THE COURT'S OBSERVATIONS THE COMMISSION'S REPLIES

INTRODUCTION

5.1. This chapter deals with the Court’s audit of heading 1 (Agriculture) of the 2000 to 2006 Financial Perspectives. It comprises expenditure on regulating and supporting agricultural markets and on direct income support for farmers. Expenditure in 2005 on the common agricultural policy (CAP) (1) totalled 48 466 million euro (2004: 43 579 million euro) (for details see Graphs 5.1 and 5.2 ).

5.2. Under the Treaty, the European Commission has overall responsibility for implementing the EU budget. Virtually all agricultural expenditure is carried out under shared management (EAGGF-Guarantee). This means that payments to final beneficiaries (farmers, private companies, traders, associations or public entities) are made by Paying Agencies approved by the Member States. Less than 1 % of expenditure is managed directly by the Commission.

5.3. The expenditure declared by the Member States is subject to several control systems: (a) control of the correctness of the farmer's claims under the Integrated Administration and Control System (IACS) (4); (b) sector-specific controls, e.g. for olive oil and rural development; (c) physical checks on subsidised exports of agricultural goods (5); (d) post-payment scrutiny of commercial documents on the premises of traders and processors of agricultural goods (6); (e) the clearance procedure, which covers all of the expenditure declared as far as the completeness and accuracy of the annual accounts are concerned (the financial decision) and, on a multi-annual basis, the legality and regularity of the expenditure (conformity decisions).

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE STATEMENT OF ASSURANCE

The audit scope

5.4. In order to obtain assurance as to the legality and regularity of the transactions underlying the Community's accounts, the Court audited the main supervisory and control systems (see paragraph 5.3) and tested a random sample of payments drawn from the expenditure of 25 paying agencies in EU-15 (which were collectively responsible for 66 % of CAP expenditure) (see Table 5.1 ) and 20 payments under the Single Area Payments Scheme (SAPS) (7) in the New Member States.

Table 5.1 — Paying agencies by expenditure declared in 2005 No Member State Paying agency Amounts declared in million euro (8) % of total Qualified certificates Disjoined accounts (9) 1 France ONIC 4 535,37 9,36 × 2 Italy AGEA 3 832,32 7,91 × × 3 United Kingdom RPA 2 952,11 6,09 4 Greece OPEKEPE 2 756,08 5,69 5 France OFIVAL 2 401,35 4,95 6 Spain Andalucía 1 817,00 3,75 7 Ireland DAF 1 805,72 3,72 8 Denmark EU-direktoratet 1 223,61 2,52 9 Poland ARiMR 1 193,04 2,46 10 Austria AMA 1 192,37 2,46 11 France ONIOL 967,48 2,00 12 Spain Castilla-León 956,40 1,97 13 Sweden SJV 954,42 1,97 14 Finland MMM 901,48 1,86 15 Spain Castilla-La Mancha 882,45 1,82 16 Germany Niedersachsen 881,09 1,82 17 Portugal INGA 801,25 1,65 18 Hungary ARDA 553,72 1,14 × 19 Belgium BIRB 525,63 1,08 20 Germany Nordrhein-Westfalen LWK 524,04 1,08 21 Czech Republic SAIF 424,82 0,88 22 Netherlands Dienst Regelingen 375,61 0,77 23 Spain Cataluña 368,39 0,76 24 Germany BLE 307,41 0,63 25 United Kingdom NAWAD 297,38 0,61 26 France ONIFLHOR 276,03 0,57 × 27 Belgium Région Wallonne 256,67 0,53 × 28 Lithuania NMA 235,90 0,49 29 Slovakia APA 205,56 0,42 × 30 Poland ARR 166,46 0,34 31 Netherlands PT 74,33 0,15 PAs covered by DAS 2005 Subtotal (10) 34 645,52 71,47 32 Germany Bayern Landwirtschaft 1 176,61 2,43 × 33 France CNASEA 813,81 1,68 × 34 United Kingdom SERAD 644,32 1,33 35 Spain Extremadura 633,95 1,31 36 Italy AVEPA 560,02 1,16 37 Spain Aragón 535,47 1,10 38 Germany Baden-Württemberg 474,29 0,98 × 39 Italy AGREA 444,56 0,92 40 Italy Region Lombardie 436,96 0,90 41 Germany Mecklenburg-Vorpommern 429,65 0,89 42 Netherlands PZ 416,27 0,86 43 Germany Brandenburg 412,50 0,85 44 Germany Sachsen-Anhalt 404,81 0,84 45 Spain FEGA 389,87 0,80 46 Germany Schleswig-Holstein 382,16 0,79 47 Germany Hamburg-Jonas 374,01 0,77 48 France FIRS 355,04 0,73 49 Germany Sachsen 345,39 0,71 50 France ONILAIT 329,50 0,68 51 United Kingdom DARD 323,06 0,67 × 52 Netherlands HPA 291,47 0,60 53 Germany Thüringen 291,31 0,60 54 France ONIVINS 270,71 0,56 55 Belgium ABKL 252,20 0,52 56 Italy ENR 248,50 0,51 57 Germany Hessen 242,77 0,50 58 Italy ARTEA 204,07 0,42 59 Germany Rheinland-Pfalz 194,53 0,40 60 Spain Valencia 173,04 0,36 61 Spain Galicia 151,41 0,31 62 France ODEADOM 129,73 0,27 × 63 Spain Navarra 128,59 0,27 64 Spain Canarias 121,23 0,25 65 Spain Murcia 108,91 0,22 × 66 Slovenia AAMRD 106,65 0,22 67 Italy SAISA 99,10 0,20 68 Latvia RSS 98,86 0,20 69 Portugal IFADAP 91,52 0,19 × × 70 Spain Asturias 81,25 0,17 71 Estonia PRIA 67,32 0,14 72 Spain País Vasco 61,34 0,13 73 Spain Madrid 57,94 0,12 74 Netherlands PVE 52,83 0,11 75 Netherlands DLG 46,07 0,10 76 Luxembourg Ministère de l'Agriculture 45,07 0,09 × × 77 Spain La Rioja 43,77 0,09 78 Austria ZA Salzburg 43,31 0,09 79 Spain Cantabria 39,45 0,08 × 80 Cyprus CAPO 38,61 0,08 81 Spain Baleares 32,51 0,07 82 Germany Bayern Umwelt 26,60 0,05 × × 83 Italy ARBEA 25,78 0,05 × 84 Germany Saarland 21,57 0,04 85 United Kingdom FC 13,45 0,03 86 France OFIMER 8,98 0,02 87 Italy FINPIEMONTE 8,72 0,02 88 Germany Hamburg 7,41 0,02 89 Malta MRAE 7,33 0,02 × 90 United Kingdom CCW 4,58 0,01 91 Germany Nordrhein-Westfalen LfEJ 4,35 0,01 92 Germany Bremen 2,28 0,00 93 Spain FROM 1,91 0,00 × 94 Ireland DCMNR 1,45 0,00 95 France SDE 0,22 0,00 Subtotal 13 830,96 28,53 TOTAL 48 476,48 100,00 Source: Summary report of the Commission on the financial clearance of the EAGGF Guarantee Section accounts for 2005.

Integrated Administration and Control System (IACS)

5.5. IACS is the key management and control tool for area aid, animal premiums and the new single area payment scheme. It comprises a computerised database of holdings and aid applications, and systems for identifying parcels of agricultural land and identifying and registering animals.

5.6. The Court analysed the inspection statistics of IACS for all Member States and audited its implementation in a number of old Member States as well as in five (11) of the eight new Member States that have opted for SAPS and in the two new Member States (12) that have opted for the traditional direct aid schemes (see Annexes 5.2 and 5.3 ).

Area aid

5.7. The Court analysed the IACS inspection results of Member States for the 2004 area declarations (for payments in 2005) (see Table 5.2 ). For all Member States together, 40 % of the applications checked contained errors. These errors represent 2,1 % of the area verified by the paying agencies. For EU-15 this latter percentage has increased from 1,8 % in 2003 to 2,2 % in 2004, which thereby exceeded the 2 % materiality threshold (13) set at Commission level. In the new Member States it was lower: 2,0 % in 2004. The errors identified by the paying agencies, through their control of a minimum of 5 % of claims received, are corrected before the payment is made to the farmer. For the 14 Member States that have implemented IACS satisfactorily, their random checks showed an error rate of 1,95 %. 5.7. The Commission has not set a 2 % materiality level that could be considered as an acceptable error rate for expenditure. The key element for reservations in the Annual Activity Report, to which the Court apparently makes reference, is the presence of significant deficiencies in the management and control systems. The threshold of 2 % (expressed in financial terms applied per ABB activity and not excluding other specific thresholds) is only used in case of significant deficiencies not compensated by financial correction procedures. The Commission considers that the results of random checks provide a reasonable estimate of the likely error in claims paid, as stated by the Court in its 2004 Annual Report.

