OPINION No 5/94 of the Court of Auditors of the European Communities on:

- a proposal for a Council (EC) Regulation amending Council Regulation (EEC) No 729/70 concerning the financing of the common agricultural policy, and - a proposal for a Council (EC) Regulation amending the financial Regulation of 21 December 1977 applicable to the general budget of the European Communities (94/C 383/03)

THE COURT OF AUDITORS OF THE EUROPEAN

COMMUNITIES

Having regard to the Treaty establishing the European Community, and in particular Articles 43 and 209 thereof,

having regard to Council Regulation (EEC) No 729/70 of 21 April 1970 () concerning the financing of the Common Agricultural Policy,

having regard to the Financial Regulation of 21 December 1977 applicable to the General Budget of the European Communities (), as last amended by Council Regulation (EEC, ECSC and Euratom) No 2730/94 of 31 October 1994 (),

having regard to Commission Decision No 94/442/EC of 1 July 1994 concerning the establishment of a conciliation procedure within the context of the settlement of the EAGGF-Guarantee accounts (),

having regard to the proposals submitted by the Commission on 1 July 1994 (),

having regard to the Council`s request for the consultation of the Court of Auditors on these proposals, which was received by the Court on 2 September 1994,

whereas a combination of lack of resources and procedural difficulties has led to long delays in the clearance decisions and caused legal and financial insecurity at the level of the national administrations,

whereas this has led to a situation where the Commission has been unable to provide, as part of the annual clearance procedure, reasonable assurance that the expenditure recorded in the accounts of the Member States and entered against the general budget of the Community is materially correct and was incurred in conformity with Community legislation,

whereas the Court has spoken out on several occasions against this situation, as well as criticising the weakness of the internal control of the EAGGF-Guarantee payment systems and the irregularities that result from that weakness, especially in the area of export refunds ();

whereas it is not expected that the Commission will be in a position to meet the conditions which would allow a single comprehensive decision to be delivered and that, consequently, the proposal by which the clearance of accounts is to be split into two separate procedures aims to revise the objectives of the clearance system in the direction of preventive and corrective actions to be carried out at the same time as, or shortly after, the operations, and to organise better collaboration between the Member States and the Commission,

whereas in this context the proposed organization and procedures of the paying agencies responsible for the decentralised management of Community expenditure, as well as those relating to the clearance of accounts itself, are to be clarified and strengthened;

whereas, in order to reform the management of the EAGGF, it appears necessary to provide for the payment of interest on arrears in cases where sums owed are not paid to the Commission by the due date, or where the recovery of unwarranted payments is necessary,

HAS ADOPTED THE FOLLOWING OPINION:

PART ONE:

GENERAL CONSIDERATIONS

1. The Court reiterates its adherence to the principle of a single, annual EAGGF-Guarantee clearance decision, as postulated by Regulation (EEC) No 729/70 in its first version. It regrets that the Commission has not been able to promote the satisfactory application of that principle by developing an appropriate methodology in respect of the control and administrative regulation of cases of non-compliance or irregularity and by allocating the necessary resources to it.

2. The Court has noted this situation on several occasions in its annual and special reports (), as well as the weaknesses in the internal control of the systems for the execution of EAGGF-Guarantee expenditure. It has also deplored the fact that the management of the EAGGF-Guarantee is subject to irregularities, especially in the field of export refunds, but also in the field of interventions and direct aid.

3. In this context, the Commission`s proposal looks like a compromise solution, taking account of the weaknesses observed in the clearance procedure but not remedying them completely. In the light of its previous recommendations, the Court therefore recommends prudence. As it favours a shortening of the clearance period, it suggests that it should be undertaken at the end of a trial period, after the Commission has carried out an assessment. The Court considers that the Commission will have to rely on, amongst other things, the initial results of the conciliation procedure provided for in Article 5(2c) of its proposal, so as subsequently to be able to justify any more fundamental amendment of the texts at present in force.

