THE COURT'S OBSERVATIONS THE COMMISSION'S REPLIES

INTRODUCTION

4.1. Expenditure in 2003 on the common agricultural policy (CAP), i.e. the European Agricultural Guidance and Guarantee Fund (EAGGF Guarantee Section), totalled 44 378 million euro. Graphs 4.1 and 4.2 show how the money was spent. Graph 4.1 shows the breakdown of expenditure by economic category (direct payments, export refunds, etc.). Graph 4.2 shows the distribution by main agricultural sector (beef and veal, olive oil, etc.).

4.2. Direct payments to farmers, based on the amount of land they farm or the number of livestock on their farms, constitute the greater part (58 %) of CAP spending. These payments, which have been an important part of the CAP since its reform in 1992, are primarily intended to compensate farmers for reductions that have been made in CAP prices.

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

4.4. The Commission's Director-General for Agriculture produces each year an activity report on the Directorate-General for Agriculture's (DG AGRI) spending and a declaration on its legality and regularity.

SPECIFIC ASSESSMENT IN THE CONTEXT OF THE STATEMENT OF ASSURANCE

Scope of the audit

4.5. The Court: (a) reviewed the work of the certifying bodies (see paragraphs 4.7 to 4.8); (b) evaluated supervisory systems, notably IACS and post-payment checks (see paragraphs 4.9 to 4.16); (c) tested transactions directly (see paragraph 4.17); (d) examined the report and declaration by the Director-General for Agriculture (see paragraphs 4.18 to 4.23).

4.6. Paragraphs 4.24 to 4.46 set out the Court's assessment of the legality and regularity of expenditure under the CAP, based mainly on the above sources of evidence. Observations on the reliability of the accounts are set out in Chapter 1, paragraphs 1.10 and 1.11.

Work of the certifying bodies

4.7. The certifying bodies' audit of the paying agencies covers their accounts, their processing of, and checks on, claims for payment of CAP subsidies, and whether they comply with the criteria for accreditation (see paragraph 4.53). The relevant EU legislation does not require the certifying bodies to examine claims at the level of farmers or traders (see paragraph 4.8.(c)).

4.8. The Court has examined the work of certifying bodies covering 80 % of expenditure in 2003 as part of its annual examination of the clearance of accounts process (see paragraphs 4.55 to 4.61). Although the Commission had concerns about the work performed by a number of the certifying bodies (see paragraph 4.65), for the purpose of the Statement of Assurance the Court has drawn the following general conclusions from their work: 4.8.

a) the reports provide assurance that financial information provided by the paying agencies (and incorporated in the Commission's accounts) is materially accurate, but this assurance does not extend to information on debtors for a number of agencies (see paragraph 4.61);

(b) overall, the reports provide assurance that claims for payment are checked and processed by the paying agencies in accordance with the applicable rules, but a significant number of certifying bodies qualify their audit opinion in respect of certain areas of spending (see paragraph 4.54);

(c) the work of the certifying bodies (as defined by Regulation (EC) No 1663/95) is however not designed to, and does not, provide direct assurance that the information supplied by claimants, and used by paying agencies to calculate the payment due, is correct and therefore that payments are legal and regular. (c) The work of the certifying body is to give assurance on the integrality, accuracy and veracity of the accounts.

IACS

4.9. IACS comprises a computerised database of holdings and aid applications, systems for identifying parcels of agricultural land and identifying and registering animals, and a set of administrative checks and on-farm inspections. IACS covers expenditure on area aid schemes (see paragraphs 4.24 to 4.30) and animal premium schemes (see paragraphs 4.31 to 4.34) directly. Claims for a number of other schemes must be compatible with the system (see paragraph 4.35).

4.10. The Court has continued to examine the operation of IACS (see paragraphs 4.9 to 4.13 of the Court's 2002 Annual Report). This year it examined the way IACS is implemented by a further seven agencies (Niedersachsen (Germany), Extremadura (Spain), Luxembourg, Austria, Finland, RPA and DARD (United Kingdom)) and returned to five agencies where problems were identified in 2002 (Bavaria (Germany), ONIC and Ofival (France), LASER (Netherlands) and AGEA (Italy)).

4.11. The main findings of the Court's audit are as follows: 4.11.

(a) administrative checks (notably cross-checks to parcel or animal databases) were good or satisfactory in all paying agencies except Luxembourg (area aid and animal premiums) while some penalties on claims for animal premium were not calculated or applied correctly in Austria and Northern Ireland; (a) The aspects raised by the Court in respect of Austria and Northern Ireland are being followed up in the context of the clearance of accounts procedure. The situation in Luxembourg is being dealt with in the clearance of accounts procedure.

(b) risk analysis and selection procedures for on-site inspections were generally weak (see also 4.26); (b) The Court's remarks are in line with the Commission's own findings, which have resulted in detailed discussions with the Member States and a significantly reinforced IACS legislation with effect from claim year 2004.

(c) most on-site inspections were satisfactorily performed, but some weaknesses were apparent at most paying agencies, and the quality of inspection was lower for animal premiums than for area aid (for example, DARD (Northern Ireland, United Kingdom) where excessive notice of inspection visits was given); (c) The two regimes are substantially different. In particular, the various bovine premia are directed towards different types of animals and involve different conditions. This, in addition to the need to check the movements of animals, has a significant impact on the nature of the inspections.

(d) reporting of the results of inspection was weak at many agencies. Errors and anomalies in the figures sent to the Commission were significant for Niedersachsen, Luxembourg and RPA England (all animal premiums). Reporting is less reliable for animal premiums than for area aid claims. Annexes 2 and 3 set out further details of the Court's findings. (d) The Commission has also identified the discrepancies mentioned by the Court. Overall, the statistics are considered as reliable as necessary for the purpose in hand i.e. to verify compliance with governing legislation on eligibility and control regimes. The Court uses data requested and collated by the Commission, and the tabulated presentation and information is generally taken from data the Commission has itself produced. The animal premium sector is more diverse than the arable crop sector, explaining the difficulties in reporting. The Court correctly states that the information supplied by Member States is not always fully correct, or presented in the timely fashion required by the governing legislation, in which case the Commission ensures prompt follow-up and revision in the framework of the clearance of accounts. In the case of Niedersachsen revised information has been provided.

4.12. For those 14 Member States which had satisfactorily implemented IACS (not Greece), IACS inspection results represent an important source of evidence of the legality and regularity of CAP transactions. However, the errors noted above in the reporting of results, particularly for checks on animal premiums (see paragraphs 4.31 to 4.32), reduce the reliability of the figures produced, while the fact that inspection results sent to the Commission do not distinguish between the different area aid subsidies, and include checks performed on forage areas, reduces the usefulness of the information for area aid (see paragraphs 4.24 to 4.30). 4.12. The Commission considers the statistical reporting to be a very good tool to verify the legality and regularity of CAP expenditure. In short, such discrepancies are duly corrected under the clearance of accounts procedure. While acknowledging that more detailed statistical information supplied by the Member States could provide a more secure environment, the benefits would be subject to ‘diminishing returns’ and there is a clear need to simplify administrative procedures.

Post-payment checks under Regulation (EEC) No 4045/89

4.13. Member States are required to perform a programme of post-payment scrutinies 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.

4.14. The Court examined the application of the regulation through visits to 11 Member States and to the Commission (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70). The audit covered the period from July 2002 to June 2003, for which the Member States had to report by the end of 2003. This covered, in most Member States, payments made in 2001. For each Member State the planning, execution, reporting and monitoring of the checks was examined. The Court examined the quality of the systems which will be applied by Member States in the future to check and, if necessary, correct subsidies paid in 2003.

4.15. The Court found that: 4.15.

(a) coordinating bodies in the Member States generally prepared scrutiny plans in accordance with the regulation, but only half of checks planned for the period were complete at the end of 2003, although Member States had reported a higher number to the Commission; (a) According to the Member States' annual reports the number of scrutinies completed was 2 469 which is 63 % of the 3 907 checks planned for the period. A further 33 % of the planned scrutinies were indicated as ‘ongoing’; the fieldwork for most of these had been already performed, and either the report remained to be finalised or a reply was awaited to a mutual assistance request made to another Member State. A deadline of up to six months is permitted for replies to mutual assistance requests.

(b) one fifth of scrutinies examined by the Court were wholly unreliable. Fewer than one in three were considered wholly satisfactory in the Court's view (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70); (b) The Commission is not in a position to confirm the conclusion of the Court. The Commission will take these elements into consideration in its future work in relation to Regulation (EEC) No 4045/89 controls.

(c) the annual reports by the coordinating bodies do not present statistics on the results of scrutinies in a format, which permits meaningful analysis and comparison, notably because there is no legislative requirement to report differing rates of error in different areas of expenditure; (c) Information received is analysed and treated by the Commission services in order to provide elements of comparison between Member States.

(d) the Commission had not put in place a programme of inspections to ensure the effectiveness of checks carried out (the last inspections were made in 1999/2000); (d) Such programmes of inspections have taken place in previous years based on risk analysis and another round is currently being carried out. Moreover, implementation of Regulation (EEC) No 4045/89 is also evaluated in the field of export refunds, the largest area of expenditure covered by the regulation. The recent audit enquiries on differentiated refunds, prefinancing and origin each included an assessment of the contribution made by Regulation (EEC) No 4045/89 scrutinies to addressing the specific risks involved.

(e) the Commission made no written response to Member States on their risk analyses, scrutiny plans or annual reports (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70). (e) For the period under review, the Commission services obtained additional assurance through informal discussions and requests for information. In the course of 2004 the Commission services implemented significant improvements in the monitoring and control of this aspect through formal letters to several Member States aiming in particular to improve the risk analysis proposed.