Table 5.2 — Area Aid, forage areas and other crops — Results of IACS field inspections and remote sensing in 2004, relating to claims paid in 2005 Member States Applications submitted Applications checked Applications with errors Number Area (ha) Average size (ha) Number % Area (ha) % Average size (ha) Number % Area (ha) % Belgium 39 821 1 000 289,72 25 3 815 9,6 133 656,40 13,4 35 1 584 41,5 1 273,33 1,0 Denmark 47 391 2 329 078,35 49 2 506 5,3 136 454,12 5,9 54 852 34,0 1 185,91 0,9 Germany 298 771 14 050 886,00 47 17 798 6,0 1 093 602,00 7,8 61 7 873 44,2 6 278,00 0,6 Greece 318 947 3 995 969,16 13 39 169 12,3 1 018 459,45 25,5 26 9 379 23,9 25 872,12 2,5 Spain 420 001 17 456 253,40 42 44 212 10,5 1 895 096,68 10,9 43 18 793 42,5 61 788,13 3,3 France 401 827 23 977 233,71 60 27 365 6,8 1 975 055,48 8,2 72 12 212 44,6 11 231,17 0,6 Ireland 130 508 4 727 823,77 36 8 892 6,8 363 336,38 7,7 41 1 441 16,2 1 468,96 0,4 Italy 599 095 7 219 935,24 12 42 540 7,1 819 002,00 11,3 19 20 212 47,5 51 457,19 6,3 Luxembourg 1 935 121 623,00 63 113 5,8 7 200,00 5,9 64 118 104,4 251,66 3,5 Netherlands 44 996 657 563,25 15 3 154 7,0 50 283,43 7,6 16 1 160 36,8 2 450,47 4,9 Austria 137 677 2 538 918,68 18 8 649 6,3 184 400,41 7,3 21 5 115 59,1 4 169,18 2,3 Portugal 130 854 1 825 638,94 14 7 641 5,8 431 406,95 23,6 56 5 904 77,3 22 391,65 5,2 Finland 67 090 2 086 152,39 31 4 290 6,4 160 238,86 7,7 37 2 088 48,7 1 105,08 0,7 Sweden 59 058 2 763 403,94 47 3 793 6,4 206 888,21 7,5 55 2 429 64,0 6 550,03 3,2 United Kingdom 131 410 14 101 732,67 107 7 091 5,4 907 565,00 6,4 128 4 335 61,1 6 898,37 0,8 Total 2004 EU-15 2 829 381 98 852 502,22 35 221 028 7,8 9 382 645,37 9,5 42 93 495 42,3 204 371,25 2,2 Total 2003 (14) 2 840 153 98 843 983,00 35 230 170 8,1 11 309 077,00 11,4 49 97 729 42,5 199 740,00 1,8 Total 2002 2 894 917 97 955 796,00 34 248 572 8,6 11 656 029,00 11,9 47 94 717 38,1 198 079,00 1,7 Total 2001 2 935 273 98 275 675,00 33 299 716 10,2 11 638 423,00 11,8 39 105 099 35,1 240 786,00 2,1 Czech Republic 18 759 3 529 134,84 188 1 344 7,2 454 565,96 12,9 338 831 61,8 3 765,64 0,8 Estonia 18 954 818 453,31 43 1 068 5,6 259 394,41 31,7 243 548 51,3 1 855,02 0,7 Cyprus 39 025 173 372,00 4 1 992 5,1 33 691,00 19,4 17 1 770 88,9 5 400,00 16,0 Latvia 69 847 1 338 352,28 19 5 220 7,5 366 043,87 27,4 70 2 667 51,1 11 539,71 3,2 Lithuania 238 068 2 550 554,55 11 17 413 7,3 352 572,07 13,8 20 7 418 42,6 6 603,17 1,9 Hungary 208 809 5 002 586,57 24 11 205 5,4 549 871,90 11,0 49 1 763 15,7 9 442,44 1,7 Malta 4 981 5 152,14 1 1 011 20,3 1 940,72 37,7 2 481 47,6 201,36 10,4 Poland 1 400 401 13 689 068,96 10 78 618 5,6 1 235 809,26 9,0 16 23 061 29,3 21 207,68 1,7 Slovenia 77 049 166 113,00 2 5 093 6,6 16 725,25 10,1 3 5 232 102,7 8 944,87 53,5 Slovakia 12 399 1 831 840,09 148 1 704 13,7 528 587,61 28,9 310 1 042 61,2 8 133,01 1,5 Total 2004 EU-10 2 088 292 29 104 627,74 14 124 668 6,0 3 799 202 13,1 30 44 813 35,9 77 092,90 2,0 TOTAL 4 917 673 127 957 129,96 26 345 696 7,0 13 181 847,42 10,3 38 138 308 40,0 281 464,15 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.

5.8. For on-site inspections, areas not found in the claims inspected (15) (see Graph 5.3 ) include both the results of checks on claims selected randomly and those selected on the basis of risk analysis. As in previous years, in certain Member States, risk-based transactions proved to have a lower rate of error than randomly selected transactions, which is contrary to what may be expected. Although the Commission has addressed the problem by adopting Regulation (EC) No 118/2004 (16) the effects will not be seen until 2006. 5.8. The Commission's audits have shown that certain Member States recorded remote sensing controls as random controls, although the farmers had been selected on a risk basis within the zone. Hence, there is a distorted view of the statistics. As regards the difference in results between the two types of selection, filtering out the bias resulting from this incorrect reporting, the Commission's analysis shows that only in Denmark and to a lesser extent Ireland, the results of the random selection are higher than those of the risk based selection (no account is taken of GR).

5.9. Like last year, some 40 % of the payments tested by the Court were found to contain overdeclarations of the area claimed for the fields measured. Around one in three payments was affected by relatively small errors of measurement and a small number of cases were affected by larger errors. 5.9. The Commission has received the cases only recently and therefore is not in the position to comment on the findings.

5.10. The Court’s findings in Greece indicate that there has been no significant improvement since last year: 5.10.

(a) the quality of inspections is low and findings are poorly or not at all documented, reporting of results is unreliable and is not always based on genuine inspections; (b) in certain local authorities in Greece, the techniques used when measuring parcels lead to a higher technical tolerance than the maximum allowed (5 %). The financial impact of this practice cannot be quantified; (a) and (b) In 2005, the Commission continued with its enhanced audit programme and other supervisory measures for Greece. 8 audit missions were carried out on IACS or IACS related measures, among a total of 13 missions. Where deficiencies were found, these are followed up by clearance of accounts procedures. At the initiative of the Commission, the Greek authorities have set up an action plan targeting the deficiencies, in order to ensure that the main IACS components are enhanced and used effectively. This action plan covers the deficiencies mentioned by the Court. The Commission is continuously monitoring the correct implementation of the plan.

(c) farmers’ unions control the input of all data into the computer system. None of the data in the system are secure and they can be and are 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. Many of these changes are irregular but cannot be precisely quantified; (c) The Commission has repeatedly criticised the role of the farmer's unions in the claim procedure, and formally required the authorities in June 2004 to implement a new procedure. The Greek authorities have included this in their action plan for implementation in 2006. The Court's observation is valid only until the end of claim year 2004 (financial year 2005). For claim year 2005, the Greek authorities have introduced an audit trail allowing to track all the changes to the original data.

(d) overdeclarations of the areas claimed by farmers continued to be detected by the Court.

5.11. The area claimed and for which aid is paid to the farmer may be higher or lower than the area measured by the inspection as long as it lies within a certain technical tolerance. In Slovenia, however, if the area is overclaimed, the 4 % tolerance is incorrectly applied, leading to overpayments. 5.11. The Commission services already detected this point during their enquiry in March 2005 and informed the Member State by letter in September 2005. This point and other findings are subject to clearance of accounts procedures.

