 78 95 89,6 133 1,6 Netherlands 45 914 654 439 14 3 239 7,1 54 624 8,3 17 1 212 37,4 2 280 4,2 Austria 127 059 2 465 204 19 8 680 6,8 200 402 8,1 23 4 434 51,1 2 517 1,3 Portugal 130 648 1 984 370 15 11 687 8,9 1 271 815 64,1 109 8 463 72,4 21 613 1,7 Finland 68 329 2 086 447 31 4 674 6,8 191 490 9,2 41 2 064 44,2 1 189 0,6 Sweden 58 958 2 745 792 47 4 054 6,9 204 571 7,5 50 2 280 56,2 6 377 3,1 United Kingdom 128 135 14 146 232 110 7 932 6,2 1 134 869 8,0 143 4 437 55,9 7 348 0,6 Total 2003 2 840 349 98 871 264 35 230 464 8,1 11 958 430 12,1 52 97 780 42,4 195 163 1,6 Total 2002 2 894 917 97 955 796 34 248 572 8,6 11 656 029 11,9 47 94 717 38,1 198 079 1,7 Total 2001 2 935 273 98 275 675 33 299 716 10,2 11 638 423 11,8 39 105 099 35,1 240 786 2,1 NB 1: Remote sensing involves the use of satellite or aerial photography to check IACS applications. NB 2: Test performed in year N are relevant to payments made in year N + 1. Source: IACS statistics submitted by Member States to DG AGRI.

4.38. For area aid as a whole, the results of the Court’s testing of transactions are broadly consistent with the results of random testing performed by the Member States, and the distribution by type is similiar to previous years: (a) the majority of the payments were free of error; (b) around one in three was affected by relatively small errors of measurement. As in previous years, errors of this nature and scale, while frequent, have no marked impact on overall expenditure; (c) a small number of cases were affected by larger errors, but the number and impact of such cases was however lower than in previous years. 4.38. The Court’s remarks broadly correspond to the Commission’s own findings of a generally satisfactory situation in the great majority of Member States.

Animal premium schemes

4.39. Spending on animal premiums amounted to 9 019 million euro in 2004, 20 % of CAP expenditure. IACS inspection statistics for animal premiums show the number of animals claimed by farmers which inspectors found not to exist or not to be eligible for subsidy. Statistics for animal premiums are still less reliable than the equivalent statistics for area aid applications. 4.39. Statistics for (the six) animal premium schemes are more varied than those for arable crops, which explains the difference in quality of the Member States' reporting. Furthermore, several reforms in the animal premium sector, concerning market and control-related issues, have necessitated regular revision of reporting requirements. However, the statistics are considered sufficiently reliable for their main purpose, i.e. to monitor Member States' compliance with regulatory controls and sanctions. Furthermore, quality has improved, and timely reporting is now the ‘norm’, overall constituting a very significant improvement compared to previously.

4.40. In 2003 (i.e. in respect of claims paid in 2004), for the largest scheme, the suckler cow premium (see Table 4.5 and Graph 4.7 ), Member States inspected 17,3 % of the animals claimed, finding 1,4 % of these to be missing or ineligible, a decrease on 2002, when 2 % were found to be ineligible. For the sheep and goat premiums the percentage of missing animals increased from 7,2 % in 2002 to 8,2 % in 2003. Italy and Greece report significantly higher levels of error for sheep and goat premiums than the other Member States; the rate of error for the remaining 13 Member States in 2003 was 1,8 % (2,2 % in 2002). 4.40. The figures reported show an improvement in terms of detecting animals miss- or over-declared by farmers. The situations described for Greece and Italy are also the result of improved checking procedures following actions encouraged under the clearance of account procedure.

4.41. Overall, the rate of error found by IACS inspections of cattle in 2003 shows small variations from Member State to Member State, except for Italy where the percentage of ineligible cattle is still very high (10,2 % of animals claimed for the suckler cow premium and 22,3 % of animals claimed for the special beef premium). 4.41. The Court’s remarks on the level of cattle ineligibility in Italy may well reflect the fact that this Member State was somewhat late in implementing its national database and had a high proportion of non-compliant farmers who are now being effectively detected and sanctioned.

4.42. The direct testing performed by the Court did not reveal any significant errors.

Table 4.5 — IACS inspections for suckler cow premium — Results of on-the-spot checks in 2003, relating to claims paid in 2004 Member State Claims inspected Inspected claims partially rejected Inspected claims fully rejected Animals inspected Inspected animals rejected Total number of claims submitted Number % Number % Number % Total number of animals claimed Number % Number % Belgium 15 433 748 4,8 7 0,9 2 0,3 394 047 40 354 10,2 39 0,1 Denmark 8 754 1 053 12,0 20 1,9 3 0,3 109 444 32 337 29,5 44 0,1 Germany 33 326 3 496 10,5 302 8,6 100 2,9 635 750 92 878 14,6 1 412 1,5 Greece 11 513 11 426 99,2 213 1,9 113 1,0 212 310 212 602 100,1 2 665 1,3 Spain 62 837 5 912 9,4 319 5,4 37 0,6 1 734 717 352 008 20,3 2 323 0,7 France 121 849 17 311 14,2 1 946 11,2 452 2,6 4 286 741 695 530 16,2 4 751 0,7 Ireland 62 861 4 655 7,4 326 7,0 32 0,7 1 105 245 121 632 11,0 1 007 0,8 Italy 58 890 6 567 11,2 184 2,8 1 037 15,8 797 680 124 429 15,6 12 699 10,2 Luxembourg 508 38 7,5 1 2,6 1 2,6 23 391 3 080 13,2 4 0,1 Netherlands 4 234 652 15,4 13 2,0 11 1,7 55 347 16 041 29,0 126 0,8 Austria 61 324 6 872 11,2 468 6,8 100 1,5 397 376 63 795 16,1 996 1,6 Portugal 25 066 2 771 11,1 170 6,1 113 4,1 328 935 60 041 18,3 1 149 1,9 Finland 1 532 203 13,3 22 10,8 2 1,0 36 794 5 079 13,8 71 1,4 Sweden 9 599 616 6,4 5 0,8 1 0,2 150 902 11 173 7,4 16 0,1 United Kingdom 31 273 2 977 9,5 534 17,9 16 0,5 1 414 748 193 212 13,7 1 339 0,7 Total 2003 508 999 65 297 12,8 4 530 6,9 2 020 3,1 11 683 427 2 024 191 17,3 28 641 1,4 Total 2002 539 093 78 087 14,5 6 056 7,8 2 933 3,8 11 934 249 2 230 816 18,7 45 408 2,0 NB 1: A claim is fully rejected when a difference of more than 20 % is found between the number of animals declared and that determined to be eligible, or when the difference is the result of irregularities committed intentionally. NB 2: Tests performed in year N are relevant to payments made in year N + 1. Source: 2003 IACS statistics submitted by Member States to DG AGRI.