4.16. Where they are performed properly, post-payment scrutinies provide a valuable tool in the identification of irregular CAP payments (see Graph 4.3 ). However, in the form in which they are currently reported by Member States, they do not assist the Commission in identifying and assessing the key risks of irregularity. 4.16. More than 3 000 scrutinies are performed annually. During the period in question 320 irregularities were detected by the end of 2003 and this number will increase when the ongoing scrutinies are completed. During the period 2001 to 2003 860 irregularities were communicated to OLAF as a result of application of Regulation (EEC) No 4045/89. The post-payment scrutinies are not only an important tool for identification of irregularities but also serve as a considerable preventive element.

The Court's sample of transactions

4.17. The Court examined a representative sample of 2003 payments drawn from the expenditure of 25 paying agencies (which were collectively responsible for 75 % of CAP expenditure) as well as from the direct expenditure of the Commission. Through these tests, the Court sought to obtain direct evidence that payments were properly made for an eligible activity. Such tests provide good evidence for expenditure on area aid subsidies and, to a lesser extent, animal premiums where physical evidence is usually available to the auditor. By contrast, in areas such as export refunds or aids paid on the basis of the quantity produced, the auditor can only check documents. The extent to which such documents provide reliable evidence is influenced by both the nature of the transaction and the control system concerned (see also paragraphs 4.36, 4.37 and 4.46). 4.17. The control systems for CAP expenditure generally provide for physical checks on a percentage of transactions, 100 % documentary controls, dissuasive sanctions, and either post-payment checks according to Regulation (EEC) No 4045/89 or/and compatibility with IACS.

Annual activity report of the Director-General for Agriculture

4.18. The activity report describes what DG AGRI has done during 2003 and contains a declaration by the Director-General that control procedures give assurance on the legality and regularity of underlying transactions. It seeks to provide management assurance that the system of internal control is working satisfactorily. The Director-General's declaration includes five qualifications. Two of these relate to CAP expenditure: continuing concerns about the management and administration of the International Olive Oil Council; and the failure of Greece to fully implement the IACS. The report discusses progress made on these two issues since 2002 and concludes that despite the progress achieved, it is not yet possible to know whether the problems noted have been resolved.

4.19. For CAP expenditure where management is shared with the Member States the basis for the Director-General's declaration is: (a) the financial clearance decision for 2002 (not 2003); (b) conformity decisions (see paragraph 4.70) taken during 2003, which do not include corrections in respect of 2003. (Conformity decisions on expenditure in 2003 will be taken in future years) (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70). 4.20. In other words, the declaration is relevant to transactions undertaken in years previous to 2003. It is not designed to, and does not, provide assurance on which the Court can rely for the 2003 Statement of Assurance. 4.19 and 4.20. The declaration of assurance of the Director-General of DG AGRI is, as far as EAGGF Guarantee is concerned, based on the following elements: The existence of an effective clearance of accounts procedure as foreseen by Article 53(5) of the Financial Regulation. Financial corrections imposed are based on the Commission audits carried out in Member States. The fact that clearance of accounts decisions are made some years after the year of the expenditure concerned is an integral part of the procedure, which includes the right of Member States to respond to the findings. The assurance which can be gained from the accreditation of paying agencies, the annual certification procedure and the IACS. These elements permit a great deal of reliance to be placed on the control over the expenditure declared. A number of other elements contribute to the basis on which the assurance is obtained. These include results of audits made by the Commission's Internal Audit Service and the Internal Audit Capability and possible information received from OLAF. The Directorate-General for Agriculture also takes account of information received from the Court of Auditors. As can be seen from the above, the declaration does cover transactions in 2003.

4.21. The supervisory systems in place for the CAP provide DG AGRI with a large amount of data of relevance to the legality and regularity of the expenditure concerned. In particular IACS identifies many incorrect claims and blocks payments and can penalise farmers who significantly overstate claims for subsidies.

4.22. The annual activity report does not make reference to the results of checks under supervisory systems; nor to apparent weaknesses in these systems. Nor does it mention the Commission's continuing postponement of the clearance of the accounts for 21 paying agencies for 2001 and 2002 (see paragraph 4.66), nor comment on the nature and budgetary impact of conformity decisions taken in 2003. 4.22. The annual activity report shall present the main achievements within the activities carried out by a service and evaluate to what extent they fulfil the programme announced in the annual management plan. The control systems in place shall be described and weaknesses identified and deemed to have a material impact on the statement of assurance of the Director-General shall be subject to a reservation and be duly qualified and quantified. Among these control systems, the annual activity report of DG AGRI for 2003 provides information in particular about the clearance of accounts systems in place, the clearance decisions made by the Commission during the year and it quantifies the conformity decisions. There is an explicit effort made to keep the report relatively short and therefore not all items are reported on specifically. As the Court indicates, DG AGRI could consider adopting a broader approach in its future annual activity reports, including a more comprehensive description of the elements on which the assurance of the authorising officer by delegation is based.

4.23. The report notes that 14 of the internal control standards had been fully implemented by 31 December 2003. By February 2004 only four remained to be partly implemented. The Commission's internal audit service carried out an in-depth audit of DG AGRI in October 2003, making a number of observations in respect of internal control standards. These recommendations were, for the most part, accepted by DG AGRI and remedial action was undertaken as described in the annual activity report.

The Court's assessment of areas of CAP spending

Area aid schemes

4.24. Spending on arable crop subsidies paid on an area aid basis amounted to 16 340 million euro in 2003, 36 % of CAP expenditure. All of this expenditure is covered by IACS.

4.25. The IACS inspection results on declarations of area for 2002 (resulting in subsidy payments in 2003) are set out in Table 4.1. These results cover arable crops (56 % of the total area inspected), and also forage areas (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70), which are not subsidised on the basis of the area cultivated. It is not possible to distinguish between inspection results for different crops (wheat, protein crops, durum wheat, etc.) or for forage areas (on which area aid is not paid). The overall figures given do not, therefore, relate solely to area aid schemes, and mask variations between different aid schemes. 4.25. While acknowledging that more detailed statistical information supplied by the Member States could provide a more secure environment, the benefits would be subject to ‘diminishing returns’ and there is a clear need to simplify administrative procedures.

4.26. The overall rate of error reported to the Commission is 1,7 % (compared with 1,3 % for subsidy payments made in 2002 and 2,4 % for 2001). The overall total includes the results of checks on claims selected at random and on the basis of an analysis of risk. The overall rate of error found in random checks is 2,4 %, compared to 1,5 % for checks selected on the basis of an evaluation of risk (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70). 4.26. If the comparison is limited to the 14 Member States which had satisfactorily implemented IACS (see point 4.47 a), the overall error rate reported by the Member States to the Commission is as follows:

Level of errors Overall error rate Error rate Random selection Error rate Risk evaluation > 0 % 1,5 % 1,6 % 1,5 % > 3 % 1,4 % 1,4 % 1,4 % > 20 % 0,9 % 0,9 % 0,9 % > 30 % 0,5 % 0,4 % 0,5 %

As noted by the Court, the overall figures are influenced by the greater use of remote sensing in risk-based inspection in mainly Finland, France, Ireland and United Kingdom. The IACS Regulation has been amended as regards risk analysis, especially in introducing an obligation for Member States to review annually the efficiency of the risk factors used.

4.27. It is remarkable that tests performed on a random basis show a higher rate of error than those selected on the basis of an analysis of risk. Some Member States report higher rates of error for tests based on risk analysis than for random testing (Sweden (3,3 % error in risk-based checks, 1,5 % at random), Italy (3,3 % on basis of risk, 1,9 % at random) and Austria (2,5 % on basis of risk, 0,7 % at random)). At the other extreme Greece reported 1,9 % for risk-based sampling compared to 13,5 % for random sampling. 4.27. If Greece is excluded, the tests performed on a random basis show essentially the same rate of error as those selected on the basis of an analysis of risk.

Table 4.1 — Area aid, forage areas and other crops — Results of IACS field inspections and remote sensing in 2002, relating to claims paid in 2003 Member State Applications submitted Applications checked Applications with errors Number Area (ha) Average size (ha) Number % Area (ha) % Average size (ha) Number % Area (ha) % Belgium 41 927 1 015 848 24 4 265 10,2 162 331 16,0 38 1 088 25,5 1 137 0,7 Denmark 51 147 2 332 595 46 2 797 5,5 135 355 5,8 48 812 29,0 919 0,7 Germany 319 167 14 243 441 45 19 518 6,1 1 062 945 7,5 54 8 671 44,4 7 419 0,7 Greece 324 667 2 162 368 7 34 465 10,6 840 636 38,9 24 10 074 29,2 33 032 3,9 Spain 435 039 18 028 312 41 42 490 9,8 2 228 789 12,4 52 17 561 41,3 56 162 2,5 France 420 222 23 690 759 56 29 437 7,0 1 881 181 7,9 64 9 916 33,7 13 270 0,7 Ireland 127 006 4 653 421 37 10 491 8,3 499 503 10,7 48 913 8,7 857 0,2 Italy 600 375 7 086 654 12 60 491 10,1 1 512 492 21,3 25 25 236 41,7 49 516 3,3 Luxembourg 2 007 122 626 61 187 9,3 17 243 14,1 92 151 80,7 485 2,8 Netherlands 46 898 662 488 14 4 144 8,8 78 156 11,8 19 1 045 25,2 1 784 2,3 Austria 129 277 2 458 617 19 8 782 6,8 202 671 8,2 23 4 889 55,7 3 924 1,9 Portugal 138 708 2 462 707 18 13 537 9,8 1 564 683 63,5 116 6 996 51,7 16 847 1,1 Finland 69 584 2 076 462 30 4 887 7,0 176 925 8,5 36 2 007 41,1 1 364 0,8 Sweden 59 705 2 730 135 46 4 210 7,1 243 405 8,9 58 2 099 49,9 6 958 2,9 United Kingdom 129 188 14 229 365 110 8 871 6,9 1 049 714 7,4 118 3 259 36,7 4 405 0,4 Total 2002 2 894 917 97 955 796 34 248 572 8,6 11 656 029 11,9 47 94 717 38,1 198 079 1,7 Total 2001 (9) 2 935 273 98 275 675 33 299 716 10,2 11 638 423 11,8 39 62 968 21,0 156 928 1,3 Total 2000 (9) 2 973 806 96 176 722 32 330 906 11,1 11 594 185 12,1 35 81 598 24,7 274 119 2,4