The Integrated Administration and Control System (IACS) in the New Member States

5.12. A key element of IACS is the Land Parcel Identification System (LPIS) containing a register of all agricultural land. Of the seven new Member States visited by the Court, four have chosen to use production blocks as the reference parcel (17) in the LPIS. The other three have defined the reference parcel as the cadastral parcel.

5.13. The Court’s audit has shown that amongst the Member States audited which apply the Single Area Payment Scheme (SAPS) and have chosen to use production blocks as reference parcels, only in the Czech Republic does the LPIS contain eligibility data for agricultural parcels. In the others the LPIS only contains eligibility data for the reference parcels. These Member States did however not require the application to be supported with particulars and accompanied with documents that enable each agricultural parcel to be located and measured (18) so that the information available to the authorities was not sufficient to ensure that every agricultural parcel can be reliably identified. This failure affected the ability and effectiveness of the checks to detect and prevent errors. 5.13. In so far as agricultural parcels fall within the reference parcel or block and the total eligible area of the reference parcel is not exceeded, the eligibility of the agricultural parcel is in principle established. The Commission performed on-the-spot audits in each of the new Member States in the period 2004 to 2005 and, although establishing weaknesses in some Land Parcel Identification System (LPIS), it is reasonably satisfied with the degree of implementation in the first years. However, the functioning of the cross-checks depends on the quality of the data recorded in the system for the identification of agricultural parcels, and so in the framework of their audits the Commission has underlined the need for a reduction in block sizes and outlined ways in which this might be achieved. From the most recent exchanges, it is apparent that significant improvements are underway, thanks to these recommendations.

5.14. As a consequence, overdeclarations and/or double declarations of agricultural parcels go undetected as long as the reference parcel is not overclaimed. Parcels not claimed or claimed partly only by one farmer can compensate for double or overdeclarations made by another farmer so that the real extent of overdeclarations and/or double declarations inside a reference parcel cannot be correctly established. Therefore, aid reductions and penalties are either not applied or applied at too low a level (19). For example, in Hungary and Slovakia this led to arbitrary reductions and sanctions being imposed in cases of reference parcel overclaims, where it was not possible to attribute the responsibility for the overclaim to any particular farmer. In none of the Member States visited was there an obligation to inspect all claimed parcels within the production block. 5.14. The risks outlined by the Court are inherent to LPIS based on physical blocks, both in the new and old Member States, and have to be countered by limitations on block size. The use of sketch maps and other graphic material further reduce the risks, but in cases of doubt it is necessary to inspect all parcels within a block, which is recommended practice. The Commission considers that LPIS based on physical blocks, when properly applied, is the most appropriate tool which facilitates the identification of boundaries on the spot (being generally more easily identified than with cadaster based LPIS).

5.15. During on-the-spot inspections, overdeclarations and underdeclarations of parcels can be off-set against each other as long as the cadastral area is not exceeded. In Poland, the area measured in excess of the cadastral area of a parcel was used for off-setting area deficits found on other parcels. The financial impact of this error cannot be quantified. 5.15. This problem has been identified by the Commission and is being followed up. (a) The Commission will follow it up during the bilateral meeting with the Member States. (b) This will be followed up during the Commission services' enquiry.

5.16. Further problems were found in: (a) Hungary: inspection results were not or not correctly taken into account for the calculation of the SAPS payment (20); (b) Poland: national top-up payments (21) are made under more restrictive conditions than SAPS payments. When national criteria were not met, SAPS payments were reduced in the same way as national payments even though SAPS criteria were met. This is not in line with EU legislation. Moreover, the administrative cross-checks allow a tolerance for differences found between the claimed area and the eligible area registered in the LPIS, which is only permitted for parcels controlled on the spot;

5.17. In 5 Member States (22), evaluation of risk factors applied was not carried out or not documented for claim year 2004 and not applied to claim year 2005 (relevant for financial year 2006). 5.17. As part of the general plan to improve statistics and their use, the Commission services since 2005 have during meetings with the Member States urged the latter to evaluate the risk analysis.

5.18. Under SAPS if the total aid payable in a Member State exceeded the national financial envelope the aid per hectare had to be reduced by an equivalent proportion. The Member States had to inform the Commission of the rate of reduction by 30 November 2004. The Czech authorities were not able to substantiate the figure for the total area claimed that was used to calculate the reduction of the aid by 1,63 %. Hungary and Lithuania did not communicate the final reduction coefficient by the deadline. 5.18-5.19. The Commission will follow up the observations of the Court.

5.19. According to the regulations, SAPS aid is to be paid once, between 16 October 2004 and 30 April 2005. Hungary made two payments. There is no legal basis for this practice.

5.20. From the sample of 20 SAPS transactions randomly selected by the Court, five overpayments were found, with a significant level of error. Four of these were due to overdeclarations by the claimants and the fifth was included in an amendment to the claim after the regulatory deadline. 5.20. The Commission will examine the findings of the Court of Auditors.

Animal premiums

5.21. The Commisssion's 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. For the largest scheme, the suckler cow premium (see Table 5.3 and Graph 5.4 ), Member States inspected 14,9 % of the animals claimed, finding 1,8 % of these to be missing or ineligible. Overall, this percentage for cattle shows small variations from Member State to Member State. However, for Italy, Malta and Slovenia it is very high (for the suckler cow premium in Italy, 11,4 % and in Slovenia, 48,2 %, and for the special beef premium in Malta, 11,8 %, in Italy, 21,8 % and in Slovenia, 56,2 %). 5.21. While it can be agreed that the Italian statistics show a relatively high percentage of reductions, the percentage of farmers involved has decreased markedly in 2004, suggesting that problems are concentrated on fewer farmers. The issue will be pursued with the Italian authorities with a view to better identifying the reasons for this high percentage. Checks regarding Malta and Slovenia have already revealed that the statistics are unreliable and the Commission has requested revised statistics.

Table 5.3 — IACS inspections for suckler cow premium — Results of on-the-spot checks in 2004, relating to claims paid in 2005 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 14 886 707 4,7 6 0,8 3 0,4 395 197 30 885 7,8 58 0,2 Denmark 8 650 1 047 12,1 5 0,5 3 0,3 109 355 25 066 22,9 18 0,1 Germany 32 899 3 508 10,7 227 6,5 81 2,3 641 781 87 995 13,7 1 125 1,3 Greece 10 849 3 728 34,4 201 5,4 22 0,6 209 825 125 424 59,8 1 179 0,9 Spain 59 800 5 195 8,7 293 5,6 44 0,8 1 758 858 311 213 17,7 4 188 1,3 France 117 249 13 958 11,9 1 024 7,3 217 1,6 4 214 721 548 148 13,0 2 181 0,4 Ireland 61 840 4 698 7,6 421 9,0 19 0,4 1 104 521 132 916 12,0 603 0,5 Italy 55 850 8 443 15,1 212 2,5 288 3,4 763 119 122 665 16,1 13 954 11,4 Luxembourg 491 62 12,6 4 6,5 0 0,0 23 288 4 959 21,3 12 0,2 Netherlands 4 549 648 14,2 16 2,5 30 4,6 73 105 10 015 13,7 141 1,4 Austria 92 616 6 563 7,1 408 6,2 79 1,2 403 022 69 724 17,3 876 1,3 Portugal 24 849 2 792 11,2 91 3,3 41 1,5 364 386 59 322 16,3 345 0,6 Finland 1 666 225 13,5 29 12,9 4 1,8 41 499 6 714 16,2 126 1,9 Sweden 9 809 590 6,0 2 0,3 1 0,2 152 363 10 661 7,0 8 0,1 United Kingdom 43 778 5 457 12,5 410 7,5 33 0,6 1 709 788 235 665 13,8 1 499 0,6 Total EU-15 539 781 57 621 10,7 3 349 5,8 865 1,5 11 964 828 1 781 372 14,9 26 313 1,5 Malta 0 0 0,0 0 0,0 0 0,0 0 0 0,0 0 0,0 Slovenia 27 813 2 832 10,2 825 29,1 45 1,6 98 537 13 556 13,8 6 534 48,2 Total EU-2 27 813 2 832 10,2 825 29,1 45 1,6 98 537 13 556 13,8 6 534 48,2 Total 2004 — EU-17 567 594 60 453 10,7 4 174 6,9 910 1,5 12 063 365 1 794 928 14,9 32 847 1,8 Total 2004 — EU-15 539 781 57 621 10,7 3 349 5,8 865 1,5 11 964 828 1 781 372 14,9 26 313 1,5 Total 2003 — EU-15 (23) 522 146 66 340 12,7 4 596 6,9 1 683 2,5 11 998 677 2 060 855 17,2 25 052 1,2 Total 2002 — EU-15 539 093 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: Test performed in year N are relevant to payments made in year N + 1. Source: IACS statistics submitted by Member States to DG AGRI.