Subsidies paid on the basis of quantity produced

4.43. The EU subsidises olive oil, cotton and tobacco production (4 132 million euro, 9,2 % of CAP expenditure in 2004) on the basis of the quantity produced, rather than the area used to grow the crop. Expenditure of this kind poses particular risks that Community legislation tries to meet by providing for a number of control mechanisms. These include: (a) requiring claims to be compatible with IACS area declarations; (b) a number of requirements for processors (for example, quality of weighing equipment, standard accounting information); (c) requiring Greece, Spain, France, Italy and Portugal to set up an olive tree register and a Geographical Information System (34) and (except in France) setting up olive oil control agencies to carry out checks on mills, producers and producer associations. If these control mechanisms do not operate effectively there can be no assurance on the accuracy of payments made.

4.44. The Court’s audit identified a number of deficiencies: 4.44.

(a) in Greece some claims for olive oil could not be verified as the parcels declared were not at the location indicated; (a) to (c) The Commission has made similar findings in the framework of the clearance of accounts audits.

(b) Greece still did not have a functioning olive oil GIS for the period relevant to payments made in 2004 and the regulatory compensating on-the-spot-checks were not carried out satisfactorily;

(c) in Greece cases were found of producer organisations failing to make the necessary checks, for example on the disposal of olive oil or on the milling certificate supporting the claim;

(d) in Andalusia, incorrect calculations for the applications of sanctions for olive growers who had declared more olive trees than recorded in the GIS. (d) Previous Commission clearance missions in several Autonomous Communities of Spain have also shown that a tolerance is systematically wrongly added when calculating the sanctions in case of over-declaration of trees. These cases are closely followed up by the Commission.

4.45. The findings of the olive oil control agencies in the four Member States concerned are set out in Tables 4.6 and 4.7 . The agencies work includes checks on olive mills (producers are paid on the basis of quantities of olive oil certified by the mills). Where the agencies find errors and weaknesses (such as incorrect accounting or reporting increased quantities), they may propose a range of penalties, the most severe being withdrawal of approval. Checks on mills in 2003 (affecting payments in 2004) led to the agencies proposing the revocation of the authorisation of 9 % of mills visited. However these proposals are often not implemented by authorities in the Member States (see Annual Report 2003, paragraph 4.39). 4.45. The quality of the control of the olive oil mills is also considered as a point of major importance (key control) by the Commission. This includes not only the quality of the control itself, but also the quality of the follow-up of the control agencies' proposals. Unjustified failure to implement proposals for sanctions is considered a basis for applying financial corrections by the Commission.

Table 4.6 — Olive oil inspection agencies: checks on mills (2002-2003), relating to claims paid in 2004 Member State No of mills Mills checked Proposals to withdraw authorisation Total In depth Summary (35) No % No % No % No % of mills checked Greece 2 198 1 097 49,9 739 33,6 358 16,3 180 16,4 Spain 1 686 958 56,8 825 48,9 133 7,9 73 7,6 Italy 5 762 3 124 54,2 1 852 32,1 1 272 22,1 285 9,1 Portugal 579 428 73,9 428 73,9 (36) (36) 22 5,1 Total 10 225 5 607 54,8 3 844 37,6 1 763 17,2 560 10,0 Source: Annual Reports for 2002 to 2003 of the Greek, Spanish, Italian and Portuguese olive oil agencies.

Table 4.7 — Olive oil inspection agencies: checks on producers (2002 to 2003), relating to claims paid in 2004 Member State No of producers Producers checked Aid payments withdrawn or reduced Total On site Using documents No % No % No % No % of producers checked Greece 593 500 3 591 0,6 2 619 0,4 972 0,2 37 1,0 Spain 485 000 1 324 0,3 943 0,2 381 0,1 47 3,5 Italy 932 822 2 013 0,2 432 0,0 1 581 0,2 63 3,1 Portugal 148 542 1 768 1,2 1 768 1,2 N/A 0,0 271 15,3 Total 2 159 864 8 696 0,4 5 762 0,3 2 934 0,1 418 4,8 Source: Annual Reports for 2002 to 2003 of the Greek, Spanish, Italian and Portuguese olive oil agencies.

Rural development

4.46. EAGGF-Guarantee rural development expenditure amounted to 5 395 million euro in 2004 (37) (12 % of CAP spending). This covers spending on agri-environmental schemes, compensatory amounts for farming in less-favoured areas, forestry, investments and support for young and for retiring farmers. Schemes of this kind frequently have relatively complex eligibility conditions which are difficult and costly to check and which therefore present a high risk of irregularity.

4.47. For rural development expenditure the certifying bodies have qualified their audit opinion on the accounts of 12 paying agencies (38), although with limited financial impact. Reasons for qualifying the accounts were material errors, ineligible expenditure, missing supporting documents and, concerned mostly agri-environment measures and investments in agriculture and forestry. In two cases the Commission has already started the follow-up of the weaknesses identified (Greece and Luxembourg).