4.28. Member States checked 8,6 % of claims on the spot, representing 11,9 % of the area for which claims were made. Member States found errors in more than one in three of the claims checked. Three fifths of checks were made using remote-sensing (typically aerial photographs), the remainder being classic on-site inspections. There were marked differences among Member States (see Graph 4.4 ). For example: (a) Luxembourg found an error in 80 % of the claims checked; Ireland, where most checks were of forage areas, found the lowest frequency of errors (9 %); (b) detected errors had the greatest impact on the area claimed in Greece and Italy where they amounted to 3,9 % and 3,3 % respectively of the area checked, followed by Sweden (2,9 %) and Luxembourg (2,8 %); (c) Portugal (98 %) made most use of remote sensing. Aerial photographs were not used at all by either Austria or Luxembourg.

4.29. Errors found by the IACS inspectors can result in the application of significant penalties. Where the error found is of 3 % or lower, subsidy for the crop group concerned is paid for the amount claimed less the amount of error. Where inspection finds an error of between 3 % and 20 %, payment is reduced by the amount of the error, and a penalty equal to twice the amount of the error is applied. Where inspectors find an error exceeding 20 % of the amount claimed, the entire subsidy for that crop group is withdrawn. Overall the Member States found errors exceeding 20 % ofthe amount claimed in nearly one in ten of claims inspected. Such errors were most frequently identified in Spain (one in five claims inspected), Portugal and Luxembourg (one in seven) and Greece (one in eight).

4.30. Taken as a whole, the results of the Court's testing of transactions (76 of which related to area aid payments) are broadly consistent with the results of random testing performed by the Member States, and the distribution follows closely the pattern of previous years: (a) the majority of the payments were free of error; (b) around one in three was affected by relatively small errors of measurement (no more than double the 3 % error rate for which no penalties are imposed under IACS (paragraph 4.29)). As in previous years, errors of this nature and scale, while frequent, have no marked impact on overall expenditure; (c) a relatively small number of wholly or largely unjustified claims is a greater source of irregular expenditure than these small measurement errors (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70).

Animal premium schemes

4.31. Spending on animal premiums amounted to 9 890 million euro in 2003, 22 % of CAP expenditure. IACS inspection statistics for animal premiums show the number of animals claimed by farmers which inspectors found not to exist or not to be eligible for subsidy. As discussed in paragraph 4.12, the Court considers these statistics to be less reliable than the equivalent statistics for area aid applications. In 2002 (i.e. in respect of claims paid in 2003), for the largest scheme, the suckler cow premium (see Table 4.2 and Graph 4.5 ), 14 Member States inspected 18,7 % of the animals claimed, finding 2,0 % of these to be missing or ineligible (in 2001, 6,4 % were found to be ineligible). For the special beef premium the percentage of animals missing or disallowed was 3,8 % in 2002, for the extensification premium 1,5 % (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70), and for the sheep and goat premiums 5,6 %. 4.32. Overall, the amount of error found by IACS inspections of animals continues to show considerable variation from year to year and from Member State to Member State. 4.31 and 4.32. As indicated in point 4.11 d) the inspection statistics are under scrutiny and subject to audit as part of the annual work programme.

Table 4.2 — IACS inspections for suckler cow premium — Results of on-the-spot checks in 2002, relating to claims paid in 2003 Member State Total number of claims submitted Claims inspected Inspected claims partially rejected Inspected claims fully rejected Total number of animals claimed Animal inspected Inspected animals rejected Number % Number % Number % Number % Number % Belgium 15 999 1 581 9,9 21 1,3 17 1,1 396 431 61 147 15,4 223 0,4 Denmark 9 108 831 9,1 77 9,3 8 1,0 109 063 25 835 23,7 205 0,8 Germany 34 576 3 877 11,2 274 7,1 79 2,0 639 269 85 734 13,4 2 935 3,4 Greece 12 198 12 141 99,5 512 4,2 95 0,8 210 899 210 062 99,6 1 981 0,9 Spain 66 156 10 178 15,4 779 7,7 74 0,7 1 716 545 516 390 30,1 5 973 1,2 France 127 842 15 710 12,3 2 475 15,8 293 1,9 4 305 417 618 471 14,4 3 304 0,5 Ireland 64 250 5 282 8,2 272 5,1 35 0,7 1 109 795 120 051 10,8 1 101 0,9 Italy 58 068 12 117 20,9 503 4,2 1 987 16,4 776 506 160 728 20,7 9 871 6,1 Luxembourg (12) (12) (12) (12) (12) (12) (12) (12) (12) (12) (12) (12) (12) Netherlands 4 498 824 18,3 44 5,3 49 5,9 51 996 19 926 38,3 284 1,4 Austria 62 463 6 170 9,9 493 8,0 117 1,9 391 117 58 753 15,0 1 165 2,0 Portugal 27 093 3 173 11,7 125 3,9 120 3,8 319 540 41 581 13,0 15 823 38,1 Finland 1 469 159 10,8 8 5,0 2 1,3 33 494 4 348 13,0 32 0,7 Sweden 10 116 850 8,4 4 0,5 0 0,0 151 709 15 011 9,9 67 0,4 United Kingdom 45 257 5 194 11,5 469 9,0 57 1,1 1 722 468 292 779 17,0 2 444 0,8 Total 2002 539 093 78 087 14,5 6 056 7,8 2 933 3,8 11 934 249 2 230 816 18,7 45 408 2,0 Total 2001 581 293 81 921 14,1 10 469 12,8 1 058 1,3 11 696 270 2 115 578 18,1 136 130 6,4

4.33. The direct testing performed by the Court revealed both errors in the amount claimed and deficiencies in the operation of control systems: (a) over-declaration of livestock (Italy) where inspectors had failed to detect that the farmer had fewer eligible ewes than he declared in his claim for subsidy; (b) poor management of documentation and the recording of livestock data by beneficiaries (Greece, Spain, France, Italy and Portugal); (c) differences in the number of animals present on the farm and recorded in the farm registrar by beneficiaries (Spain, France and Portugal). 4.33. The Commission is aware of these problems and through the clearance of accounts procedure has urged Member States to take the necessary actions to improve the situation. It is anticipated that such improvements will be forthcoming from claim year 2003 onwards.

4.34. Frequent animal movements and the complex conditions of the animal premium schemes are two of the reasons why the results of IACS checks in the animal sector show higher error rates than for arable crops. Both the results of IACS testing and the direct work of the Court indicate that there is inherent risk of overpayment of animal premiums. 4.34. The various bovine premia are directed towards different types of animals and have to comply with different conditions. There is also a wider variety in practices/conditions over Europe in the animal sector compared to the area aids. The risk that some farmers over-declare cannot be eliminated, but it is reduced by a dissuasive control and sanctions system.

Subsidies paid on the basis of quantity produced

4.35. The EU subsidises olive oil, cotton, tobacco and dried fodder production (5 297 million euro, 12 % of CAP expenditure in 2003) on the basis of the quantity produced, rather than the area used to grow the crop. Expenditure of this kind poses particular risks: (a) quantities produced may be overstated (if the activities of producers are not properly supervised and/or their records are not reliable there is no other way of verifying the figures declared); (b) producers have an incentive to understate the area devoted to the production of such crops, and to claim they used some of the area for the production of crops subsidised on an area aid basis.

4.36. To seek to reduce such risks, Community legislation provides for a number of control mechanisms. These include: (a) requiring claims to be compatible with IACS area declarations; (b) a number of requirements for processors (for example, quality of weighing equipment, standard accounting information); (c) requiring Greece, Spain, France, Italy and Portugal to set up an olive tree register and a geographical information system (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70) and (except in France) setting up olive oil control agencies to carry out checks on mills, producers and producer associations. If these control mechanisms do not operate effectively there can be no assurance on the accuracy of payments made. 4.36. The Commission agrees with the Court's view and has identified the same particular risks as regards production aid. The checking systems for the various COMs take account of these risks. If these systems are not applied correctly, financial corrections are applied as part of the clearance of accounts procedure.

4.37. The Court's audit of a sample of transactions identified a number of errors and of deficiencies: 4.37.

(a) in Greece, staff in regional offices did not always have access to the IACS database, which is an obstacle to effective on-site checks (see paragraph 4.35(b)). Producers have an incentive to understate the area cultivated with crops paid on actual production and to overstate crops paid on an area basis; (a) The Commission is aware of the shortcomings of the IACS in Greece, which have resulted in a large number of financial corrections as regards field crops. The consequences of these shortcomings for checks on the schemes for production aid are taken into account when the accounts for those schemes are cleared.