5.22. For the sheep and goat premiums the number of overclaimed animals decreased from 8,2 % in 2003 to 6,3 %. Italy and Slovenia report significantly higher levels of error for sheep and goat premiums (10 % and 24,1 % respectively) than the other Member States (1,2 %). The Court found problems in Greece, Spain, France, Netherlands and the United Kingdom. The flock registers are poorly maintained. The registers cannot be relied upon to confirm that the retention period requirements have been met or to reconcile the claim with the number of sheep found on inspection. 5.22. As regards the findings for Italy and Slovenia, reference is made to the response to point 5.20. Commission audit missions to Greece, Spain, France, the Netherlands and other Member States in 2005 have all identified weaknesses as regards farmers' keeping of flock registers and these findings are being considered in the clearance-of-accounts procedures.

5.23. In Malta, aid reductions and penalties applicable to bovine and ovine premiums were systematically calculated incorrectly. 5.23. This will be followed up under clearance procedure after receipt of the details of the Court's finding.

5.24. In general, the national statistics for animal premiums are still less reliable than the equivalent statistics for area aid applications. The risk of overpayment is higher because of the frequent animal movements and the complex conditions of the animal premium schemes. Overall, the Court’s own testing does not provide evidence which significantly differs from the IACS statistics.

Olive oil

5.25. The Court has examined nine olive oil production aid payments in Spain, Greece and Italy (24) — these Member States have declared some 2 000 million euro. All of the transactions contained either an overpayment and/or one or more formal errors and the two cases in Italy were found to be irregular. The results indicate that there are serious weaknesses in control over the production aid scheme and also more generally with the reliability of the olive cultivation Geographical Information System (GIS). This system of aerial photographs is used to verify the existence of olive tree parcels. 5.25. Along with checks on mills, the olive GIS is one element in the system of checking production aid for olive oil. It is compulsory only as from the 2003/2004 marketing year. Commission audits conducted in the context of the clearance of accounts procedure since 2003 have established similar shortcomings in the Member States audited by the Court, concerning the updating of the olive GIS, the application of sanctions to the mills and the use of the olive GIS to control the yields or apply the regulatory sanctions to the producers over-declaring the number of olive trees. Member States have been informed and the clearance of Accounts procedure is currently ongoing. Financial corrections will be applied if a risk for the EAGGF is confirmed.

5.26. The GIS should have been fully operational from the 2003/2004 marketing year. The Commission was initially responsible for certifying the completion of the GIS but changed the Regulation so that Member States had to declare when the system was completed. Despite the fact that they have confirmed completion, the Court has found that in all Member States the failure to update the GIS data (the alphanumerical database, the real number of olive trees, new plantings and the production potential) clearly demonstrates that the GIS can still not be considered fully operational. This has significant implications because the olive cultivation GIS will be merged with IACS and be used as a basis for the calculation of payment entitlements and for the management and control of the new Single Payment Scheme (SPS) (25) (olive growers will be paid on an area basis). 5.26. The deficiencies in the olive GIS are also known to the Commission, which shares the concerns of the Court about the implementation of the reform. Recommendations have been made to the Member States during the clearance of accounts procedures. When the expenditure for the new schemes is made, the risk to the EAGGF will be evaluated and may give rise to financial corrections.

5.27. The average yield for the production zone is fixed by the Commission every year. It is difficult for the Commission to verify that the Member States use these averages appropriately to check the eligibility of the production claimed and do not make irregular payments (see for example Italy paragraph 5.25). 5.27. The compliance with the average yield is not a condition of eligibility for the aid but it is a means to control the reality of the production of olive oil. If production above the average yield is not justified the farmer can be excluded for a part of his aid. In its audits, the Commission has asked Member States to prove the effectiveness of their controls on yields and has applied financial corrections to Italy based, among other reasons, on the absence of this control. In Spain and Greece the Commission has criticised: — the approach based on only one criteria, not supported by any thorough analysis, — the apparent lack of effectiveness of this approach because most of the production under control was finally considered eligible.

Rural development

EU-15

5.28. EAGGF-Guarantee rural development expenditure amounted to 6 311 million euro in 2005 (13 % of CAP spending). This covers spending on agri-environmental schemes, compensatory amounts for farming in less-favoured areas, forestry, investments, and support for young farmers and farmers who are intending to retire.

5.29. Most entitlements to rural development support are dependent on observance of (often complex) commitments entered into by the beneficiaries, such as observance of good farming practices, and are calculated on the basis of the number of hectares used. The Court’s audit found a high incidence of errors because farmers did not meet their commitments or the key eligibility conditions were not checked by the authorities. 5.29. The Commission will examine in detail the problems identified by the Court when the replies from the Member States have been received.

Temporary Rural Development Instrument for new Member States

5.30. The new Member States have a specific rural development regime (26), to support the four so-called ‘accompanying measures’ (27), and some specific rural development measures (28) (payments in 2005 amounted to 1 069 million euro).

5.31. The financially most important measure in Poland is Less-Favoured Areas, for which 225,8 million euro was paid in 2005. One of the eligibility conditions for this measure is that farmers must apply usual good farming practices. The Polish rural development programme sets out verifiable standards for this, which are checked on the spot as part of the 5 % controls. These verifications found a high level of non-compliance with the standards; 3 281 farms (9,6 % of the farms checked) had one or more infringements.

5.32. In accordance with Polish laws, in the case of a first infringement, the farmer only receives a warning and is not sanctioned. This was the case for all farmers, thus no recoveries or sanctions were applied. This is not in accordance with EU law: infringements of an eligibility condition of the Council Regulation (29) should lead to reductions in the amounts payable. The total value of payments affected was 0,8 million euro. 5.32. This problem has already been identified by the Commission, and a clearance of accounts procedure is already underway and may result in financial corrections.

Export refunds

5.33. 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 (30). In 2005 refunds accounted for some 3 billion euro, or 7,5 % of CAP expenditure. Member States are required to physically check 5 % of exports to ensure that they are correctly described and entitled to the export refund claimed. They also have to carry out checks at the point of exit from the EU where this is different from the place at which the goods were presented for physical check (substitution checks). The Commission monitors the quality and number of these checks.

5.34. Given the time needed to finalise clearance procedures, the weaknesses found by the Commission during audits in Member States in 2004 (31) have not yet been the subject of a final decision on whether or not a financial correction should be imposed. In 2005 problems were found relating to prior warning in Belgium. 5.34. Two enquiries have meanwhile been closed without a financial correction (Poland, Lithuania). For the remaining enquiries, where deficiencies have been identified, clearance of accounts procedures are under way (Ireland, Italy, Netherlands, France, Spain, Germany, United Kingdom) and may result in financial corrections.

5.35. The Court’s audit of physical and/or substitution checks in 11 Member States from 2004 to 2006 concluded that: 5.35.

(a) the fundamental requirement that exporters should not have tacit prior warning of such checks at the point of loading had not been systematically complied with (Belgium, Denmark, Germany, France, Italy, Netherlands, United Kingdom); (a) The Commission services have noted during their on-the-spot enquiries that the timing of physical checks can become too predictable. This is why Member States were reminded at the March 2005 meeting of the Trade Mechanisms Committee that they should vary the time of arrival when carrying out physical checks at exporter's premises and a document on this point (D(2005) 12998) was discussed in the Trade Mechanisms Committee of June 2005. Consideration is being given to ways of making this obligatory.

(b) there were significant weaknesses in the verification of ingredients used in the manufacture of ‘Non-Annex I’ goods such as biscuits, confectionery, whisky, etc. on which refunds are paid (Belgium, Germany, France (32), Italy (32), United Kingdom (32)); (b) The Commission services will examine the Court's findings and Member State replies and take appropriate action.