4.48. Most entitlements to rural development support are dependent on respect of commitments entered into by the beneficiaries, such as respect of good farming practices, and are calculated on the basis of the number of hectares used, number of animals etc. The Court’s Special report on agri-environment measures (see paragraphs 4.98 and 4.99), the largest type of expenditure in the rural development area, concludes that the verification of such expenditure poses particular problems and that verification can rarely lead to reasonable assurance of the legality and regularity of expenditure at a reasonable cost. 4.48. The control of agri-environment measures is, due to its complexity, resource intensive both in technical and financial terms. Therefore, a more exhaustive check of the AEM would lead to disproportionate additional costs and would bring only limited value added as to the minimisation of the risk. See also reply to paragraphs 4.98 and 4.99.

Other expenditure

4.49. Expenditure not discussed in paragraphs 4.35 to 4.48 amounts to 8 674 million euro. This includes export refunds (3 384 million euro), subsidies for the withdrawal and storage of excess production, a number of small subsidy schemes and veterinary expenses.

4.50. The Court examined how the Commission has monitored the application of two regulations relevant to expenditure not covered by IACS and predominantly classified here as other expenditure.

4.51. The Commission’s monitoring of post-payment checks in 2004 could have been more extensive. A significant proportion of checks planned were not completed and reporting by Member States on the value, nature, and distribution of errors and the value of transactions tested was deficient. Taking these factors into account, the Court considers that the Commission did not have a sufficient basis to take assurance from the work performed (see paragraph 4.10). 4.51. The Commission also closely monitored the post-payment checks in 2004 by analysing the documents provided by the Member States and by visiting Member States in order to check the implementation of the Regulation on the spot (see the response on paragraph 4.10). Considering — that post-payment checks provide an additional supplementary level of controls to the pre-payment checks (which for the majority of measures provide already reasonable assurance), and — that the major part of the required minimum number of post-payment checks had been performed by the end of 2004, and — that the Member States have communicated in their annual reports the number, value and nature of irregularities identified and the value of transactions tested, the Commission had sufficient basis to take part of its assurance from the work performed (see also reply to paragraph 4.52). Although the quality of reporting will be further improved, it is already of sufficient quality to provide assurance over the work performed.

4.52. Physical and documentary checks on goods under Regulation (EEC) No 386/90 at the time of export should cover at least 5 % of most subsidised exports. The Commission carried out a programme of missions to seven Member States and provisionally found weaknesses in the execution of these checks (see paragraphs 4.11 to 4.14). It has not stated the degree of assurance to be gained from them. 4.52. The range of physical, pre- and post-payment checks available to Member State authorities is exhaustive and weaknesses in any one form of check must be evaluated in this context. Nevertheless, any control failures are subjected to financial correction under the clearance of accounts procedure. Thus the Director-General gains assurance from the clearance of accounts system as a whole. Subjects to be audited are selected based on an annual risk analysis on which the Court previously has commented positively, and it is from this total population of audits and their follow-up that the Director-General derives assurance.

4.53. While export refunds accounts for less than 10 % of the CAP budget, in 2004, by value, they accounted for some 26 % of CAP irregularities reported to the Commission under Regulation (EEC) No 595/91 (39). The Commission should therefore improve its monitoring of the system of post-payment checks and state its findings on the execution of physical checks and the degree of assurance to be gained from them. 4.53. The Commission is already carrying out regular audits on specific aspects of post-payment checks concerning export refunds, as stated by the Court in paragraph 4.10(b). Regarding physical checks, the Commission does not consider it appropriate to publish specific findings before they have been dealt with in the clearance of accounts procedure. The disproportionate share of export refunds in CAP irregularities is at least partly due to average export refund payments being considerably higher than for other intervention measures and especially direct payments. Therefore irregularities for export refunds are more likely to exceed the 4 000 euro threshold for being reported under Regulation (EEC) No 595/91.

4.54. The Court found weaknesses in subsidies for dried grapes (Greece, also reported on in both 2002 and 2003 Annual Reports) and nuts (Spain). 4.54. The Commission has made and will continue to propose financial corrections for the deficiencies found concerning dried grapes. Concerning nuts, the Commission will follow up these cases.

Conclusion and recommendations

Global conclusion

4.55. As in previous years, the Court found recurrent evidence that CAP expenditure, viewed as a whole, and drawing on all available sources of evidence, was still affected by significant errors. The Court recognises that different degrees of risk and weaknesses attach to the main categories of CAP expenditure. 4.55. The Commission concludes from this observation together with the points made under paragraphs 4.38 and 4.42 that for the agricultural expenditure managed and controlled by the IACS the situation is satisfactory, the risks identified by the Court being concentrated on the other CAP measures (see paragraph 4.57). At the moment IACS covers some 60 % of CAP expenditure. It should be noted that the CAP reforms of 2003 and 2004 reduce the overall risk even further by extending the expenditure covered by IACS to around 80 %. As a general remark concerning the errors, the following should be noted: due to the tight timetable for the Court’s Annual Report, the Court’s conclusion on the individual cases is drawn before all Member States have replied to the Court’s findings. The Commission services, where necessary in collaboration with the Member States concerned, make a thorough analysis of the errors found by the Court, some of which do not lead to a clearance of accounts financial correction.

4.56. The result of the Court’s work shows that, where properly applied, IACS (25 000 million euro) is an effective control system to limit the risk of irregular expenditure. Even though the elements that constitute IACS are formally in place in Greece, there are serious deficiencies in the functioning of the system with the result that the system is not reliable (1 000 million euro). 4.56. The Commission shares the Court’s opinion that IACS is an effective control system to limit the risk of irregular expenditure. Important weaknesses in the application of the system still exist in Greece, and these are followed up in the framework of the action plan consisting of an enhanced clearance of accounts audit programme for Greece, see also the reply to paragraph 4.8.

4.57. All other expenditure (19 500 million euro) which cannot be checked by IACS poses greater risk because the systems available to control them are not as effective. 4.57. Even if the other expenditure poses a greater inherent risk, it should be noted that many of these schemes are managed in an IACS compatible way. Furthermore, this expenditure is subject to an additional layer of controls, i.e. the ex post controls pursuant to Regulation (EEC) No 4045/89.