(b) neither Greece nor Spain had a functioning olive oil GIS for the period relevant to payments made in 2003, and Spain failed to perform the number of on-site inspections required to compensate for this; (b) Payments in 2003 were for the 2001/02 marketing year. Along with checks on mills, the olive tree register is one element in the system of checking production aid for olive oil. It is compulsory only from the 2003/04 marketing year. In earlier years, the lack of the register could be offset by on-the-spot checks on crop declarations. As far as the Commission is aware, the main Autonomous Communities used an olive tree register for 2001/02, and so carried out no on-the-spot checks. This point, along with the inspection system in Greece, is being considered as part of the clearance of accounts procedure.

(c) in Greece the Court found a quantity of cotton rejected by a ginning mill which nevertheless received subsidy. (c) The Commission will look at the case the Court mentions.

4.38. The findings of the olive oil control agencies are set out in Tables 4.3 and 4.4 .

Table 4.3 — Olive oil inspection agencies: checks on mills (2001 to 2002), relating to claims paid in 2003 Member State Number of mills Mills checked Proposals to withdraw authorisation Total In depth Summary No % No % No % No % of mills checked Greece 2 541 1 146 45,1 805 31,7 341 13,4 149 13,0 Spain 1 715 1 001 58,4 881 51,4 120 7,0 9 0,9 Italy 5 737 3 144 54,8 1 881 32,8 1 263 22,0 298 9,5 Portugal 710 449 63,2 449 63,2 (15) (15) 74 16,5 Total 10 703 5 740 53,6 4 016 37,5 1 724 16,1 530 9,2

Table 4.4 — Olive oil inspection agencies: checks on producers (2001 to 2002), relating to claims paid in 2003 Member State Number of producers Producers checked Aid payments withdrawn or reduced Total On site Using documents No % No % No % No % of producers checked Greece 854 780 4 562 0,5 2 811 0,3 1 751 0,2 27 0,6 Spain 435 605 1 446 0,3 753 0,2 693 0,2 149 10,3 Italy 972 499 1 879 0,2 298 0,0 1 581 0,2 60 3,2 Portugal 142 464 2 519 1,8 1 621 1,1 898 0,6 199 7,9 Total 2 405 348 10 406 0,4 5 483 0,2 4 923 0,2 435 4,2 Source: Annual Reports for 2001 to 2002 of the Greek, Spanish, Italian and Portuguese olive oil agencies.

4.39. A key part of the agencies' work relates to checks on olive mills (producers are paid on the basis of quantities weighed and processed at the mills). Where the agencies find discrepancies (such as irregular accounting or reporting increased quantities or yields) at the mills they may propose a range of penalties, the most serious being to remove the mill from the approved list. In 2002 (checks affecting 2003 expenditure) the agencies proposed this course of action at one in 10 of the mills inspected. In practice, ministries of agriculture of the Member States often impose a lesser penalty. For example, in Greece, the ministry of agriculture only followed the recommendation of the olive oil control agency in four out of 241 cases (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70). The report of the Italian agency provides an estimate of the discrepancy between the quantity of olives declared in demands for subsidy (663 200 tonnes) and the estimated quantity entering mills (573 500 tonnes). The quantity on which subsidy was claimed exceeds estimated production by 15,6 % in 2002, and by an average of 8,1 % over the period 1984 to 2002. 4.39. The Commission monitors the Member States' checks on the work of the inspection agencies. Account is taken of any shortcomings in the procedures for clearing the accounts relating to production aid for olive oil.

Rural development

4.40. Rural development expenditure amounted to 4 719 million euro in 2003, 11 % of CAP spending. This covers spending on agri-environmental schemes, forestry, investments, support for young and for retiring farmers.

4.41. Schemes of this kind frequently have relatively complex eligibility conditions which sometimes need to be checked over several years.

4.42. The certifying bodies have qualified their audit opinion on the accounts of three agencies which specialise in rural development measures (Bayern Umwelt (Germany), Cnasea (France) and Ifadap (Portugal)). Errors affecting rural development expenditure are involved in the audit qualification of a further five agencies (Bayern Landwirtschaft (Germany), INGA (Portugal), NRW Westfalen (Germany), Région Wallonne (Belgium), Saarland (Germany)). 4.42. The errors highlighted by the Certifying Bodies in respect of rural development expenditure will be followed up in the framework of the clearance of accounts procedure (financial and compliance audit) and financial corrections will be proposed if they are found to imply a risk for the Fund.

4.43. The errors found by the Court include: (a) reimbursement of ineligible costs (Germany and France); (b) relatively small overstatements of the area claimed for environmental schemes (Finland, France and Austria).

Other expenditure

4.44. Expenditure not covered by the above headings amounts to 8 132 million euro. This includes export refunds, which are paid to cover the difference between EU and world market prices and allow surplus EU production to be disposed of on world markets, subsidies for the withdrawal and storage of excess production, a number of small subsidy schemes, and veterinary expenses.

4.45. The Court continues to find serious errors in these areas of spending, for example in subsidies for dried grapes (Greece), reported on in the 2002 Annual Report, and the treatment of direct expenditure on veterinary measures (France). 4.45. The Commission has and will continue to propose financial corrections for deficiencies found in subsidies for dried grapes, the aid for which is mainly concentrated in Greece. As for the veterinary measures in France, the problem highlighted by the Court concerned the late submission of the request for the financial contribution. The late request was exceptionally accepted as priority was given to the eradication of TSE. The late submission was acknowledged and regularized in the corresponding Commission Decision concerning the financing of the TSE programs submitted by all the Member States, and therefore in the Commission's view does not constitute an error.

4.46. The Court examined two control systems relevant to expenditure not covered by IACS and predominantly classified here as other expenditure: 4.46.

(a) post-payment checks (see paragraphs 4.13 to 4.16) were found to be of a low standard in terms of both the performance of inspections (one in five proving wholly unreliable) and the reporting of errors (the Commission has no information on the type of expenditure most at risk); (a) Scrutinies of commercial documents under Regulation (EEC) No 4045/89 are an ideal complement to front-line controls and offer increased assurance of the sound execution of the budget. These controls are separate from and additional to the pre-payment control and sanctions systems applying to all expenditure.

(b) physical and documentary checks on goods at the time of export cover at least 5 % of subsidised exports (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70). All Member States reported the number of checks performed to the Commission, but several did not communicate the number of errors detected. The results do not indicate the amount of subsidy claims rejected, nor the type of export refunds most affected. (b) The Court raised this matter in its 2002 annual report. The Commission, which was already aware of this necessity, has already taken steps to start collecting data on the financial volume of the exports subject to physical checks.

Conclusion

4.47. As in previous years, the Court found that CAP expenditure, viewed as a whole, and drawing on all available evidence, was materially affected by error. The Court notes, however, that different degrees of risk attach to the main categories of CAP spending: 4.47.

a) in the 14 Member States which in 2003 had satisfactorily implemented IACS, expenditure on arable crops appears to be the lowest risk category of CAP expenditure, and subject to the most effective control system;

(b) animal premiums are subject to a generally satisfactory and operational system of checks, which results in the rejection or correction of many claims made by farmers. However, largely because of frequent animal movements, final expenditure remains subject to a greater degree of risk than arable payments;

(c) categories of expenditure which cannot be checked through IACS pose greater risks because the systems available to control them are not as effective. (c) The Commission has sought to switch support to direct payments to farmers as, inter alia, such a change in policy limits the risk to the Fund and helps to protect EU tax-payers' interests. The 2003 CAP Reform, followed by the second wave of the Reform in 2004 on Mediterranean products, will further enhance this positive evolution. In addition, many of the schemes referred to by the Court became compulsorily IACS compatible from 1 January 2003. Regarding export refunds and some intervention measures, the Commission agrees that those schemes are exposed to greater risk. Nevertheless, the continuing reduction in the incidence of irregularities communicated by Member States seems to suggest that the effort made over the years to strengthen controls and sanctions has not been without effect.

4.48. The Court identified a number of ways in which the operation of supervisory systems could and should be improved (see paragraph 4.49).

Recommendations

4.49. The Commission should seek to: 4.49.

(a) identify the reason for poor-quality checks of CAP spending (in particular for post-payment checks) and ways in which they could be improved; (a) The Commission agrees that, in cases where controls have been poorly executed, improvements should be sought.

(b) improve the format of reporting of the results for all supervisory systems, providing a breakdown of the information available on the number and value of payments checked and of errors found by budgetary chapter (for example, distinguishing between findings for area aid and for forage areas, and, within area subsidies, between results for the basic cereal subsidy and the supplement for durum wheat); (b) The Commission services consider the current system of statistical reporting to be an efficient tool. When information supplied by Member States appears not to be fully correct, the Commission services ensure prompt follow-up and revision in the framework of the clearance of accounts.

(c) use the information so provided to compare the results provided by the different Member States in order to: (c) The Commission is in fact already implementing this recommendation in performing detailed analyses each year, when establishing the annual work plan.

(i) identify subsidies which are particularly subject to fraud and error;

(ii) evaluate the performance of the different paying agencies in preventing and detecting errors; and

(iii) propose changes to regulations and to systems aimed at eliminating areas of risk and reducing the rate of error.

4.50. In the light of the Court's findings for 2002 and 2003, and the comments made by the Commission in the reply to last year's report, the Court recommends that the Commission investigate the reason why, for IACS checks on areas, tests performed on a random basis continue to show a higher rate of error than those selected on the basis of an analysis of risk. 4.50. See reply to point 4.26. In its efforts to improve the IACS, the Commission has amended the IACS Commission Regulation in January 2004 as regards risk analysis, especially in introducing an obligation for Member States to review annually the efficiency of the risk factors used.

4.51. The Court considers that a summary of the results of supervisory checks should be included in the Annual Activity Report of the Director-General for Agriculture (see also paragraph 4.22). 4.51. DG AGRI will take account of the Court's recommendation for future annual activity reports.