(c) excessive numbers of physical checks had been carried out on consignments for which the refund claim was less than 200 euro (33). According to the rules, these transactions should be excluded unless they are to prevent fraud and abuse; (c) The Commission services verify this aspect as a routine part of their audits on physical checks. While some Member States carry out checks on exports below the minimum size thresholds, the Commission services have found no evidence that they do so to the detriment of the minimum requirement of checks on exports above the thresholds.

(d) substitution checks are not carried out at the point of exit from the EU on significant numbers of consignments which have been customs-sealed despite not having been physically checked at the point of loading (34). In particular, Denmark (35) and the Netherlands allowed authorised exporters to affix customs seals themselves; (d) Article 10(2) of Regulation (EC) No 2090/2002 provides that no substitution check shall be carried out if the customs office of export has sealed the means of transport. However, in the Trade Mechanisms Committee of March 2002, the Commission stressed that an authorised trader's seal cannot replace the customs office's seal. The Commission services are studying the Court's proposal to exclude from the population for substitution checks only the consignments which were subject to a physical check. The Commission will examine the Court's findings concerning Denmark and the Netherlands and the replies of these Member States and, if necessary, investigate further.

(e) as the physical presence of customs officials at the point of taking goods under customs control at the customs office of exit from the EU has been replaced by computerised inventory systems in the United Kingdom and certain French ports, the necessary checks that customs seals have not been broken or removed are no longer carried out. (e) Article 10(2)(a) of Regulation (EC) No 2090/2002 does not require the 100 % check on the customs seals. The Commission considers that systematic seal checks by customs at the entrance to ports are useful, but can be compensated if the information and assurance available to customs services from other sources is sufficient.

5.36. The Court concludes that significant improvements are required in these areas before it can derive assurance that the system of physical checks on export refund consignments is operating satisfactorily. Furthermore, the Court is not in a position to confirm that checks have been carried out in the required number in respect of the 2005 EAGGF year and have been verified and potential corrections made, as this information is not made available to the Commission until after 30 April 2006. 5.36. The Commission takes the view that the system of physical and substitution checks is already operating sufficiently well to contribute to providing reasonable assurance for the underlying transactions. However, in order to further improve the system, the Commission intends to amend the legislation on physical checks in order to make the pattern of checks less predictable and to reduce the risk of substitution. As regards the other weaknesses identified by the Court, the Commission will examine the Court's findings and the replies from the Member States and, if necessary, take appropriate action.

Ex-post scrutiny of subsidies paid to traders and processors

5.37. Member States are required (36) 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. 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.

5.38. The Commission's monitoring includes a supervision and coordination role to ensure that Members States’ risk analysis and control programmes are appropriate. It further includes analysis of the relevant reports and other documents Member States provide and may include visits to Member States in order to check the implementation of the Regulation on the spot. The Court found that during 2005 the Commission: 5.38.

(a) made progress in monitoring and analysing documents submitted but still cannot provide full and comparable information on the transactions checked and the value of irregularities detected and recovered. It has made regulatory changes to improve the reporting of the results of post-payment checks, although the effects of these changes are not yet known; (a) The Commission welcomes the Court's acknowledgment of the efforts made in order to improve the reporting by Member States on post-payment checks, as well as of the efforts made to improve monitoring and analysis of documents submitted. The Commission considers that it already receives sufficient information regarding transactions tested and irregularities detected. The reporting has been further improved by the introduction of Regulation (EC) No 40/2006, permitting the potential level of irregularities to be estimated for all categories of expenditure.

(b) had again carried out specific missions to three Member States to examine the implementation of the Regulation. These missions did not cover all risks or a sufficient number of Member State checks to enable the assessment of compliance with the Regulation and the quality of the scrutinies carried out. Three further audits included an assessment of the new Member States’ readiness to apply the Regulation and 19 conformity audits included a review of at least one post-payment check as part of the work carried out. These conformity audits do not yet follow a standard methodology or reporting format for the scrutinies checked, which hampers comparability and a meaningful analysis; (b) The Commission considers that the number of post-payment checks reviewed in 2005 was sufficient and in line with the objectives of the audits. In 2006, the Commission has already carried out 3 specific missions on post-payment checks according to Regulation (EC) No 4045/89 in Italy, Denmark and the Netherlands. Further missions are scheduled for the autumn 2006. The conformity units have continued in 2006 to check the application of Regulation (EC) No 4045/89 as part of their missions covering specific sector related issues.

(c) has started an exercise to assess the extent of the backlog of planned checks in certain Member States (highlighted in previous Court reports). Initial results have confirmed the failure of four Member States to complete the minimum number of post-payment checks required but as yet no remedial action has been taken; (c) The Commission has, in fact, already assessed the extent of the backlog. Remedial action has been initiated through missions to two Member States where the backlog is most serious. The two Member States in question have been requested to develop action plans to resolve the backlog. Such action plans including a clear calculation of the number of outstanding scrutinies versus available resources and including clear deadlines are to be communicated to the Commission and their implementation will be closely followed-up.

(d) is not able to fully measure the success or otherwise of the Regulation in terms of detecting and recovering irregular payments (37) (38). (d) The Commission considers that it can measure the success of the Regulation in detecting potentially irregular payments.

5.39. As a follow-up to its work in 2003 the Court re-visited seven Member States to assess the progress made. Whilst the Court’s follow-up found that improvements had been made in the overall quality of checks examined, weaknesses persisted in the recovery of irregularities detected by the checks, and there was a failure to complete the planned post-payment checks on time. In two Member States there was a persistent failure to complete the minimum number. 5.39. The Commission welcomes the Court's acknowledgment of the improvements made. Recovery of irregular payments is not the responsibility of those carrying out post-payment checks but of the paying agencies. As regards the persistent delays in the execution of controls in two Member States, the Commission has initiated remedial action, as described in the response to point 5.38 (c).

5.40. According to the Regulation, post-payment checks on 2005 transactions will be carried out in the period July 2006 to July 2007. These checks can cover more than the transactions for the year 2005. The results will be reported to the Commission by 1 January 2008 at the latest. The Commission will then review them and may decide to exclude expenditure. For this reason the Court cannot derive assurance as to the EAGGF transactions for the year 2005. 5.40. The Commission considers that assurance can be derived from the post-payment checks because the system of controls, as such, is operational. Moreover, Regulation (EC) No 4045/89 provides for an ex-post control system within the comprehensive system for the management and control of agriculture expenditure, as described in detail in the response to point 5.59. It is an additional level of control to the pre-payment checks (which for the majority of measures already provide sufficient assurance).

5.41. The Court’s findings at the Commission and in the Member States show that, while the system of post-payment checks is improving, the backlog of checks not carried out in certain Member States limits the assurance that can be gained as to the legality and regularity of payments made in previous years in these Member States. 5.41. Whilst the Commission welcomes the Court's acknowledgment of the improvements made, it considers that assurance can be gained as to the legality and regularity of payments made. The comprehensive system for the management and control of agricultural expenditure, as described in the response to point 5.59, provides reasonable assurance as to the effective management of the risk of error in the legality and regularity of the underlying transactions in agriculture. Regulation (EC) No 4045/89 provides for an ex-post control system which is actually an additional level of controls to the pre-payment checks.

The Commission's clearance of accounts

5.42. One of the elements considered by the Commission to be of major importance for an adequate control of shared management in the agricultural domain is the audit work carried out by the clearance of accounts units, which leads to the financial and conformity clearance decisions taken by the Commission.

5.43. The annual Financial Decision taken by the Commission is based on the work and the certificates of certifying bodies. These certificates include a statement of whether the accounts are true, complete and accurate and whether the paying agencies have the capability to ensure that compliance of payments with Community rules is checked. The Commission's annual clearance decision is limited to the accounts and is dealt with in Chapter 1. The decision to exclude expenditure not in compliance with Community rules is taken at a later stage (see conformity decisions). Until then expenditure has a provisional character (see also paragraphs 1.57 and 1.64 to 1.66 of the present report). 5.43. Notwithstanding the clearance of accounts process, the Commission considers that the expenditure does not have a provisional character.