4. The Commission`s proposal provides that the shortening of the clearance period will not apply to the financial consequences of these irregularities. With a view to preserving the legitimate rights of the European Union beyond the specific area of irregularities, the Court favours an extension of the exceptions to the shortening of the clearance period to include cases of negligence, as provided for by the provisions of Article 8(2) of Regulation No 729/70.

5. This is the point of view from which the Court sets out the following specific comments which, in its view, are such as to improve the wording of the proposed texts.

PART TWO:

SPECIFIC COMMENTS

A) On the proposal amending Regulation No 729/70.

Paying agencies accreditation

6. Given the key role of the paying agencies in the implementation of the EAGGF-Guarantee policy, the Court underlines the need for careful and thorough procedures for their accreditation. Therefore the criteria to be fulfilled by the paying agencies, or bodies delegated by them, should be clearly laid down by the Commission as part of the conditions for accreditation specified in Article 4, paragraph 7, of Regulation No 729/70. Furthermore, in order to avoid discrepancies in assessments of the paying agencies` systems of internal control and administrative organization, any national accreditation should be given on the basis of a specific Commission opinion (Article 4, paragraph 1, of Regulation No 729/70).

Clearance of accounts procedure

7. The Commission`s proposal splits the clearance of accounts operation into two separate audit procedures:

(a) an annual audit by independent auditors of the paying agencies` accounts, based on their available supporting documents, which is intended to confirm that the revenue and the expenditure of a single financial year have been entered correctly, completely and reliably in the accounts;

(b) multiannual compliance audits (), relating to different financial years, which are intended to verify the substance of the underlying transactions and the compliance of the corresponding expenditure and revenue with the Community legislation.

In order to ensure the coherence of the overall clearance procedure, the objectives, scope, and methodology followed for each of these two audit phases need to be clearly defined.

8. The annual accounts clearance decision must be based to a great extent on attestations regarding the completeness, correctness and reliability of the accounts of the paying agencies. Underlining the Commission`s final responsibility and given the vital importance of these attestations in this context, it should be specified in the revised Regulation that:

(a) the organizations which examine the accounts must be functionally and hierarchically independent of the paying agencies (Article 4, paragraph 3, of Regulation No 729/70);

(b) the names of the organizations which will examine the accounts must be communicated to the Commission (Article 4, paragraph 3, of Regulation No 729/70);

(c) before relying on the attestations, and in order to ensure that they are homogeneous and reliable, the Commission should satisfy itself that the audits have been executed in accordance with internationally accepted auditing standards, including an examination of the effectiveness of the internal control systems (Article 5, paragraph 1, of Regulation No 729/70), and that the results provide a sufficient basis for these attestations.

9. The compliance audit should be transaction-based. It should examine, on a representative basis, whether the appropriations of the EAGGF-Guarantee budget have been expended in conformity with Community legislation. It should also include an examination of the legality and regularity of the underlying operations, so that final beneficiaries can be identified, more particularly in areas at risk, as well as an examination of the substance of the operative events.

10. For the reasons of prudence mentioned in paragraph 3 above, the Court considers that the immediate reduction of the clearance period set by the Commission to three years, covering the current financial year and the two previous ones (Article 5, paragraph 2(c) of Regulation (EEC) No 729(70), is excessive and should be changed to five years, covering the current financial year and the four previous ones. Due to this new timing, and in order to ensure effective coverage of all expenditure, the Commission should establish, at the beginning of every year, a rolling multiannual programme for the compliance audits, covering the current year and the following two years (Article 5, paragraph 2(c) of Regulation No 729/70) and should simultaneously produce an activity report on the audits carried out during the previous year (Article 5, paragraph 2(b) of Regulation No 729/70).

11. The decisions taken as a result of the compliance audits, being either a deduction from or an addition to the Community financing, will each time relate to specific budget areas and will usually cover the expenditure of more than one budget year. To ensure adequate transparency, these decisions should specify for each of the Member States the amounts by budget area(s) as well as by budget year(s).