CLEARANCE OF ACCOUNTS

Introduction

4.52. Clearance of accounts is a procedure designed to ensure that CAP payments have been legal and regular and that appropriate amounts are definitively charged to the Community budget (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70). It involves: (a) an annual ‘financial clearance’ decision, in which the Commission decides whether to accept the CAP paying agencies' accounts for the preceding budgetary year in the light of reports by the ‘certifying bodies’ which audit them; (b) ‘conformity decisions’ under which the Commission decides whether to ‘disallow’ expenditure (i.e. refuse to finance it definitively for the Community budget) and ‘make corrections’, (i.e. reduce payments to the Member States concerned accordingly). Such decisions relate to several EAGGF years. In most cases, disallowance takes place because the Commission has identified weaknesses in Member States' control systems, and the Commission applies a scale of flat-rate corrections based on the seriousness of the management failure. The process is selective, not comprehensive. The Commission examines particular areas of expenditure in particular Member States as the basis for its conformity decisions. The Court examined how these arrangements functioned in 2003.

Financial clearance decision for 2003

4.53. The Court examined in detail the reports produced by the certifying bodies of the 25 paying agencies (see Table 4.5 ) from which transactions for substantive testing were selected by the Court for the Statement of Assurance purposes. These reports indicate whether, in the view of the certifying bodies, paying agencies' accounts are true, complete and accurate (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70); and whether the agencies' control systems are satisfactory. In addition, the Court examined any other reports on paying agencies for which a qualified certificate was given. The Court sought to establish whether: (a) reliance could be placed on the work of the certifying bodies; (b) the Commission's financial clearance decision took proper account of the work of the certifying bodies and was otherwise satisfactory.

Audit opinions of certifying bodies

Table 4.5 — Paying agencies by expenditure declared in 2003 No Member State Paying agency Amounts declared in million euro % of total Qualified accounts Disjoined accounts (22) 1 Italy AGEA 4 891,34 11,06 2 France ONIC 4 594,60 10,39 × 3 Greece Opekepe 2 765,73 6,26 × 4 United Kingdom RPA 2 758,04 6,24 × 5 France Ofival 2 380,50 5,38 × × 6 Ireland DAF 1 893,02 4,28 7 Spain Andalucia 1 741,57 3,94 8 Denmark EU-direktoratet 1 219,66 2,76 9 Germany Bayern, Landwirtschaft 1 074,78 2,43 × × 10 Austria AMA 1 074,97 2,43 11 France ONIOL 936,40 2,12 × 12 Spain Castilla — La Mancha 932,60 2,11 13 Spain Castilla — Léon 915,23 2,07 14 Finland MMM 874,40 1,98 15 France Cnasea 797,76 1,80 × × 16 Portugal INGA 744,13 1,68 × × 17 Germany Niedersachsen 652,57 1,48 × × 18 France Onilait 631,07 1,43 19 Spain Extremadura 607,96 1,38 20 Spain FEGA 473,35 1,07 21 Germany Baden-Württemberg 446,75 1,01 × × 22 Germany Mecklenburg-Vorpommern 309,15 0,70 23 France Oniflhor 263,92 0,60 × × 24 Germany Sachsen-Anhalt 254,70 0,58 25 Germany Bayern, Umwelt 22,32 0,05 × × Subtotal (23) 33 256,52 75,22 26 Sweden SJV 864,38 1,96 × 27 Germany Hamburg-Jonas 586,24 1,33 28 United Kingdom SERAD 569,01 1,29 × × 29 Belgium BIRB 559,35 1,27 × 30 Spain Aragón 527,45 1,19 31 Netherlands PZ 518,11 1,17 32 Germany BLE 432,82 0,98 33 Netherlands LASER 402,24 0,91 × 34 France FIRS 375,11 0,85 × 35 Spain Cataluña 371,92 0,84 × 36 Germany Nordrhein-Westfalen Westfalen-Lippe 352,50 0,80 × 37 Germany Schleswig-Holstein 335,72 0,76 38 Germany Brandenburg 312,32 0,71 39 Italy SAISA (ex DCCC) 300,30 0,68 40 Netherlands HPA 290,18 0,66 × 41 United Kingdom DARD 283,85 0,64 × 42 France Onivins 283,75 0,64 × 43 Germany Thüringen 272,08 0,62 44 United Kingdom NAWAD 246,02 0,56 × × 45 Belgium Région Wallonne 237,53 0,54 × 46 Germany Hessen 228,83 0,52 47 Belgium Vlaamse Gemeenschap ALP 204,06 0,46 × 48 Germany Sachsen 199,81 0,45 49 Germany Rheinland-Pfalz 187,08 0,42 50 Spain Canarias 161,30 0,36 51 Spain Valencia 150,68 0,34 52 France ODEADOM 142,56 0,32 × 53 Spain Navarra 137,29 0,31 × 54 Spain Galicia 133,71 0,30 55 Germany Nordrhein-Westfalen Rheinland 124,31 0,28 56 Italy ENR 109,38 0,25 57 Portugal IFADAP 104,75 0,24 × 58 Spain Murcia 90,06 0,20 59 Italy AGREA 68,07 0,15 60 Spain Asturias 63,73 0,14 61 Spain País Vasco 59,50 0,13 62 Netherlands DLG 58,73 0,13 63 Ireland DCMNR 52,76 0,12 64 Spain Madrid 52,46 0,12 65 Italy Region Lombardie 50,71 0,11 66 Austria ZA Salzburg 49,48 0,11 67 Netherlands PT 47,15 0,11 68 Italy ARTEA (Toscana) 45,23 0,10 69 Luxembourg Ministère de l'Agriculture 44,21 0,10 × × 70 Spain La Rioja 41,33 0,09 71 Italy AVEPA (Veneto) 40,13 0,09 72 Spain Cantabria 35,31 0,08 73 Netherlands PVVE 34,04 0,08 74 Spain Baleares 24,62 0,06 75 France ACCT/SDE 21,15 0,05 × × 76 Germany Saarland 19,82 0,04 × 77 United Kingdom FC 15,87 0,04 × 78 Belgium Vlaamse Gemeenschap ALT 7,92 0,02 × 79 France Ofimer 7,82 0,02 80 Germany Hamburg 7,28 0,02 × × 81 Germany Nordrhein-Westfalen LfEJ 4,57 0,01 82 United Kingdom CCW 4,53 0,01 × 83 Germany Bremen 2,34 0,01 84 Germany Berlin 1,36 0,00 × × 85 Spain FROM 0,90 0,00 Subtotal 10 955,73 24,78 Total 44 212,25 100,00 11 266,58 19 042,73

(c) breaches of the criteria for the accreditation of paying agencies which do not have a direct financial impact (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70) and other control weaknesses — Opekepe (Greece), Vlaamse Gemeenschap (Belgium), SDE (France), Ministry of Agriculture (Luxembourg); (d) some certifying bodies' inability to give an opinion on the completeness of the debtor's statement (SERAD, Niedersachsen, Ifadap and Opekepe).

Analysis of the work of certifying bodies

4.55. The Commission seeks to ensure that the certifying bodies properly audit expenditure managed by the paying agencies by establishing guidelines (including on the sampling of transactions in order to establish whether there is a material level of error (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70)), and by reviewing the reports of the certifying bodies to ensure that this guidance has been applied.

Audit of expenditure

4.56. The certifying bodies reviewed the procedures put in place by paying agencies to administrer CAP expenditure. In the case of 69 paying agencies, responsible for 40 billion euro of expenditure, they also tested a statistical sample of the paying agencies' documents relating to CAP payments. Some 24 000 transactions were tested in this way.

4.57. The Commission concluded that, in addition to the qualifications noted in paragraph 4.54: (a) there was a material level of error in the expenditure of three other paying agencies (Madrid, Cantabria and Mecklenburg-Vorpommern); (b) the French certifying body had not used the required approach to sampling; (c) the United Kingdom certifying body had not tested a sufficiently large sample of transactions; (d) the reports for HPA and LASER (Netherlands) did not provide the required information about sampling and the treatment of errors.

4.58. For its part the Court identified: 4.58.

(a) that the report for Luxembourg suffered from the same weaknesses as those for HPA and LASER; (a) The accounts for Luxembourg have been disjoined — due to lack of reporting on the measures taken in response to previous year's recommendations. The issues mentioned by the Court will also be taken into consideration before the final clearance decision for this Member State.

(b) that there was inadequate information in nine of the reports for Spanish paying agencies. However the Commission obtained additional information which enabled it to clear the accounts. The Court reviewed the work of two of the certifying bodies concerned on the spot. One of these had performed a thorough audit of the accounts and was able to provide full documentation of the work carried out (Castilla-La Mancha). For the other agency (Andalucía, the largest in Spain) the situation was unsatisfactory. The certifying body had contracted out the audit in November 2003 leaving the contractee very limited time to perform the audit. There was little audit evidence to support the work carried out and supervision was inadequate. Compliance testing was performed too late and at a negligible level. (b) Regarding the late appointment of the auditor by the certifying body in Andalucía, the Commission agrees that such decisions should be made in good time. It will insist (as has already been done in the past for other paying agencies) on the importance of early appointment of audit firms. As far as the limited level of compliance testing is concerned, the Commission makes its clearance proposal taking into consideration the whole work performed by the certifying body. Finally, with regard to the questions of the limited audit evidence and supervision, the Commission will insist on the need to ensure that both aspects receive sufficient attention by certifying bodies (in particular when audit firms are appointed to perform all or part of the audit work).