Certifying bodies

5.44. The reports of certifying bodies may bring to light problems in the management and control systems of paying agencies but they cannot be relied upon to provide assurance as to the legality and regularity of payments made to farmers and traders (39), as claims for EU aid are usually not checked on the spot by the certifying body. As indicated in the Court’s opinion on the single audit model, such coverage would represent a stronger and clearer chain of accountability for CAP spending. It would provide increased assurance to the Commission as to the legality and regularity of transactions. 5.44. The Commission takes the view that there is a comprehensive system for the management and control of agricultural expenditure, as described in detail in the response to point 5.59, already provides reasonable assurance as to the effective management of the risk of error in the legality and regularity of the underlying transactions in agriculture. In order to improve and reinforce the overall system for providing reasonable assurance even further, the Commission is prepared to implement the Court's recommendation that the certifying bodies should do more work to verify and validate inspection's statistics and post-payment checks. To this end, the certifying bodies will be required in the new guideline on reporting to review more in detail the administrative capacity of the paying agency as regards on-the-spot checks. They will have to gain assurance as to whether the system (for on-the-spot checks) in place has operated satisfactorily by reviewing in detail elements like accuracy of control statistics, instructions and manuals, human resources, training and competencies of controllers, agreements with delegated bodies, monitoring and supervision systems in place by the paying agency, application of sanctions etc.

5.45. With respect to the paying agencies’ internal control systems the Court’s analysis of the reports of 31 paying agencies (40) has shown that most of the major deficiencies found by the certifying bodies related to payment checks and procedures, accounting (including debtors) and delegation of functions (41); four paying agencies were found with four or more major deficiencies relating to different accreditation criteria (42). The Commission places reliance on the work of the certifying bodies by reviewing their reports and certificates but does not evaluate the work of the certifying bodies on the spot on a systematic basis (43). 5.45. In the new Commission Regulation (EC) No 885/2006, the requirements for monitoring paying agencies have been significantly strengthened by obliging Member States to keep their paying agencies under constant supervision and to establish a system for the exchange of information on possible cases of non-compliance. A procedure has to be put in place to deal with such cases, including the obligation to draw up a plan to remedy any identified deficiencies within a determined time limit. Expenditure effected by paying agencies whose accreditation is maintained by their Member State although they have failed to implement such a remedial plan within the determined time limit will be subject to the conformity clearance procedure provided for in Article 31 of Regulation (EC) No 1290/2005. Although a systematic review of the work of the certifying bodies was introduced by the end of 2005, the Commission has visited on-the-spot and reviewed the work of certifying bodies since the introduction of the new clearance of accounts procedure in 1996. The 2006 mission programme, which is based on a detailed risk-analysis, includes 5 missions to certifying bodies. The missions are targeted towards those bodies where certain problems have been identified. In addition, 7 paying agencies are to be visited.

Conformity clearance

5.46. Conformity decisions have the objective of excluding expenditure from Community financing where the Commission has found it has not been in compliance with Community rules. The procedures in place are not designed to ensure that this objective is achieved at the level of payments made to final beneficiaries (farmers and traders). These decisions are in most cases flat-rate corrections for weaknessess in the control systems rather than an assessment of the impact of the individual irregular payments. Therefore, irregular payments are unlikely to be recovered through the clearance of accounts procedure. 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; or (b) to require his/her 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. In the spirit of the Court’s opinion on the single audit, the Commission should, where possible, take into account the management and control systems already in place, such as IACS. 5.46 and 5.47. As the Court correctly points out, the objective of the conformity clerance is to exclude expenditure from Community financing which has not been effected in compliance with Community rules, thus shielding the Community budget from expenditure that should not be charged to it. In contrast, it is not a mechanism by which irregular payments to beneficiaries are recovered, which according to the principle of shared management is the sole responsibility of the Member States, as clearly stated in Article 9(1) of Regulation (EC) No 1290/2005. The Commission considers, that on the basis of this definition, the objective of the conformity clearance is achieved by its current approach, which is to audit Member States' management and control systems and, in case of deficiencies, applying financial corrections which, if the loss for the EAGGF cannot be quantified, can take the form of a flat rate. The effectiveness and efficiency of such an approach has been recognised by the Court itself in point 6.35 of its present report. Moreover, as the Court itself points out in point 6.35, financial corrections are an important means to improve the Member States' management and control systems and thus to prevent or detect and recover irregular payments to final beneficiaries. The conformity clearance thereby indirectly contributes to the legality and regularity of the transactions at the level of the final beneficiaries. The level of irregularities is already estimated in certain expenditure areas. For example, for area aids, the error estimated on the basis of around 47 000 random controls carried out by Member States is 1,95 %. This constitutes a very big and representative sample. In line with the single audit approach it would not appear cost-effective that the Commission should select a separate sample to verify the legality and regularity of expenditure. It is more cost-effective that the Commission relies on the work performed by the paying agencies and concentrates its audit work on verifying the systems in place in the Member States to control expenditure. In order to improve and reinforce the overall system for providing reasonable assurance, the Commission is prepared to implement the Court's recommendation that the certifying bodies should do more work to verify and validate inspection's statistics and post-payment checks (see reply to paragraph 5.44). Whether the burden of a financial correction is passed on to the national budget or the final beneficiary depends on the reason for the correction.

5.47. The financial corrections are not means by which irregular payments to beneficiaries are recovered, which is the responsibility of the Member States. The cost of these corrections is borne by the Member States and do not, in most cases, directly affect those who have received the subsidy (farmers and traders).

5.48. The 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 2005 relate to CAP payments to final beneficiaries made in years before 2005. The expenditure to be excluded for the year 2005 will only be decided during the coming years. At the end of 2005, clearance was not complete for any year later than 1998. 5.48. 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 2006 was drawn up. The situation in June 2006 is that 97 % of the audits carried out in 2001 (which allow financial corrections back to 1999) and 94 % of the audits carried out in 2002 (which allow financial corrections back to 2000) have been closed. The still outstanding financial corrections for the years 1999 and 2000 are estimated at a maximum of, respectively, 41 and 126 million euro. For the audits carried out in 2003 and 2004, the closure rates are, respectively, 83 % and 84 %. For the financial years 2001 to 2005, the corrections to be decided in future conformity decisions is clearly set out in the Annual Activity Report 2005. This information is also disclosed as a contingent asset in the Commission's accounting system. However, the multi-annual nature of the conformity clearance process referred to by the Court does not affect the assurance which can be derived from that process for the financial year 2005. Since the Commission's audits cover the Member States' management and control systems, they do not only provide information on the expenditure audited, but indirectly also on future expenditure covered by the systems in question.

Audit of the Commission's Clearance of Accounts units

5.49. In 2005 the Court carried out an audit of the Commission's Clearance of Accounts units which included the allocation of staff and an assessment of a sample of conformity audits carried out in 2004 and 2005 respectively (44).

5.50. The audit revealed the following main weaknesses: 5.50.

(a) the Commission was unable to evidence that it systematically takes account of its central risk analysis when allocating staff to the various measures it has to audit; (a) As regards the conformity audit work (excluding direct expenditure), the current division into three different units broadly reflects the main categories of aid measures under the CAP: traditional market mechanisms, direct income support under the IACS and rural development measures. The allocation of personnel to the different units was done in a way to ensure that for each of the three main areas of aid measures under the CAP a sufficient amount of conformity audit work can be carried out. The directorate's central risk analysis is in the first instance a tool for the selection of the aid measures to be audited. Moreover, there are many other factors to be considered in the allocation process which are subject to specific risk analysis such as, for example, audits on Regulation (EC) No 4045/89, certification of accounts, Sapard accreditation, administrative and monitoring activities as well as experience and availability of staff. The result has been, over several years, movements of resources between teams and units and the evaluation of the allocation of personnel is an ongoing process.

(b) for six of the conformity audits examined not all relevant risks and key controls had been covered and this without adequate justification; (b) The Commission's audit work in the field of agricultural expenditure, which in 2004 and 2005 included, respectively 177 and 163 on-the-spot missions, is based on available human resources and a risk analysis. On this basis the responsible directorate selects certain risks and key controls to be checked, which are considered most appropriate for the enquiry in question. Such a scope limitation is a perfectly normal and accepted audit practice. In three of the six cases raised by the Court, the scope limitation was explicitly provided for in the Mission Planning Memorandum. In the other three cases the scope limitation was due to circumstances outside the auditors' control.

(c) for five of the audits examined no use was made of detailed audit programmes or the use was not adequately evidenced. (c) The Commission is of the opinion that its audit work is generally well documented and provides sufficient evidence of the audit work carried out and the conclusions to be drawn. However, the Commission is always committed to further improve the documentation of its audit work. In this context, reference is made to the implementation of the IAC recommendations in 2005 (see next point).