Post payment checks

4.58. In view of the limited scope of the Commission’s monitoring action (involving visits to only 3 Member States to check full implementation in 2004) and of the backlog of incomplete checks, and given that weaknesses were already reported in the Court’s 2003 Annual Report (40), the Court cannot agree with the basis of the Commission’s statement in the Annual Activity Report 2004 that ‘Based on the information received and based on on-the-spot missions undertaken annually in order to evaluate the application of the Regulation it can be concluded that the controls pursuant to Regulation (EEC) No 4045/89 provide reasonable assurance as to the compliance with Community legislation of the expenditure in the sectors covered by the Regulation’. 4.58. As outlined in paragraph 4.10, the Commission is of the view that it has fulfilled all of its obligations as set out in Regulation (EEC) No 4045/89. Risk analysis proposals, annual programmes, annual reports, mutual assistance requests and replies, overviews of payments to undertakings established in other Member States and other forms of communication/reporting have been received and analysed. In addition to the three missions mentioned by the Court, another six are scheduled in 2005. Furthermore, regular missions covering specific aspects of Regulation (EEC) No 4045/89 regarding export refunds have been taking place since 2001. All questions or enquires from Member Sates have been replied to. Considering the above reasons as well as the following: — that post-payment checks provide an additional supplementary level of controls to the pre-payment checks (which for the majority of measures provide already relatively complete assurance), and — that the major part of the required minimum number of post-payment checks had been performed by the end of 2004, and — that the Member States have communicated in their annual reports the number, value and nature of irregularities identified and the value of transactions tested, the Commission is of the view that Regulation (EEC) No 4045/89 checks contribute to the overall assurance on the legality and regularity of the 2004 expenditure.

Clearance of accounts

4.59. The reports of the certifying bodies provide assurance that financial information provided by the paying agencies (and incorporated in the Commission’s accounts) is materially accurate (41). The Commission’s financial clearance decision for 2004 was, in general, soundly based on the work of the certifying bodies on the reliability of accounts. It has dealt correctly with decisions to defer approval of the accounts (see paragraphs 4.19 to 4.21).

4.60. The work of the certifying bodies, however (as defined by Regulation (EC) No 1663/95) is not designed to, and does not, provide direct assurance that the information supplied by claimants, and used by paying agencies to calculate the payment due, is correct and, therefore, that payments are legal and regular. The Court maintains its view that certification (or any other part of the control chain) should cover the legality and regularity of expenditure at the level of beneficiaries (42), current arrangements provide limited assurance to the Court as certifying bodies do not generally check beneficiaries of aid. 4.60. As already indicated in the response to the Court’s annual report for 2003, the set-up and accreditation of the Member States' paying agencies, the annual certification procedure and the application of the various management and control systems, including IACS, permit a great deal of reliance to be placed on the control over expenditure declared. In order to further improve the overall system, the new basic regulation on the financing of the common agricultural policy provides that the heads of paying agencies shall henceforth sign an ex post declaration of assurance on the legality and regularity of their expenditure.

4.61. Commission’s conformity decisions, whereby it can exclude expenditure from Community financing, were not complete for any year later than 1998 (see paragraph 4.24). 4.61. As indicated in the response to paragraph 4.24, the situation in June 2005 was that 94,3 % of the audits carried out in 2001 (which allow financial corrections back to 1999) and 78,7 % of the audits carried out in 2002 (which allow financial corrections back to 2000) have been closed.

Annual activity report of the Director-General for Agriculture

4.62. Notwithstanding improvements made in the report, it provides limited coverage of, and assurance on the legality and regularity of 2004 expenditure. As the report cannot indicate to what extent expenditure might be affected by subsequent financial corrections, it limits the assurance which the Court can derive from it. The report does not assert that irregular payments are recovered through the clearance of accounts procedure and through the recovery procedures in the member states. 4.62. The Annual Activity Report and the annual declaration of DG AGRI are based on the assurance which can be gained from the systems in place and their functioning. The activity report explains the whole chain of controls of CAP expenditure under shared management. This system gives reasonable assurance that by the end of the whole process, possible serious shortcomings will have been detected and appropriate financial corrections will have been imposed on Member States. This is the basis which allows the Director-General to provide the Statement of Assurance. By the time of signing of the annual declaration, all expenditure under shared management may still be subject to clearance of accounts audits and possible financial corrections. This is inherent to the system of shared management, in conformity with EU legislation, and should not be seen as a limiting factor for the Director-General for providing the annual declaration. The assurance will be further consolidated with the annual statements of paying agencies provided in the new CAP Financial Regulation as well as by other measures proposed by the Commission in its communication COM(2005) 252 final on a road map to an integrated internal control framework.

Recommendations

4.63. The Commission should seek to: 4.63.

(a) improve the checks of CAP spending in those areas where significant shortcomings persist; (a) The Commission is committed to address continuing shortcomings still existing, such as the application of IACS in Greece. In this context, it should be noted that the CAP reforms of 2003, and for Mediterranean products of 2004, reduce the overall risk by extending the expenditure covered by IACS.

(b) as indicated last year, improve the format of reporting of the results of all supervisory systems. In particular make post-payment checks a more valuable tool in the identification of irregular CAP payments by addressing the deficiencies in the data requested from Member States, notably by reporting on value of transactions tested and irregularities detected by budget heading (see paragraph 4.10(a)). It should assess the quality of checks performed, and if appropriate, programme further visits to Member States (see paragraph 4.10(b)) and take appropriate measures to ensure the completion of planned programmes (see paragraph 4.10(c)); (b) First, the Commission accepts that reporting in accordance with Regulation (EEC) No 4045/89 could be improved and will introduce a proposal to amend Commission Regulation (EC) No 4/2004 to this effect. New tables will be introduced for communication on the value of transactions tested and of irregularities detected so that their number, value and nature can be clearly identified and analysed. Secondly, the Commission is already assessing the quality of checks performed on a regular basis. in the course of 2001 to 2004, 27 missions that included the review of Regulation (EEC) No 4045/89 controls on export refunds were carried out by DG AGRI. The Commission took, following the Court’s 2003 Annual Report, further measures to improve the monitoring of checks performed by programming, with regard to general aspects, three missions in 2004 and six missions in 2005 and, with regard to conformity issues, 10 missions in 2005. Finally, new ways of identification and reporting of the backlog are foreseen (in the proposal to amend Commission Regulation (EC) No 4/2004) so that the checks not completed during the reporting period can be followed up in the reports in respect of following reporting periods. The Commission is, in this respect, also investigating the reasons for the failure to complete in due time control programmes in certain Member States and, where appropriate, will request clarification from Member States.