Debtors

4.59. Paragraphs 4.113 to 4.121 summarise a Special Report by the Court on CAP irregular payments and debts.

4.60. The total value of debts as at 15 october 2003 was 2,3 billion euro (similar to the previous year). Four certifying bodies qualified the debtors statement (see paragraph 4.54) and many others noted significant weaknesses in the management, recording and recovery of debts (17 paying agencies). 4.61. Reports for several of the paying agencies indicate that the work performed by the certifying bodies is not sufficient to ensure that all debts are reliably recorded. In addition, the Commission guideline (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70) on the valuation of debt requires certifying bodies to form an opinion on the value of debts to the paying agencies which are likely to be recovered. Four did not do so. 4.60 and 4.61. The Commission shares the view of the Court as regards the importance of this issue. It is aware of the difficulties of debt management in a number of paying agencies and also of the improvements introduced. This question has received particular attention since 1999 and will continue to be the subject of further review and action. Nevertheless, having taken all the available information into consideration, the Commission was able to propose clearance of the paying agencies' accounts, despite the existence of some difficulties. The Commission has always taken note of problems identified and will futher insist on the necessity of clear opinions from certifying bodies on this subject. The Commission continues to closely supervise this issue, and four visits to Member States have been organised for the second half of 2004.

The Commission's decision

4.63. The Commission took its financial clearance decision on 29 April 2004 (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70), within the deadline laid down in the regulation.

4.64. The Commission accepted the accounts of 56 paying agencies which together account for 25,2 billion euro (57 % of the total declared). Where there are quantifiable errors in the accounts of paying agencies the Commission has indicated that it will make appropriate financial corrections.

4.65. The Commission postponed its decision on the accounts of 29 paying agencies representing 19 billion euro (43 % of the total declared). The reasons given by the Commission for postponing its decision on the accounts common to more than one paying agency were: (a) a failure by the certifying bodies to respect the sampling guidelines (the use of too low a confidence level/sample size too small) (15 accounts); or (b) insufficient details given by the certifying bodies about the sampling method used (two accounts) (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70).

4.66. It is standard practice for the Commission to delay its approval of the reports of certifying bodies where it has doubts about the adequacy of their work. The accounts of four paying agencies were omitted from the financial decision for 2001; and those of 17 paying agencies from the financial decision for 2002.

4.67. On no occasion in the past has the Commission however postponed its decision in respect of such a large number of paying agencies, representing such a large proportion of expenditure.

4.68. It is not clear at what stage the Commission will be able to accept the paying agency accounts not included in its decision of 29 April 2004. Past experience suggests that the delay could be considerable, the 2000 accounts for the former Greek paying agency were not approved until 2003, when the agency had ceased to exist. None of the accounts not included in the 2001 and 2002 financial decisions had been approved by April 2004. The accounts of 10 paying agencies (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70) remain uncleared for two out of the past three years. 4.68. By the end of this year the Commission expects to clear the accounts for the four paying agencies disjoined for 2001, plus more than half of the paying agencies disjoined for 2002 (for which all necessary information has been provided).

4.69. Postponing the financial clearance decision does not have any financial consequences for the Member States concerned, nor does it prejudice any future decision on the eligibility of expenditure to Community financing. Nevertheless, the Commission could not reach a conclusion on the accounts of the paying agencies covering 43 % of the expenditure declared for 2003 by the due date.

Conformity decisions taken in 2003

4.70. In 2003, the Commission took three conformity decisions in respect of expenditure declared from 1996 to 2002 (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70), refusing to finance 377 million euro, of which the Court examined an amount of 366 million euro and has sought to establish whether the corrections were: (a) adequate and well founded; (b) made in good time.

Adequacy of corrections

4.71. The Court concluded that in respect of 308 million euro of disallowed expenditure, the Commission's procedures were well founded and the amounts disallowed consistent with its normal scale of flat-rate corrections (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70).

4.72. In the following cases, the Court took the view that a more rigorous application of the Commission's own rules would have been justified (and would have increased the sum disallowed by 65 million euro): 4.72. In assessing the financial corrections the Commission has to consider what alternative forms of check would reduce the risk to the EAGGF. Its decision must therefore be deemed to be in line with the rules and protocols. The Commission considers that it has fully and correctly applied its guidelines on fixing the levels of financial corrections, and must stress also its legal obligation to accurately assess the real risk to the Fund. The Commission maintains that the rates of financial correction imposed in the concerned cases were justified.

(a) olive oil in Italy, correction of 13 million euro. The Commission applied a 2 % flat-rate correction to expenditure incurred in 2000, thus relating mainly to the 1998/99 marketing year. The correction is mainly for significant weaknesses found in the checks carried out at the mills and a lack of rigour in the performance and follow-up of compatibility checks on the quantities of olive oil produced. In addition the Geographical Information System (GIS) was not complete and operational when the expenditure was incurred; and, the minimum number of alternative checks required (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70) during the marketing year 1998/99 were not made. The Commission has classified these checks as key controls. A correction rate of 5 % would have been consistent with the Commission's scale of flat-rate corrections; (a) In the 1998/99 marketing year Italy introduced alternative forms of check that reduced the risk to the EAGGF. This led the Commission to propose a correction rate of 2 % despite the existence of failings in key controls. In particular Italy had an olive cultivation register and in 1998/99 made many on-the-spot checks in connection with creation of the olive cultivation GIS. These checks resulted in significant penalties on growers whose crop declarations showed discrepancies.

(b) olive oil in Greece, correction of 45,1 million euro. Since 1994, the Commission has applied a 5 % correction because of the non-implementation of the olive oil register and inadequacies of the computerised database. Member States had five years from 1998/99 to implement the GIS, which replaces the olive tree register and database. The Commission considers that the lack of effort to develop the GIS is a weakness in itself and that the improvements made do not compensate for its absence. Thus the 5 % flat-rate applied to expenditure incurred in 2000, relating mainly to 1998/99 marketing year, has been maintained. These checks are key controls and as they are not implemented, a 10 % correction would have been consistent with the Commission's normal scale of flat-rate corrections. (b) Under the olive oil production aid scheme there are two key interdependent controls, on mills and on trees. It is true that Greece had neither an olive cultivation register, operational computerised files or an olive cultivation GIS (compulsory from 1998/99), but she did make the alternative checks specified in the rules for cases where there was no GIS and imposed penalties when incorrect declarations were found. There were also checks on mills and on abnormally high yields. These factors led the Commission to maintain a 5 % correction rate for the marketing years in question.

24 months rule

Time taken to make corrections

4.74. The average length of the clearance of accounts procedure, for corrections made in the three decisions taken in 2003, from the date of the mission in the Member States to the inclusion of the correction in a decision, is more than two and a half years (900 days). This is a reduction from the average length of the procedure in 2002 of three years (1 100 days). However, the average time taken from the date of the mission to the final letter notifying the correction continues to exceed significantly the standards defined internally by the Commission's services. 4.74. The Commission acknowledges that in some cases delays in the progress of accounts clearance persist. But, as the Court finds from year to year, major efforts have been made to reduce the average duration of the procedure. These will be continued.

Clearance of accounts decisions in recent years

4.75. Clearance of accounts takes place over a period of years (see paragraphs 4.52 and 4.70). Table 4.6 shows the results of the Commission's clearance decisions for 1991 and subsequent years. Clearance is not yet complete for any year later than 1997. The total corrections represent the Commission's view, for the budget lines and Member States it has examined, of the amount of expenditure which, mainly because of weaknesses in Member States' systems for managing and controlling expenditure, should not be borne by the Community budget. 4.75. In June 2004 only nine procedures remain open (three predating 1 January 2000) out of a total of 482 initiated between 1997 and the end of 2000. The Commission has applied itself to reducing the backlog and the oldest cases still open were given particular attention when the 2004 work programme for auditing agricultural expenditure was drawn up.

4.76. Graphs 4.6 and 4.7 set out the distribution of corrections in decisions taken by the Commission during the period 1999 to 2003 (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70), by Member State and market sector. These decisions relate to items of expenditure from the Community budget years 1996 to 2002.

Table 4.6 — Corrections in clearance of accounts decisions in respect of budget years 1991-2003 (million euro) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Expenditure declared 31 255,9 30 480,2 34 008,0 33 592,8 35 654,4 39 062,5 40 884,3 38 857,4 40 726,2 40 410,6 41 593,8 42 710,8 43 988,4 Total amount of corrections –1 504,1 – 788,2 – 737,0 – 307,8 – 572,9 – 790,1 – 481,4 – 328,3 – 248,4 – 305,0 – 132,7 –0,2 0,0 of which: (a) Milk super levies – 979,2 – 419,7 – 248 0,0 –15,1 – 215 – 110,2 0 0 0 0 0 0 (b) Corrections – 524,9 – 368,5 – 489,0 – 307,8 – 557,8 – 575,1 – 371,2 – 328,3 – 248,4 – 305,0 – 132,7 –0,2 0,0 Corrections as a percentage of expenditure declared 1,7 % 1,2 % 1,4 % 0,9 % 1,6 % 1,5 % 0,9 % 0,8 % 0,6 % 0,8 % 0,3 % 0,0 % 0,0 % NB: Clearance is not yet complete for any year later than 1997. Source: Commission's ‘conformity’ decisions adjusted to take account of corrections cancelled as a result of European Court of Justice rulings.

The Court's conclusions

Financial clearance decision

4.77. Subject to the individual problems listed in paragraphs 4.54 to 4.57, the certification of paying agencies' accounts worked satisfactorily.

4.78. There is however scope for: 4.78.

(a) the Commission to evaluate the work performed by certifying bodies on the spot on a cyclical basis (see paragraph 4.58); (a) Specific on the spot reviews of the certifying bodies' activity will be considered, after examining all the priorities for the auditors of the Commission.