5.51. These findings limit the conclusions that can be drawn as to the proper functioning of Member States’ control systems and the assurance that can be gained from conformity audits. The Court confirms the conclusions set out in the report, finalised in 2004 (45), of the Commission's Internal Audit Capability for Agriculture. There was no disagreement on these conclusions in the final report transmitted to the Director-General for Agriculture. 5.51. The Commission remains convinced that the conformity audits are a key element in the overall system for the management and control of agricultural expenditure, as described in detail in the response to point 5.59, and that its audit work is of sufficient quality to contribute to the assurance derived from that system. However, improvement of procedures is an ongoing process and the follow-up report to the IAC final report, to which the Court refers, confirms that significant improvements have been observed in 2005.

Conclusions and recommendations

5.52. As in previous years, drawing on all available sources of evidence, the Court found that CAP expenditure, viewed as a whole, was still affected by a material level of error which are not detected or prevented by the supervisory and control systems. Different degrees of risk and weaknesses attach to the main categories of CAP expenditure. 5.52. The Commission takes the view 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. At the moment, IACS covers some 67 % of EAGGF Guarantee expenditure. The CAP reforms of 2003 and 2004 reduce the overall risk even further by extending the expenditure covered by IACS to around 89 % by 2013. The Commission, where necessary in collaboration with the Member States concerned, will analyse the errors found by the Court, some of which may lead to a clearance of accounts financial correction. The systems in place allow the risk of error in the legality and regularity of the underlying transactions to be managed in an effective manner. Where the systems are not applied properly, the Commission makes financial corrections in the context of the clearance of accounts procedures. This is demonstrated by the Court's own findings on the application of IACS.

5.53. CAP expenditure managed and controlled by IACS amounts to 25 500 million euro in EU-15 and 1 400 million euro in the New Member States. IACS, where properly applied, is an effective control system for limiting the risk of error or irregular expenditure. However, this is not the case in Greece. In the New Member States audited by the Court systems are not yet reliable: in particular the information recorded in LPIS together with the information requested in the aid applications was found insufficient to systematically ensure the correct identification of agricultural parcels. This failure affects the efficiency of administrative controls and of on-the-spot inspections and measurement tolerances are wrongly applied. 5.53. The Commission shares the Court's opinion that IACS is an effective control system to limit the risk of irregular expenditure. The Commission continued in 2005 with its enhanced audit programme and other supervisory measures in Greece and, at the initiative of the Commission, the Greek authorities have set up an action plan targetting the deficiencies (see reply to paragraph 5.10.). Some of the Court's observations regarding the new Member States' LPIS are accepted, but the weaknesses are considered to be relatively minor given the overall successful implementation of IACS. Furthermore, the teething problems raised by the Court are being dealt with in the course of the routine audits of agricultural expenditure, under which all new Member States have been subject to on-the-spot audits at least once in the period 2004 to 2005.

5.54. The 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 the certifying bodies cannot be relied upon to provide assurance on claims by farmers and traders because claims for EU aid are not usually checked on the spot. 5.54. The Commission considers that it has a comprehensive system for the management and control of agricultural expenditure, as described in detail in the response to point 5.59 and which includes, in particular, the IACS, already provides reasonable assurance as to the effective management of the risk of error in the legality and regularity of the underlying transactions in agriculture. However, in order to improve and reinforce the overall system for providing reasonable assurance even further, the Commission is prepared to implement the Court's recommendation that the certifying bodies should do more work (see reply to paragraph 5.44).

5.55. Continuing control weaknesses in the olive oil sector, rural development and export refunds mean that related payments run the risk of being illegal/irregular. The Court’s own testing has proved that these risks are real. This is particularly evident in the case of olive oil, where the unreliability of the Geographic Information System calls into question the basis for the future single payment to olive growers. 5.55. The deficiencies in the olive GIS are also known to the Commission, which shares the concerns of the Court about the implementation of the reform. The Commission has issued recommendations to the Member States during the clearance of accounts procedures. When the expenditure for the new schemes is made, the risk for the EAGGF will be evaluated and may give rise to financial corrections.

5.56. Although clearance systems and post-payment checks have the objective of excluding expenditure which does not comply with Community rules, at present they fail to do so at the level of payments to final beneficiaries. The level of irregular payments financed by the CAP is not known or estimated by the Commission (46). It is therefore not clear whether the proportion of irregular payments recovered by such systems is satisfactory. 5.56. The Commission considers the clearance of accounts system to be an effective and efficient tool for excluding expenditure from Community financing which does not comply with Community rules. This has been confirmed by the Court itself in point 6.35 of its present report. 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 estimate of the overall level of irregular payments.

5.57. The Commission's conformity decisions are not complete for any year later than 1998. Since these decisions for 2005 expenditure will be taken in the future, the expenditure is provisional and assurance as to the legality and regularity of the transactions underlying the Community accounts can only be provided once a full clearance procedure is in place and applied. 5.57. 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 2006 was drawn up. The situation in June 2006 is that 97 % of the audits carried out in 2001 (which allow financial corrections back to 1999) and 94 % of the audits carried out in 2002 (which allow financial corrections back to 2000) have been closed. The still outstanding financial corrections for the years 1999 and 2000 are estimated at a maximum of, respectively, 41 and 126 million euro. For the audits carried out in 2003 and 2004, the closure rates are, respectively, 83 % and 84 %. For the financial years 2001 to 2005, the corrections to be decided in future conformity decisions is clearly set out in the Annual Activity Report 2005. This information is also disclosed as a contingent asset in the Commission's accounting system. Despite the fact that for the financial years 2001 and subsequent financial correction procedures are still under way, the Commission takes the view that it already has sufficient information to have reasonable assurance of the legality and regularity of agricultural expenditure (see reply to paragraph 5.59 for details). Moreover, the multiannual nature of the conformity clearance process does not affect the assurance which can be derived from that process for the financial year 2005. Since the Commission's audits cover the Member States' management and control systems, they do not only provide information on the expenditure audited, but indirectly also on future expenditure covered by the systems in question.

5.58. The Commission should continue to support the respective Member State's authorities in order to ensure that IACS is fully implemented in Greece and that the weaknesses found in the new Member States are remedied.

5.59. The Commission should ensure that supervisory and control systems provide assurance as to the legality and regularity of the transactions at the level of the final beneficiary and should seek to ensure that irregular payments are recovered. It should estimate the value of irregular payments: (a) either by making arrangements for the 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 inspection statistics and post-payment checks; (b) or by requiring its 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 the final beneficiaries. 5.59. The Commission considers that it has sufficient information to have reasonable assurance of the legality and regularity of agricultural expenditure and to ensure that irregular payments are recovered. A comprehensive system of management and controls exists and relies on four levels: (a) compulsory administrative structure at the level of Member States, centred around the establishment of paying agencies and an authority at high level which is competent for issuing and withdrawing the agency's accreditation. The decision for issuing the accreditation is based on a detailed review by an external audit body; (b) detailed systems for controls and dissuasive sanctions to be applied by those paying agencies, with common basis features and special rules tailored to the specificities of each aid regime; (c) ex-post controls through certified audit bodies and special departments (checks under Regulation (EC) No 4045/89); (d) clearance of accounts through the Commission (both annual financial clearance and multiannual conformity clearance). These four levels establish a comprehensive system for the management and control of agricultural expenditure and provide the Commission with reasonable assurance as to the effective management of the risk of error in the legality and regularity of the underlying transactions in agriculture. The level of irregularity can already be estimated for the financially most important measures, especially IACS. The Commission is working on improving the quality of data for other measures. In order to improve and reinforce the overall system for providing reasonable assurance, the Commission is prepared to implement the Court's recommendation that the certifying bodies should do more work to verify and validate inspection's statistics and post-payment checks (see reply to paragraph 5.44).

5.60. As indicated last year, the Commission should 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 the value of transactions tested and irregularities detected by budget line. 5.60. The Commission has already taken action to further improve the reporting on post-payment checks by modifying the legal framework. The improvements relating to the value of transactions tested and irregularities by budget line have been included in the amendments to Regulation (EC) No 4/2004, introduced by Regulation (EC) No 40/2006 which has been published on 10 January 2006.