(c) ensure that control and supervisory systems provide assurance on the legality and regularity of the transactions at the level of the final beneficiary; (c) The Commission is of the opinion that the existing management and control systems, if properly placed in the context of a multi-annual process, already provide reasonable assurance on the legality and regularity of the transactions at the level of the final beneficiary. The whole process is divided into an annual financial clearance on the one hand and a multi-annual conformity clearance on the other, which allows the Commission to exclude expenditure from Community financing that has been effected less than 24 months prior to the Commission’s written communication of the results of its audits to the Member State concerned. Against this background, reasonable assurance as regards the legality and regularity of the transactions carried out under shared management cannot be obtained on an annual basis from the audit work of the Commission services alone, but must be predicated on the premise that Member States fulfil their management and control obligations. Where Commission audits subsequently identify deficiencies, the risk of ineligible expenditure will be determined and appropriate financial corrections applied.

(d) soundly estimate the level of irregularities and ensure that it is recovered through the different procedures; (d) As regards the requested estimation of the level of irregularities, the Commission considers the total financial corrections in respect of a given year, together with the sanctions imposed on final beneficiaries at national level, to give a valuable estimation of the overall level of irregular payments. The recovery of sums lost as a result of irregularities falls under the responsibility of Member States. The Commission follows up on the national recovery procedures on the basis of Article 8 of Regulation (EC) No 1258/1999.

(e) distinguish in the declaration of assurance of the Director-General, on the one hand, expenditure which has been verified (and has been subject of corrections where necessary) for which the Director-General can give reasonable (or no) assurance and, on the other hand, expenditure which is the subject of further verification (and possible correction); (e) The Commission considers that it would not be appropriate in the AAR to distinguish, as the Court suggests, between expenditure which has already been verified and expenditure which will be subject to further verification. Given the multi-annual nature of the conformity clearance process, such a distinction would be largely arbitrary; it would also prejudice the Member States' right of defence in the context of the clearance of accounts procedure.

(f) continue to investigate the reasons why, for IACS checks on areas, tests performed on a random basis continue to show a higher level of error than those selected on the basis of risk analysis. It should also analyse the effects of the changes made in the risk analysis in 2004. (f) Regulatory amendments introduced with effect from 1 January 2004 will improve the situation and the Commission continues to audit the issue as normal. The effect described by the Court is limited to some Member States and is sometimes due to the classification of remote sensing controls as random. Furthermore, when expressed in terms of farmers with irregularities, the results from the risk-based selection are indeed more successful than those from the random selection. However, it should be noted that with decreasing levels of irregularity, and effective 100 % administrative checks, the difference in results achieved between random and risk-based on-the-spot checks is expected to be marginal.

NEW MEMBER STATES: TRANSITION

Accreditation of the EAGGF paying agencies in the new Member States

4.64. The acceeding countries were required to have established and accredited EAGGF paying agencies by 1 May 2004.

4.65. The new Member States had to designate a competent authority responsible for accrediting the paying agency. The body that carries out the accreditation review must report on the administrative and accounting conditions, including those adopted to protect the Commnuity’s interests regarding advances paid, guarantees obtained, intervention stocks and amounts to be collected. Based on this report the Member State’s competent authority decides whether to grant provisional or final accreditation.

4.66. Of the 11 paying agencies, seven have been granted accreditation (43), but two of them were accredited for a limited period of time (44) and four have provisional status.

4.67. The Commission has not verified whether these paying agencies meet the accreditation criteria. Expenditure for 2004 was negligible (19,5 million euro) but significant amounts are likely to be charged to the Fund in the 2005 EAGGF year. It is therefore important that the Commission completes its work as soon as possible. 4.67. The Commission 2005 audit work programme covers all the new Member States and missions will be carried out to them all from June to November 2005. Thus, all new paying agencies will have been audited before the clearance of accounts exercise for the financial year 2005. Since 2003, the Commission has ascribed paramount importance to the development of the required structures and has been very proactive in follow-up vis-à-vis each of the new Member States (candidate countries at that time). In this respect, missions were carried out and a flow of information through written communications was established. Meetings between the Commission services and each of the new Member States were held. Measures needed to be taken in order to remedy identified problems were recorded.

4.68. As can be seen from Table 4.8 , accreditation reports indicate that five paying agencies have attained a satisfactory level of compliance. Two agencies have significant weaknesses in two areas, while four are weak in at least four areas.

Table 4.8 — Summary of weaknesses identified in the accreditation reports for the paying agencies in the new Member States (45) Member State EAGGF Expenditure in 2004 (million euro) Paying agency Written procedures Segregation of duties Payment checks and procedures Accounting procedures (46) Computer security Internal audit Delegated Bodies (47) Cyprus — Cyprus Agricultural Payments Organization (CAPO) × × × × × × × Czech Republic 4,70 SAIF (SZIF) State Agriculture Intervention Fund No major problems Estonia 0,50 ARIB (PRIA) Agricultural Register and Information Board × × Hungary 0,50 ARDA (MVH) Agricultural and Rural Development Agency × × × × × Latvia 0,50 RSS (LAD) Rural Support Service × × × × Lithuania 0,50 NPA (NMA) National Paying Agency No major problems Poland 10,80 ARMA (ARiMR) Agency for Restructuring and Modernization of Agric. × × × × × Poland — AMA (ARR) Agricultural Market Agency No major problems Malta — ‘Paying Agency’ Dept. within MRAE × × Slovak Republic 1,40 APA (PPA) Agricultural Paying Agency No major problems Slovenia 0,10 AAMRD Agency for Agricultural Markets and Rural Development No major problems Source: Reports on accreditation provided to the Court by the Competent Authorities.