(b) the certifying bodies to follow more closely the Commission's guidelines in respect of the treatment of CAP debts (see paragraphs 4.59 to 4.61). (b) The Commission will insist on the importance of proper reporting on debtors and increase the attention paid to this subject for the next accounts clearance decision.

4.79. The fact that no financial clearance decision has yet been taken for 43 % of expenditure declared for 2003 nor for 21 paying agencies accounts for 2001 or 2002 is a cause for concern (see paragraphs 4.65 and 4.68). 4.79. It should be emphasised that the disjunction of accounts does not cause any financial consequences for the Member States concerned, nor does it prejudice any exclusion of expenditure of Community financing. The postponement of the clearance allows the Member States to provide additional information and in some cases to perform certain tasks requested by the guidelines which were not finalised by the regulatory deadline of 30 April. Once these matters are addressed by the Member States the Commission should be in a position to clear the disjoined accounts. The Commission continues to make efforts to clear the backlog of cases from the 2001 and 2002 exercises. It expects to clear the accounts for the four paying agencies disjoined for 2001, plus more than half of the paying agencies disjoined for 2002.

Conformity decisions

4.80. Most of the corrections made in 2003 were calculated on the basis of the Commission's normal scale of flat-rate corrections (see paragraph 4.71). In two cases, a higher rate of correction could have been applied (see paragraph 4.72). 4.80. The Commission maintains that the rates of financial correction imposed in the following cases were justified.

FOLLOW-UP TO PREVIOUS OBSERVATIONS

Export refunds — destination and placing on the market

4.81. Export refunds are subsidies paid on the export of agricultural products to compensate exporters for the difference between EU prices and lower prices prevailing on the world market. Rates for the same product may vary according to the destination. 4.81. The significance of export refunds as a policy instrument has steadily decreased due to the successive reforms of the Common Agricultural Policy designed to make Community produce more competitive by bringing EU prices closer to world market prices. 10 years ago expenditure on export refunds exceeded 10 billion euro; in 2003 it was down to 3,7 billion euro. This trend is expected to continue with the latest CAP reforms of 2003 and 2004.

4.82. In its Special Report No 7/2001 (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70) the Court recognised that it was preferable to apply one refund rate for each product to all destinations, although this was not immediately possible. It therefore made the following recommendations to simplify and improve the financial control of such transactions: 4.82 and 4.85. The Commission has reacted appropriately to remedy the weaknesses identified in the special report. An action plan was defined and has been implemented. The Commission believes that with the measures taken, the management of the risks involved has significantly improved.

(a) proofs of arrival should not be required in every case, but only in cases of doubt, or for high risk destinations; (a) Relaxing the requirements for proof of arrival could generate a potential risk for the Community budget through a loss of control over exports to countries for which an export refund is not fixed. It would also expose the Commission to fundamental criticism of the way the EU monitors and controls its subsidised trade with third countries, particularly taking into consideration its international undertakings to refrain from granting export refunds for specific markets.

(b) transport documents and commercial invoices should be presented to CAP paying agencies for all claims exceeding the de minimis limit (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70); (b) The Commission considers that generally speaking customs import declarations issued by official state authorities give greater assurance that goods have been imported in the third country for which the refund is paid than transport documents and commercial invoices issued by private operators. However, the Commission has decided to double the de minimis limit by which payment claims involving small amounts of refunds can be exempted from production of proof of import, but to maintain this requirement for differentiated export refunds above this limit.

(c) a posteriori checks that products had been placed on the market intended (and not exported elsewhere) should be intensified; shipping and container movement databases should be consulted for the transactions selected for a posteriori checks (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70). (c) Given the decision to continue to require proof of import for differentiated export refunds, there is no need for a posteriori checks that products had been placed on the market intended to be intensified. Nevertheless, the Commission has encouraged Member State authorities to use the data held by transport companies as an additional element of check on the arrival of goods at their destination.

4.83. The Court also put forward a series of detailed recommendations for improvements in financial control arrangements which should be applied if the requirement for the systematic presentation of proofs of arrival was maintained.

4.84. The Council and Parliament supported the Court's recommendation for changes (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70). In particular the Parliament invited the Commission to make a radical effort to simplify legislation and procedures for more transparency, before phasing out the export refund scheme.

4.85. The Commission has not taken action to simplify the scheme as recommended in paragraph 4.82. 4.85. See reply to paragraph 4.82.

4.87. However, on other detailed points raised by the Court, the Commission: 4.87. Having examined the recommendations of the Court the Commission decided not to follow the recommendation suggested by the Court in point (a) whereas actions have been taken in relation to points (b) and (c).

(a) has not taken over responsibility for approval of supervisory companies; (a) Within the framework of shared management the responsibility for approval of supervisory companies lies within the Member States and the Commission has no intention to take it over. Member States are closer to events on the ground and are in a better position for managing the conditions for the approval and control of supervisory companies. However, following the Court recommendation, procedures for approval of supervisory companies have been reinforced (see Commission Regulation (EC) No 1253/2002 OJ L 183, 12.7.2002, p. 12)).

(b) has not yet provided Member States with a model file of acceptable proofs of arrival (customs documents and customs stamps used in various non-Member States); (b) The verification of the validity of proofs which are furnished by exporters in the payment application for differentiated refunds is the responsibility of Member States' paying agencies. However, the Commission launched a tendering procedure, but this proved to be unsuccessful and had to be relaunched. Bearing in mind the time needed for the tender's procedure and completion of the study, the results will not be available until the end of 2005. Meanwhile, in order to ensure a better coordination between paying agencies, Member States have been asked to exchange copies of the customs import documents, customs stamps and customs codes (entry for home use, entry for warehousing, entry for inward processing, etc.) that are available in their paying agencies concerning various third countries included in the study.

(c) could have made more effective use of external audit firms to examine the system of differentiated export refunds. (c) The Commission contracted for the first time external audit firms for this task in 2001. With hindsight some aspects might have been perfectible and experience has already been, and will continue to be, taken into account in possible future engagements of external auditors.

4.88. OLAF has followed up some cases of concern identified by the Court, but has not taken or completed action in respect of a series of other cases involving illegal exports to Iraq, shortages in deliveries of cattle to Lebanon, carousel trade in milk products with the Baltic States, diversion of cheese from the United States of America to Canada and deliveries to North Korea of feta cheese which substantially exceeded its expiry date. 4.88. The case ‘diversion of cheese from USA to Canada’ will be finalised shortly. Follow-up actions for all mentioned cases are still ongoing.

4.89. There has thus been only a partial follow-up to the Court's recommendations (and the Council's and Parliament's conclusions). Destination-specific export refunds continue to account for a significant proportion (45 %) of expenditure on export refunds, (i.e. 1 882 million euro in 2003). 4.89. As the Court recognises in paragraph 4.87, the Commission has responded positively to many of the Court's more detailed observations and recommendations. For the recommendations not accepted, due explanation is given in the reply to paragraphs 4.83, 4.86 and 4.88. The Commission has reacted where appropriate to remedy the weaknesses identified in the Court's special report. An action plan was defined and has been implemented. The Commission believes that with the measures taken, the management of the risks involved has significantly improved.

Support scheme for olive oil

4.91. In its Special Report the Court observed in particular that: (a) the system for the Commission's management and control was not sufficiently efficient and reliable; (b) the CMO objectives set were not sufficiently clear; (c) in creating and implementing the olive cultivation geographic information system (GIS) (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70) in the Member States, the Commission should not allow repetition of the delays experienced with the initial olive cultivation register; (d) any reform should maintain the principle of sound financial management set out in the Financial Regulation and the CMO objectives should be specified in such a way to make it possible to measure progress towards them; (e) payment based on the number of trees rather than the quantity of production would pose fewer control problems but would reinforce further the need of the olive cultivation GIS.

4.92. The Council and the Parliament (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70) supported the Court's recommendation relative to the need for sufficient and reliable management and control through a workable olive cultivation GIS and the integration of the olive oil data in the IACS system. Because consumption aid was abolished by the 1998 reform and because of the insignificance of export refunds, the Court's follow-up concentrates on the production aid to olive oil producers.

4.93. The Court notes that, in the period before the 2004 reform, the Commission had already addressed a number of issues concerning notably overproduction and competitiveness of olive oil production. Despite the fact that every year the Commission has invited the Member States to accelerate their procedures, a discrepancy between the number of penalties recommended by the olive oil control agencies and the number of penalties effectively imposed by the Member States still persists. 4.93. The Commission closely monitors the quality of the Member States' monitoring of the work of the inspection bodies. Any inadequacies found are taken into account in the accounts clearance procedures for the olive oil production aid.

4.94. The 2004 reform, by setting clearer objectives and replacing the quantity based production aid by an area aid, abolished a number of measures in which the Court had found weaknesses, notably those concerning the controls in the Member States, the obligation to estimate production yields, and the decoupling of aid from production. However, the Commission did not quantify the reform objectives as required by the Financial Regulation. This hinders the measurement of progress in achieving them. 4.94. The reform of the olive oil sector is part of the reform of the common agricultural policy started in 2003 and aims at achieving the same objectives, which were presented in the explanatory memorandum of the proposal for a long term policy perspective for sustainable agriculture (COM(2003) 23 final, 21 January 2003), namely: — to enhance the competitiveness of the EU agriculture, — to promote a more market oriented, sustainable agriculture, — to provide a better balance of support and strengthen rural development. The achievement of the objectives is assessed by the Commission as part of the ongoing management and monitoring of the implementation of the CMO. Council Regulation (EC) No 864/2004 foresees that the Commission shall, before 31 December 2009, provide the Council with a report on the situation among others of this sector, accompanied, if appropriate, by proposals for amendments.

