Opinion No 1/2005 on the proposal for a Council Regulation on the financing of the common agricultural policy (COM(2004) 489 final of 14 July 2004)
Date: 2005-03-17
Institutions: European Court of Auditors
Subjects: budgetary discipline (EU), common agricultural policy, farmers' income, financing, market support, opinion of the Court of Auditors, rural development

20.5.2005

EN

Official Journal of the European Union

C 121/1

I

(Information)

COURT OF AUDITORS

OPINION No 1/2005

on the proposal for a Council Regulation on the financing of the common
agricultural policy (COM(2004) 489 final of 14 July 2004)

(pursuant to the second subparagraph of Article 248(4) of the EC Treaty)

(2005/C 121/01)

TABLE OF CONTENTS

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A CLEAR SEPARATION OF THE TWO ‘PILLARS’

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current situation and proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MANAGEMENT AND CONTROL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EAGF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current situation and proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EAFRD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current situation and proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

BUDGETARY DISCIPLINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Commission’s proposal

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EAGF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EAFRD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

TREATMENT OF IRREGULARITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EAGF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Proposal and analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EAFRD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Current situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Proposal and analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Points

1-6

7-14

7-13

14

15-34

15-25

15-18

19-25

26-34

26-29

30-32

33-34

35-48

35-40

41-44

45-48

45-47

48

49-61

49-53

49

50-53

54-61

54-57

58-61

Page

3

3

3

6

6

6

6

7

8

8

8

9

9

9

9

10

10

10

10

10

10

10

11

11

11

C 121/2

EN

Official Journal of the European Union

20.5.2005

OTHER COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

62-65

Consistency between financial years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transitional arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

62

63

Minor points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

64-65

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I-II

12

12

12

12

12

Points

Page

20.5.2005

EN

Official Journal of the European Union

C 121/3

THE COURT OF AUDITORS OF THE EUROPEAN COMMUNITIES,

Paragraphs (7 to 61) below discuss four principal themes

4.
of the draft regulation:

Having regard to the Treaty establishing the European Commu-
nity, and in particular Article 248(4), second subparagraph, and
Article 279 thereof,

— Consolidation of agricultural expenditure and separation of
the two pillars (Articles 2 to 5 of the draft regulation),

Having regard to the proposal for a Council Regulation on the
financing of the common agricultural policy (1),

— Management and control (Articles 6 to 8,10,11,12 to 17, 22

to 31, 36, 37 of the draft regulation),

Having regard to the request for an opinion on this proposal sub-
mitted by the Council to the Court of Auditors on 29 Octo-
ber 2004, and received by the Court on 5 November 2004,

— Budgetary discipline (Articles 12 to 21 of

the draft

regulation),

HAS ADOPTED THE FOLLOWING OPINION:

INTRODUCTION

1.
The purpose of the proposed regulation is to establish
with effect from 1 January 2007 a legal framework for financing
the two ‘pillars’ (market expenditure and income support; rural
development) of the common agricultural policy (CAP). The pro-
posal builds upon existing CAP provisions (2). It does not intro-
duce changes to the substance of the CAP or fix the amounts to
be spent on the CAP.

— The treatment of irregularities (Articles 9, 32 to 35 of the

draft regulation).

Paragraphs 62 to 65 discuss other detailed points, some of them
concerning transition.

5.
At a number of points (Articles 7, 8, 9, 13, 15, 16, 18, 19,
26, 30, 39, 42, 45 and 48) the draft regulation leaves important
issues, to be settled through committee procedure in secondary
legislation, on which the Court is clearly unable to comment at
the moment. The Court notes that the effectiveness of a number
of aspects of the proposed system will depend on the quality and
content of such secondary legislation. In particular, the draft regu-
lation leaves unclear the precise financial responsibilities of the
Commission and the Member States.

2.
The Court has considered whether the proposal is likely to
improve the financial management of the CAP taking into
account its opinion of April 2004 on the single audit model
(Opinion No 2/2004) (3).

6.
Some of the proposed changes of the draft regulation are
not consistent with some of the provisions in the Financial Regu-
lation (4). The Commission will need to consider whether amend-
ments to the Financial Regulation are necessary.

3.
Under this model, the Commission would be responsible
for promoting improvements in internal control systems and for
providing assurance that they are working effectively. The inter-
nal controls systems would be based on a logical framework using
common principles and standards. The Court emphasised that the
cost of the controls should be in proportion to their benefit.
However, some elements identified in the Court’s single audit
opinion as necessary for an effective and efficient chain of
accountability and financial control require further clarification
(see paragraphs 20, 21, 23 and 24).