SAPARD — Satisfactory supervision but some weaknesses in claims assessment

4.69. The Special Accession Programme for Agriculture and Rural Development (SAPARD) (48) aims to help the 10 beneficiary countries of central and eastern Europe (49) to deal with the problems of the structural adjustment in their agricultural sectors and rural areas and to contribute to the implementation of the common agricultural policy and related policies (see chapter 8).

4.70. The contracting period for those countries which joined the EU on 1 May 2004 ended in 2004. Payments will, however, continue to be made for the projects contracted in the previous years. During this final contracting period (50), due to the low implementation rate in the first years (51), a high number of applications was processed in a short time. Consequently, the quality of these assessments and the related payment claims present a higher risk. 4.70. During the transition period (from Sapard to post-accession programme), the Commission drew the attention of the new Member States to the importance of maintaining an adequate level of qualified staff for the management of the Sapard Programme. The Commission is aware of the potential risk, and will take it into account in its audits, but has so far found no evidence of a financial risk arising.

4.71. Each SAPARD country is required to provide the Commission annually with a certificate on the accounts and an audit report by a certifying body, which form the basis of the Commission’s annual clearance of accounts decision. On 28 September 2004 the Commission cleared the 2003 SAPARD accounts for seven countries (Czech Republic, Estonia, Latvia, Lithuania, Hungary, Slovenia and Slovakia) but postponed its decision on the accounts for Poland, Bulgaria and Romania. The Court’s review of the Commission’s decision does not give rise to any major finding. 4.71. The Commission has requested supplementary audit work from the certifying bodies of the countries concerned. Once this assessment is finalised, and considered satisfactory, the Commission shall proceed with the clearance of those Sapard accounts.

4.72. The Court reviewed the Commission’s analysis of the annual implementation reports which the SAPARD countries are obliged to submit. This review showed that the legal deadlines for these analyses were not always respected. 4.72. The Commission is paying increased attention to the respect of deadlines.

4.73. The Court visited two SAPARD Countries, Hungary and Slovenia, to check a sample of payments for 20 projects and to review the procedure, descriptions and checklists used by the SAPARD paying agencies. Notwithstanding the errors found by the Court (see next paragraph), the SAPARD systems included the key concepts (segregation of duties, internal audit, etc.); procedures were well documented and the systems as described and accredited were generally working in practice.

4.74. The review of payments, covering the main measures implemented at the time of the audit, revealed the following weaknesses and errors although with minor financial impact some of which are similar to those found for other SAPARD Countries (52): (a) some major business plan figures were not evidenced with supporting documentation; (b) in the project file the evidence of the checks on the total eligible cost was inadequate; (c) the work actually carried out by the authorities during the on-the-spot visits was not clearly evidenced or was not appropriate leading in one case to a payment for an investment only partially completed; (d) errors of non-compliance with the three price offer procedure (53) (54).

4.75. Some invoices for high value items, which were subsequently reimbursed by the SAPARD agency, were settled by the beneficiary in cash. It could not be established whether payments were actually made by the beneficiary. Cash payments are more difficult to evidence than other forms of payment and therefore present a higher risk. 4.75. The Member State concerned considers that it has received adequate evidence to prove the reality of the payment to the supplier. It is accepted however that cash payments represent a higher potential risk.

4.76. On the basis of the audit work performed and excepted the findings in paragraphs 4.73 to 4.75), the Court reiterates the opinion (55) that the SAPARD supervisory and control systems generally worked in practice.

FOLLOW-UP TO PREVIOUS OBSERVATIONS

CMO in the Banana sector

4.77. In November 2002 the Court published a Special Report (56) on the CMO in the banana sector. The Court observed that the definition of the CMO’s objectives and the description of the expected impact were not sufficiently clear, which made measurement of its impact and effectiveness difficult, and that it was impossible to form an opinion on the cost-effectiveness of the compensatory aid system. Weaknesses were also found in the documentation of aid payments and in import controls. 4.77. As it has already pointed out in its reply to the special 2002 Court report, it feels that the CMO objectives in the banana sector correspond to those laid down for the common agricultural policy in Article 33 of the Treaty and that the detailed description and quantification of the CMO objectives are comparable to those of other CMOs. During preparations of the current CMO evaluation criteria the Steering Committee worked systematically and defined the objectives in detail. A more thorough and, where necessary, a review of the CMO objectives will be based on the results of the impact analysis evaluation which the Commission is going to undertake in the second half of 2005.

4.78. The Court recommended that the Commission should carry out the in-depth evaluation of the CMO, and a full analysis of the risks, costs and benefits associated with various possible options in view of the transition to tariff-only system foreseen on 1 January 2006. The Council supported (57) the Court’s recommendations by expecting the overall evaluation to be completed by 2004, and the Commission undertook this task in its action plan for the 2001 (58) discharge procedure. 4.79. The overall evaluation had not yet been completed by the Commission at the time of the Court’s follow-up audit in April 2005. Consequently, the planned in-depth review of the aims and objectives of the CMO has not taken place since the Court’s Special Report in 2002. The delay in the evaluation has deprived the Commission of important management information allowing it to make an assessment of the cost-effectiveness of the compensatory aid, prevented it from evaluating the extent of the contribution of the Structural Funds measures to the CMO, and hindered an impact analysis of the aid measures for ACP producers. 4.78 and 4.79. The evaluation was launched in 2003 and the contract signed at the end of august 2004. The final stage of the evaluation report will cover the operation of the CMO and its impact including an assessment of the effectiveness and efficiency in support of Community producers. The evaluation report as well as the report of the Court of Auditors will be the basis for the planned impact study. In view of these details and the public debate which it intends to open, the Commission plans to present its proposals for reform to Parliament and to the Council in 2006.

4.80. The Commission reported to the budgetary authorities in February 2005 (59), as required by Article 32 of the framework Regulation (EEC) No 404/93 (60). However, the contents and analysis of its report were limited by the absence of the evaluation results, and it presented no proposals or alternatives on the operation of the Regulation. 4.80. Article 32 of Regulation (EEC) No 404/93, requires the Commission to present a report on the operation of the CMO to the European Parliament and the Council no later than 31 December 2004. Pending the finalisation of the evaluation study and international negotiations on the tariff rate to be applied to imports from 1 January 2006 onwards, the Commission thought it advisable to present a purely factual report.