12. Finally, it is necessary for precise time limits to be fixed at all stages of the clearance procedure, in particular so as to preclude prolonged delays in closing files. Likewise, it is essential that provision be made for the payment of interest on arrears in cases where sums due on specific maturity dates are paid late, and during the recovery of unwarranted payments.

13. The Court notes that the Commission has already decided () on a conciliation procedure in the context of the results of the compliance audit, provided for in Article 5, paragraph 2(c) of Regulation 729/70, final paragraph of the revised Regulation. Given the possible impact of this new procedure on the future clearance decisions, the Commission should carefully evaluate the conciliation procedure and its results after some years of experience, but not later than 31 December 1998.

Evaluation of the new system

14. The changes in the clearance of accounts procedures, as they are now proposed, are important. In many respects it is difficult to foresee their impact on the implementation of the EAGGF-Guarantee policy. The Court considers, therefore, that the Commission should submit to the budgetary authorities, before 31 December 1998, an evaluation of the functioning of the new procedures, covering:

- the accreditation of paying agencies;

- the attestation of the accounts;

- the compliance audit;

- the conciliation procedure.

This evaluation should also be presented to the Court of Auditors (Article 2 of the proposed Council Regulation).

B) On the proposal amending the Financial regulation

15. The aim of the Commission`s proposal is to adapt the provisions of the Financial Regulation to the proposed amendments to Regulation (EEC) No 729/70.

16. The Court considers that the recommendations it has made above concerning this Regulation are applicable mutatis mutandis to the proposal to amend the Financial Regulation. However, the Court also believes that Article 102, paragraph 5, concerning the results of the compliance audit should also cover the possibility of an increase in expenditure.

PART THREE:

PROPOSED AMENDMENTS

17. In the following tables the Court has set out the amendments to, and comments on, the Commission proposals which were adumbrated in Parts One and Two.

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This Opinion was adopted by the Court of Auditors in Luxembourg at the Court meeting of 15 December 1994.

For the Court of Auditors

André J. MIDDELHOEK

President

() OJ No L 94, 28. 4. 1970, p. 13.

() OJ No L 356, 31. 12. 1977.

() OJ No L 293, 12. 11. 1994, p. 7.

() OJ No L 182, 16. 7. 1994, p. 45.

() OJ No C 284, 12. 10. 1994, p. 5 and COM(94) 240, 1. 7. 1994.

() See the following:

(a) Annual reports:

(a) - Observations on the clearance procedure:

(a) - - Annual report on 1986, § 5.26 (OJ No C 336, 15. 12. 1987).

(a) - - Annual report on 1988, § 5.1-5.32 (OJ No C 312, 12. 12. 1989)

(a) - Observations on Member States:

(a) - - Annual report on 1989 (OJ No C 313, 12. 12. 1990)

(a) - - Annual report on 1990 (OJ No C 324, 13. 12. 1989)

(a) - - Annual report on 1991 (OJ No C 330, 15. 12. 1992)

(a) - - Annual report on 1992 (OJ No C 309, 16. 11. 1993)

(a) - - Annual report on 1993 (OJ No C 327, 24. 11. 1994).

(b) Special reports:

(a) - No 2/89 on fresh and processed fruit and vegetables (OJ No C 128, 24. 5. 1989)

(a) - No 2/90 on the management and control of export refunds (OJ No C 133, 31. 5. 1990)

(a) - No 2/92 on export refunds paid to selected major traders (OJ No C 101, 22. 4. 1992)

(a) - No 4/93 on the implementation of the milk quota system (OJ No C 227, 23. 8. 1993)

(a) - No 7/93 on irregularities and frauds in the agricultural area (OJ No C 307, 13. 11. 1993)

(a) - No 8/93 on the market in raw tobacco (OJ No C 64, 2. 3. 1994).

() Checks as to the substance of the operative events and the legality/regularity of the expenditure.

() Commission Decision of 1. 7. 1994 concerning the introduction of a conciliation procedure in the context of the clearance of the accounts of the EAGGF-Guarantee, OJ No L 182, 16. 7. 1994, p. 45.