4.95. Under the new Council Regulation the aid will be based on the area planted with olive trees with a minimum amount of aid of 60 % allocated to the single payment scheme. This part of the aid will be related neither to production of olive oil nor to the number of olive trees. The remaining 40 % will be linked to the number of olive trees. However, until the olive cultivation GIS has been completed, the management and control of this 40 % part of the aid, linked as it is to the number of olive trees, will continue to depend on insufficiently reliable statistical data. The absence of data and lack of reliability of the Commission's statistical information was also confirmed by an external evaluation, requested by the latter, to evaluate the impact of the main market organisation measures of the olive oil sector (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70). 4.95. The remaining funds (up to a maximum of 40 %) would be retained by Member States for the granting of aid confined to olive groves already registered in a GIS. Producer Member States have informed the Commission as regards completion at various stages of the GIS. According to legislation in force, the GIS shall be fully operational for the payment of the aid from the marketing year 2003/04 onwards (advance payment fixed in September 2004, final payment to be fixed in June 2005) – see also reply to 4.97. The purpose of this aid is to contribute to the maintenance of olive groves of environmental or social value. It will be granted per hectare of olive grove, whether or not in production. For the granting of this aid variations in the number of trees registered on 1 January 2005 in the olive groves should not exceed 10 %.

4.96. Contrary to the Court's recommendation the Commission proposed to the Council (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70) a delay in the completion of the olive cultivation GIS by two years until 31 October 2003. The fact that this has not been fully completed to date will have a negative impact on the implementation of the reform. 4.96. The proposal to delay in the completion of the olive cultivation GIS was motivated by the limited progress achieved in 2001 by the Member States in the execution of the GIS and the aim of obtaining a reliable and trustworthy tool for the management of the sector. In cases where the GIS had not been completed, Member States were required to carry out reinforced on the spot controls (Regulation (CE) No 2366/98). The proposal was accompanied by additional provisions stipulating that from November 1st 2003, olive trees and corresponding areas not attested by a GIS or olive oil produced therefrom are not eligible for aid to be paid to olive producers. According to the information provided by the producer Member States to the Commission, the GIS is largely operational to check the aid payments for the marketing year 2003/04, and its role in the practical implementation of the reform will be verified in due course in the framework of the clearance of accounts procedure.

4.97. The Commission has taken into account in the clearance of accounts procedure the Member States' failure to comply with CMO provisions concerning the olive oil register and the computerised files. However, in its Annual Report 2002 (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70) and in the present Annual Report, the Court called on the Commission to be more rigorous in respect of applying its own instructions concerning corrections of olive oil expenditure (see paragraph 4.72 and Annual Report 2002, paragraph 4.61). 4.97. The Commission maintains that the rates of financial correction imposed in the concerned cases were justified. See the reply to point 4.72. and the 2002 Annual Report.

4.98. In view of the foregoing, the Commission should take immediate action to address the following outstanding issues: 4.98.

(a) set appropriate and measurable indicators in order to monitor the implementation of the reform objectives and, in this way, to comply with the provisions of the Financial Regulation on sound financial management, and to improve the management of the CMO; (a) The reform of the olive oil sector is part of the reform of the Common Agricultural Policy started in 2003 and therefore aims at achieving the same objectives. The Commission will monitor the achievement of these objectives.

(b) insist that Member States dispose of a workable and reliable olive cultivation GIS and if this cannot be achieved, make appropriate financial corrections in accordance with the rules applicable. (b) As of November 1 2003, olive trees and corresponding areas not attested by a GIS or olive oil produced therefrom are not eligible for an aid to be paid to olive producers. The Commission accepts the Court's recommendation and as in the past will continue to verify that checks are made correctly and uniformly.

PRINCIPAL OBSERVATIONS IN SPECIAL REPORTS

Evaluation of farm incomes by the Commission

4.99. According to Article 33(1) of the EC Treaty, one of the five objectives of the common agricultural policy (CAP) is to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture. This objective is proving to be a genuine guiding principle of the CAP.

4.100. The Commission has three systems for measuring farm incomes: the Farm Accountancy Data Network (FADN), which measures the incomes of agricultural undertakings on the basis of harmonised accounts, but is inadequate as far as the quality and comparability of the results are concerned, the Economic Accounts for Agriculture (EAA), which provide data that vary in quality according to the Member State concerned, and the Income of the Agricultural Household Sector (IAHS) containing non-homogeneous and obsolete statistics. 4.100. Improving the quality and especially the comparability of the statistical data from the FADN is a major concern of the departments responsible for these statistics and has been the subject of constant attention on the part of the Commission, the FADN Committee and the Member States. The latter have introduced a basic methodology designed to improve quality and harmonise the results from the FADN. It is true that the regional diversity of agriculture,in both socio-economic and structural terms, has meant the adoption of rules specific to some Member States. However, the impact of the methodological differences referred to by the Court is reduced as much as possible by the efforts made regarding sampling and weighting. The economic accounts for agriculture are continuously and closely monitored for accuracy and comparability by the Working Party ‘Agricultural accounts and prices’ and more specific controls such as the inventories. This is why the quality of the income statistics produced under the EAA has always been considered satisfactory. In addition, although the choice of sources of data is left to the Member States depending on the specific structure of their agricultural sector and their statistical system, this has little impact on the quality of the EAA data.It is in fact not the harmonisation of data sources but the harmonisation of definitions and principles of data extraction which guarantees the harmonisation of the EAA data among Member States and contributes to their quality. Finally, studies have shown that the multiplicity of data sources makes accuracy indicators very difficult to establish and complex to interpret for such statistics as national accounts and accounts for agriculture. The statistics on incomes of agricultural households do not benefit from the same degree of quality, homogeneity and updating as the FADN and the EAA. A taskforce to develop and improve these statistics was set up in 2003 in collaboration with the FAO, the OECD and UN/EEC.

4.101. The European Community has never defined the concepts of ‘agricultural population’, ‘fair standard of living’ or ‘income’ that are set out in Article 33 of the EC Treaty. As a consequence, there are to this day no clear concepts and criteria that can be applied to the statistics that are supposed to measure these magnitudes. 4.102. The Court was able to establish that the nature of the information needed on the financial situation of farmers has evolved over the years. Whereas under the Mac Sharry reform of 1992 the aim was merely to make up for losses of revenue by means of direct payments, the Commission is now also interested in the sources of non-farm income and in the distribution of incomes within the agricultural sector. Information on the overall income of agricultural households is needed in order to examine these questions. 4.101 and 4.102. There are various different measures of income (inter alia, income by branch of activity and income of households at macroeconomic level, and income of holdings at microeconomic level). These have been extensively used and published by the Commission for the purposes of monitoring and analysing the levels of and changes in incomes in agriculture, as well as contributing to generating agricultural policy.

4.103. With the assistance of an expert, the Court endeavoured to clarify the various concepts set out in Article 33 EC. The conclusion of this study was that, where there are no other data, the overall disposable income for all the members of the household can be taken as an approximate indication of the standard of living. Furthermore, an agricultural household's standard of living can no longer be considered fair if the overall disposable income of all the members of the household falls below a certain threshold compared with other business households.

4.104. The Court examined the Commission's three agricultural statistics systems from the point of view of their ‘relevance’ with regard to the requirements of the CAP. The purpose of all these systems is to measure incomes in the agricultural sector. However, the FADN gives only the figure for the profits of so-called professional farms, without taking account of either non-farm income or the incomes of other household members. As for the EAA, the main result it gives is the surplus remaining after the costs of all the agricultural products have been covered. These two systems do not therefore give any direct information on the standard of living of agricultural households. The IAHS project was conceived for this purpose, but it has never produced reliable and comparable results. 4.104. The statistical instruments represented by FADN and EAA have made it possible from their inception to monitor, evaluate and analyse changes in the income generated by agricultural activity, both across the agricultural sector as a whole and by farm specialisation. Moreover, since the most significant part of farm households' income comes from agricultural activity (and mainly commercial holdings), these statistics also make it possible to monitor and analyse changes in farm households' income in a relatively reliable way. In fact, this is in line with of Article 33 (a) and (b), which explicitly link the goal of ensuring a fair standard of living for the farming community to increases in income generated by agricultural activity.

4.105. In conclusion, the Community statistical systems do not at present provide enough information on the net incomes of agricultural households and do not allow the standard of living of the agricultural population to be assessed. The Commission should therefore redefine precisely the Community's needs in this area and reorientate the existing statistical systems accordingly. 4.105. Each of the statistical tools provides additional information in the decision-making process. Therefore, they should be seen as complementary parts in a very complex policy field. The statistics of the EAA and of the FADN have for many years provided very useful, reliable and relevant information on the incomes generated by agricultural activity. This information has proved very important for the monitoring, evaluation and design of the common agricultural policy. So far these figures on income from agriculture could be regarded as relatively reliable estimates of farm households' income to the extent that the latter draw the major part of their income from farming. The socio-economic developments in the agricultural sector and recent changes in agricultural policy (in particular as regards rural development) may well require more detailed figures on farm income. Although reliable statistics on the income of agricultural households already exist in a considerable number of Member States, it would be worth making a study of the feasibility and cost of statistics that measure the standard of living of the farming population across all the Member States of the Union. The financial situation and income levels of farming undertakings and in the agricultural sector generally will continue to be the subject of regular monitoring on the basis of FADN and EAA data, the harmonisation and consistency of which will need to be strengthened through increased collaboration among the various services concerned.

Management and supervision by the Commission of control measures and expenditure relating to foot and mouth disease (3 4 5 6 7 8 10 11 14 16 17 18 19 20 21 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70)

4.106. The need to complete the single market and promote trade in livestock in general made it essential for the Community to establi