4.81. In view of the transition to a tariff-only system in the EU’s banana imports foreseen to take place no later that 1 January 2006 (61), the Commission agreed to the Court’s recommendation that a thorough analysis of the impact of the transition on all the parties involved would be made at the time of the abovementioned review exercise. In January 2005, the Commission notified the WTO of its plan to introduce a new common customs tariff of 230 euro/tonne (thereby replacing the existing tariff of 75 euro/tonne for quantities under the present quotas A and B up to 2 653 000 tonnes for countries other than the ACP countries). In March 2005, the EU’s four major trading partners requested WTO arbitration on the proposed new tariff. The arbitration process is ongoing.

4.82. The banana aid scheme for Community producers grants one of the highest levels of support per hectare (in average over 8 800 euro/ha (62)). The Court reported that the cost of the tariff quota system has been two to three times greater to consumers than the total aid paid to EU producers. However, the delays in the evaluation have adversely affected the Commission’s undertakings vis-à-vis almost all of the Court’s observations, all the more important given the short time left before the mandatory introduction of the tariff-only system. 4.82. The Commission acknowledges that the evaluation has not been carried out according to the initial timetable. Nevertheless, the Commission will have a sound evaluation which certainly will enliven the proposed discussions during the second half of 2005.

4.83. The Commission acted on the control weaknesses in compensatory aid identified by the Court by imposing financial corrections on the Member States concerned. However, in the follow-up assessment of its 2001 Action Plan (63), the Commission found that import control problems still prevailed and instructed the Member States to solve them. This is not in accordance with the Court’s recommendation and the subsequent Council conclusion that ‘the Commission, in consultation with the Member States, draw up instructions on the control procedures’. 4.83. In order to improve the control environment and to take account of the interest of the legitimate traders, the Commission is currently working on a proposal to amend the provisions for checks on the weight of fresh bananas released for free circulation in the Community. After discussions with the various Commission services involved, taking input from the Customs Code Committee meeting of 13 July 2005 and the views of banana traders, the Commission is preparing a proposal for adoption before autumn 2005.

4.84. Therefore, the Court repeats its recommendation that the Commission complete the announced in-depth review and re-examination of the CMO, and conduct the wide consultation with the Community’s producers, consumers and its major trading partners with the aim of better defining the objectives of the CMO and to improve its management. 4.84. Like the Court, the Commission considers it advisable to complete the CMO evaluation with an impact analysis which is to be launched in the second half of 2005.

Pre-financing of export refunds

4.85. Subsidies for the export of certain agricultural products (export refunds) are paid to exporters up to four months in advance of the date of export (pre-financed). The products concerned have to be placed under customs control and a complex system of checks put in place to ensure that goods for which refunds have already been paid are physically exported.

4.86. In its Special Report No 1/2003 the Court criticised prefinancing for being cumbersome, difficult to control and not serving its original purpose, which was to give preference to Community sourced agricultural products. It concluded by requesting that the Commission review the system and that consideration should be given to its removal. Subsequently, in its decision on discharge (64), the Parliament requested the Commission to present a proposal for the abolition of pre-financing by December 2004.

4.87. The Commission reacted to the Court’s recommendations by implementing two new regulations establishing horizontal rules, and a further three new sector specific regulations in relation to prefinancing (65). The regulations did not remove the system but only modified the implementing rules for a ‘test phase’. 4.88. Since the Court’s report, the amount of refunds paid under pre-financing has fallen from around 600 million euro to 188 million euro, or around 5 % of total refunds, due to a change in market conditions and a significant reduction in refund rates in the cereals sector. 4.89. In an internal analysis subsequent to the Court’s report the Commission accepts that alternatives to pre-financing could be applied to the cereals and processed beef sectors. The Commission however justifies retention of prefinancing for ‘fresh’ (in reality frozen) beef as a way of paying the higher special rate of refund applicable to such exports; that control over beef exports would be compromised by the removal of the scheme; and that in the absence of prefinancing an increase in refund rates would be necessary to compensate companies and therefore impose extra costs to the EU budget. 4.90. The Court considers that a system reliant on making payment up to four months in advance of export in order to pay a special refund rate to a limited number of commercial traders and achieve efficient control is fundamentally flawed. 4.91. The Commission has not complied with the Parliament’s request to present proposals to abolish prefinancing by the deadline set. 4.87 to 4.91. The Commission took note of the Court’s criticism of the pre-financing system raised in its Special Report and implemented an action plan in order to remedy the weaknesses highlighted. Pre-financing was effectively limited to the two sectors, beef meat and cereals, where it was deemed still to be needed. Furthermore, the period of time under which products can stay under pre-financing was shortened, some other simplifications were made and some control measures were reviewed. The Commission announced that the amended system would be reviewed after a trial period. As the Court indicates in paragraph 4.89, in 2004, the Commission services made an intermediary analysis. In this, alternatives to pre-financing were indicated but it was stated that a possible abolition of the system should be seen against the alternative control systems that would have to be introduced. The Commission is at the stage of concluding its analysis of the operation of the present system in order to allow it to make a final proposal on the future of the pre-financing scheme.

Potato and cereal starch

4.92. The system of support for cereal and potato starch production aims to secure the competitiveness of European non-food starch user industries, and is complemented by specific direct support measures for the production of potato starch. In its Special Report No 8/2001 the Court concluded that administrative controls were satisfactory on the whole in the Member States audited (66), but that they were not sufficiently supported by physical checks, and it made a number of recommendations to address weaknesses that it identified in the implementation of the support system. 4.92. As not every measure can be audited every year, the Commission’s audits are determined on an annual risk-analysis driven basis. The Special Report of the Court dates from July 2001. As a result of the risk analysis based on a variety of risk factors including findings of the Court, the audit work programme for 2004 for clearance of accounts which was established in 2003 did envisage an enquiry into potato starch. During the audit missions carried out in 2004, the issues raised by the Court were also addressed. Clearance procedure for both audits is progressing as scheduled and for the time being at the stage of the bilateral procedure.