5.61. The Commission should investigate 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. 5.61. The Commission's audits have shown that certain Member States recorded remote sensing controls with the random controls although they have selected the farmers on a risk basis within the zone. Hence, there is a distorted view of the statistics. As regards the difference in results between the two types of selection, filtering out the bias resulting from this incorrect reporting, the Commission's analysis shows that only in DK the results of the random selection are higher than those of the risk based selection (no account is taken of GR). This is subject of verification. To enhance a more accurate reporting, the Commission has already taken further action (see paragraph 5.8).

5.62. The Commission is recommended to improve the checks on CAP spending in those areas where significant shortcomings persist. 5.62. The Commission is committed to address continuing shortcomings still existing, such as the application of IACS in Greece. The CAP reforms of 2003 and, for Mediterranean products, of 2004 reduce the overall risk by extending the expenditure covered by IACS to 89 % by 2013.

5.63. As requested by the Council (47), the Commission should distinguish on the one hand between expenditure which has been verified (and has been the subject of corrections, where necessary) for which it can give reasonable (or no) assurance and, on the other hand, expenditure which is subject to further verification (and possible correction at a later stage) (see also paragraphs 1.57 and 1.64 to 1.66 of the present report). 5.63. The Commission is of the opinion that it would not be appropriate to distinguish, as the Court suggests, between expenditure which has already been verified and expenditure which will be the 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. Moreover, in its annual accounts, the Commission makes the necessary disclosure for the amounts which it still expects to be recovered through the clearance of accounts process.

FOLLOW-UP OF PREVIOUS OBSERVATIONS

Rural development: support for less-favoured areas

5.64. The Court’s Special Report No 4/2003 concerning rural development dealt with support for less-favoured areas. The main observations and recommendations were taken up in the discharge procedure for the 2002 budget by the European Parliament (48) and focused on: (a) the need for the Commission to submit to Parliament a comprehensive evaluation report in respect of this measure; (b) the need for the Commission to adapt and update the definition of ‘good farming practices’ and to ensure that the Member States apply this condition consistently; (c) the need for the Commission to undertake a comprehensive and thorough review of the current classification of all less-favoured areas.

5.65. In its report on the follow-up to the 2002 discharge procedure (49), the Commission announced that it was preparing a specific evaluation study of this measure and that the results would be available in late 2005. The contract to carry out this evaluation study was signed in December 2005 and the report is planned to be finalised by the end of 2006 and published in early 2007.

5.66. The new Regulation on support for rural development for the period 2007 to 2013 (50) includes the measures for less-favoured areas, and the discharge authority's other two requests were addressed in this framework.

5.67. The condition that farmers in less-favoured areas must apply usual good farming practices in order to receive compensatory allowances will no longer exist as an eligibility criterion. Instead, such farmers will have to comply, on the whole holding, with the mandatory requirements as regards environment and animal welfare which have been known as ‘cross-compliance’ since the 2003 CAP reform.

5.68. The areas eligible for payments under the ‘payments to farmers in areas with handicaps, other than mountain areas’ category will be determined on the basis of soil productivity and climatic conditions, thus breaking the link with socio-economic criteria. The concept of natural handicap payments to farmers in mountain areas (and those areas north of the 62nd parallel) has been retained. 5.68. Following Council Regulation (EC) No 1698/2005 concerning the next programming period, the areas eligible for ‘payments to farmers in areas with handicaps, other than mountain areas’ must be affected by significant natural handicaps (notably a low soil productivity or poor climate conditions) and specific handicaps, where land management should be continued in order to conserve or improve the environment, maintain the countryside and preserve the tourist potential of the area in order to protect the coastline.

5.69. However, with the exception of the cross-compliance requirement, the entry into force of all other changes to the less-favoured areas measure has been postponed until 1 January 2010 and will require the adoption of a Council regulation based on a proposal from the Commission. Thus the current criteria for determining the areas to be classified as less-favoured will remain in force at least until 2010. 5.69. Concerning the definition of less-favoured areas, the Commission proposal COM(2004) 490 final for the future rural development framework contained a proposition for a reclassification of the ‘intermediate category’ of LFAs. However, the proposal faced strong opposition in particular in the Council. As part of the final compromise on the proposal, adopted as Regulation (EC) No 1698/2005, it was agreed to endeavour further in-depth analysis on the issue before taking a final decision on the reclassification.

The organisation of the system for the identification and registration of bovine animals in the European Union

5.70. The Court’s Special Report No 6/2004 examined the bovine identification system, which aims to guarantee the traceability of beef and veal animals and is used to check eligibility for the various cattle premiums. The Court found weaknesses in the system introduced by the Community legislation, and in particular found that the traceability of intra-Community cattle movements was not assured since the legislation made no provision for the harmonisation or exchange of information between Member States’ databases. 5.70-5.72. In 2004 the Commission has set up the TRACES system which is able to trace animal movements within the EU and from the outside. TRACES consolidates and simplifies the existing traceability systems for the trade of animals. It became compulsory for all Member States from 1 January 2005 and complies with most of the requests from the Member States and of the recommendations given by the Court in the Special Report No 1/2000 related to classical swine fever. Following the conclusions of the Council on the Special Report No 6/2004 of the Court the Commission has developed further guidance in close cooperation with the Member States. On 14 February 2005 the Commission finalised the working document on benchmarking of bovine databases, which has been welcomed by the Member States and which is in use to further develop the national databases. Furthermore, on 26 January 2005, the Commission has presented its Report to the Parliament and the Council on the possibility of introduction of electronic identification for bovine animals (COM(2005) 9). This report contains different options for legislative proposals, which were discussed at Council level in the Special Committee on Agriculture on 7 March 2005. With the preparation of an appropriate legislative proposal the Commission intends to consider also the exchange of information between national databases.

5.71. As part of the 2003 discharge procedure, the Council (51) sought greater harmonisation between databases in the Member States. The European Parliament (52) invited the Commission to submit a legislative proposal to ensure compatibility between the national databases, and to provide guidance on exchanges of data.

5.72. The Commission accepted the main findings of the Court’s Special Report No 6/2004. It accepted (53) the proposal to organise exchanges of information and developed a working document for benchmarking the national databases. While keeping the situation under review, the Commission has not proposed further legislation.

5.73. The Court examined the implementation of the Slaughter Premium Scheme in the context of the follow-up of the Court’s Special Report No 6/2004. The slaughter premium scheme is one of the premium schemes relying on the bovine identification system (54). The premium is paid for the slaughter or export from the EU of adult cattle and calves.

5.74. The design of the scheme facilitates adequate control over payments in respect of animals which are slaughtered in the Member State of payment. However checks relating to the minority of animals (1,2 % on average in the regions examined) which are slaughtered in one Member State and for which a premium is paid in another are not as rigorous. The transfer of information between Member States relating to such cases is incomplete and does not ensure that all eligibility criteria for the premium are verified before payment. Germany and the Netherlands paid the premium in some cases where confirmation of slaughter from other Member States had not been received before payment. For the Member States visited, only Ireland and the United Kingdom (for animals slaughtered in Northern Ireland) had arranged to exchange information automatically between the relevant databases. 5.74. Community legislation lays down the general principles of management of the slaughter premium for animals which have been the subject of intra-Community trade after the retention period (Article 35(3) of Regulation (EC) No 2342/1999). The slaughterhouse of the Member State in which the animal is slaughtered must issue a certificate containing the information to be submitted in support of the application for the premium. As a general rule, Member States assist one another to ensure effective controls on the authenticity of the documents submitted and the accuracy of the information. The Member State where payment is made must transmit regularly to the Member State where the slaughter takes place a summary of the slaughter certificates received from the latter Member State. The implementation of these principles is the responsibility of the Member States. The implementation of the reform of direct payments introduced by Council Regulation (EC) No 1782/2003, applicable from 2005, modified the conditions for applying for the premium for animals which have been the subject of intra-Community trade. The fact that 17 Member States have decided to implement the decoupled single payment scheme without maintaining the slaughter premium has contributed to make the information on the trade of animals for slaughter less important.

5.75. The Court’s examination of the Slaughter Premium Scheme showed that weaknesses in the bovine identification system identified in the Special Report continue to exist, especially relating to cattle traded between the Member States. 5.75. Once the situation as regards implementation of the reform has been stabilised, the conditions for applying the slaughter premium in intra-Community trade must be examined from both the standpoint of trade between Member States which apply the ‘coupled’ slaughter premium and that of trade between these Member States and those which have decoupled this premium.

SPECIAL REPORTS ISSUED SINCE THE LAST ANNUAL REPORT