4.93. In the context of the 2000 discharge procedure, the Council (67) recognised that the starch support scheme did not present any major difficulties, and supported the majority of the Court’s recommendations. The European Parliament required in particular that the Commission define predictable and transparent criteria for the calculation of production refunds for potato and cereal starch (68). 4.93. The recommendations of the Parliament concerning the calculation of production refunds have been followed up by the Commission. Parameters and the calculation method used for the calculation of the production refunds for cereal and potato starch are specified in Commission Regulation (EC) No 1548/2004.

4.94. An evaluation (69) in 2002 addressed the lack of information and analysis of production refunds on the competitivity of the EU non-food starch industry, and on the impact of direct support on the incomes of starch potato producers noted by the Court, and served as the basis for modifications to the support scheme in the context of the CAP reform. The 2003 CAP reform left the scheme components essentially unchanged, but allowed for partial decoupling of direct aid to starch potato producers. 4.94. In its proposals for the CAP reform, the Commission proposed a full decoupling of potato starch payment as well as the abolition of the minimum price paid to the producers. However, the Council favoured only a partial decoupling of the direct aid of 40 %.

4.95. As recommended by the Court, from September 2004, the Commission simplified and clarified its method for calculating the monthly production refund. Apart from this, few other recommendations were taken on board by the Commission: 4.95.

(a) checks made by national authorities on the potato starch manufacturers have not yet been clearly defined by the Commission, in particular as that the number of potato starch producers has increased from 17 (EU-15) to 39 (EU-25); (a) The Commission carried out audits in 2004 to Germany and the Netherlands allowing the clarification of a number of issues within the clearance of accounts procedure. In addition, within the reform, plausibility checks with areas planted have been imposed as of 2004 which should further enhance the control system.

(b) there is no reliable data on the structural disadvantage suffered by potato starch producers compared to cereal starch producers, therefore the compensatory premium has remained unchanged since 1995. (b) Given the oligopolistic structure of the potato starch industry, the companies regard their cost structure as highly sensitive and consequently keep them confidential. The Commission has therefore only limited access to information regarding the structural disadvantage of potato starch producers. As, in addition, there are no official price quotations for different varieties of starch like stock exchange quotations, the Commission had no basis for proposing a change of the compensatory premium, subsequently maintaining it unchanged.

PRINCIPAL OBSERVATIONS IN SPECIAL REPORTS

Forestry measures within rural development policy (70)

4.96. The Court’s audit led to the following conclusions about forestry measures financed by rural development funds: 4.96.

(a) programme objectives are often contradictory and it is difficult to monitor how far they are achieved; (a) The approach adopted since 2000 following the rural development Regulation (EC) No 1257/1999, is consistent with the EU Forestry Strategy, which provides the overall reference framework and principles (sustainability and multifunctionality) for forestry actions in the EU. For the future programming period, the Commission has introduced a more strategic approach for rural development and has set out in its strategic guidelines the EU priorities for its three policy axes (competitiveness, sustainable land management and the wider rural economy).

(b) management is shared between the Commission and the Member States. There is no clear responsibility for assessing the extent to which the financed projects contribute to the achievement of the EU forestry strategy; (b) The link between the Forestry Strategy and the individual projects co-financed by the EAGGF funds is ensured via the Rural Development Programmes (RDPs). The Commission verifies that programmes are in line with the Forestry Strategy. The national or regional authorities approve the individual projects on basis of the RDP. The contribution to the achievement of the EU Forestry Strategy is assessed for each Rural Development Programme in the evaluation reports prepared by the Member States and summarised by the Commission. The Commission proposed in July 2004 (COM(2004) 490 final) to reinforce the evaluation requirements for the future rural development framework.

(c) contrary to the requirements of the relevant regulation, forestry measures are frequently not based on national or sub-national forest programmes; (c) At the beginning of the present programming period only few Member States had developed national forest programmes. In the absence of such programmes, it seemed justified to accept RDPs or OPs as equivalent instruments, a possibility which was provided for in Regulation (EC) No 1257/1999. However, Member States made progress over the last years in the formulation and implementation of their national forest programmes.

(d) the system in place for implementing forestry measures is complex, creating difficulties for both managing authorities and beneficiaries. Weaknesses found included unclear project selection criteria, weak on the spot checks of claims, and unsatisfactory control procedures for public contract tendering; (d) The Commission is aware of the fact that the system is complex and has consequently proposed significant simplifications for the period post 2006 (COM(2004) 490 final). A single funding and programming system will remove the need to comply with different rules for different funds. The Commission audit services verify the selection systems on the basis of guidelines. Non-transparency or non-objectivity entails recommendations addressed to the Member State and in some cases lead to financial corrections. The Commission audit services pay particular attention to the respect of proper procedures for public contract tendering.

(e) there is a risk that afforestation measures by municipalities will fail at a later stage: municipalities do not receive aid for the maintenance of seedlings and young plantations; (e) There is a certain responsibility of municipalities to maintain their own forests. The authorities approving projects should require sufficient evidence from the municipalities that the maintenance work is ensured.

(f) increasing woodland by grant-aided afforestation of agricultural land is very expensive, mainly due to compensation for loss of agricultural income over a period of 20 years. The results could have been obtained more cheaply. (f) Afforestation of agricultural land does indeed appear to be expensive but is justified as a long term investment in ecological stability and renewable natural resources. The loss of income over a considerable number of years from the land planted with forest is the biggest cost to the farmer entering the scheme. Therefore, long-term compensation is necessary for afforestation of agricultural land to be attractive to farmers. Nevertheless, in its initial proposal for the post 2006 Rural Development framework, the Commission suggested to limit the compensation for income loss to 10 years. A compromise was reached with the Member States on 15 years.

4.97. The Court recommended that the Commission should review various aspects of the support scheme. In particular the Commission should reconsider how aid for afforestation can be better targeted, at a lower cost, taking into account changing public needs and the fact that the emphasis of