(1) Commission document reference 2004/0164 (CNS) — COM(2004)

489 final.

(2) Council Regulation (EC) No 1782/2003 of 29 September 2003 estab-
lishing common rules for direct support schemes under the common
agricultural policy and establishing certain support schemes for
farmers (OJ L 270, 21.10.2003, p. 1). Council Regulation (EC)
No 1783/2003 of 29 September 2003 amending Regulation (EC)
No 1257/1999 on support for rural development from the European
Guidance and Guarantee Fund (EAGGF) (OJ L 270, 21.10.2003, p. 70).

(3) OJ C 107, 30.4.2004.

A CLEAR SEPARATION OF THE TWO ‘PILLARS’

Current situation and proposal

7.
For many years the common agricultural policy has been
implemented through one ‘Fund’: the European Agricultural
Guidance and Guarantee Fund. This Fund has two sections, Guid-
ance and Guarantee, which are governed by different rules. (They
are currently set out in Council Regulation (EC) No 1257/1999
and Council Regulation (EC) No 1258/1999 (5)).

(4) For example, Article 149(3) of the Financial Regulation, which per-
mits the carryover to the next financial year of uncommitted EAGGF
Guarantee section appropriations relating to rural development will
no longer be necessary due to the introduction of EAFRD.

(5) OJ L 160, 26.6.1999, pp. 80 and 103.

C 121/4

EN

Official Journal of the European Union

20.5.2005

8.

The Guarantee section

— finances all expenditure in support of agricultural markets

and income support, and

— co-finances (with Member States) certain rural development

measures.

The rural development measures co-financed by the Guar-

9.
antee section are

(a)

early retirement payments,

(b)

subsidies to farmers in less-favoured areas and areas with
environmental restrictions,

(c)

support towards meeting standards (in the field of environ-
ment, public health etc.),

(d) agri-environmental and animal welfare payments,

(e)

support for food quality,

(f)

afforestation (1) and,

(g)

support for all ‘other rural development measures’ in areas
not covered by Structural Funds Objective 1:

— investments in agricultural holdings,

— helping young farmers to establish themselves in

business,

— training of farmers and other persons involved in agri-

cultural and forestry activities,

— improving processing and marketing of agricultural

products,

— forestry, and

— other measures promoting the adaptation and develop-
ment of rural areas (2) (such as reparceling, diversifica-
tion of agricultural activities etc.).

(1) Article 31 of Council Regulation (EC) No 1257/1999.
(2) Article 33 of Council Regulation (EC) No 1257/1999.

The Guidance section co-finances all ‘other rural devel-
10.
opment measures’ listed under (g) in the preceding paragraph in
areas covered by Objective 1. It also co-finances the Community
Initiative ‘Leader+’ (3).

11.

These arrangements are shown graphically in figure 1.

12.
Thus, at present, whether a rural development measure is
financed by the Guarantee or Guidance section of the EAGGF
depends on both the type of measure and its geographical loca-
tion. For example: modernisation of an abattoir in an Objective 1
region will be co-financed by the Guidance section, while an iden-
tical project situated outside Objective 1 will be co-financed by
the Guarantee section; afforestation of agricultural land will be
co-financed by the Guarantee section throughout the Commu-
nity, whereas investment in maintenance and improvement of
forest resources will be co-financed by the Guidance section in
Objective 1 areas.

The Commission proposes that two funds, a European
13.
Agricultural Guarantee Fund (EAGF) and a European Agricultural
Fund for Rural Development (EAFRD) should replace the Guar-
antee and Guidance sections of the current EAGGF. The EAGF
would include expenditure in support of agricultural markets and
income support to farmers as laid down in paragraph 8, first
indent above (4). All rural development expenditure, regardless of
type or geographical location, would be co-financed by EAFRD.

(3) ‘Leader+’ is a Community initiative, a complement to the mainstream
programmes of rural development. It is implemented by active part-
nership at the local level (‘local action groups’) and aims to encourage
the emergence and testing of new approaches to integrated and sus-
tainable development that can influence, complete and/or reinforce
rural development policy in the Community.

(4) Most aid will take the form of decoupled aid in the future.

20.5.2005

EN

Official Journal of the European Union

C 121/5

Figure 1

C 121/6

EN

Official Journal of the European Union

20.5.2005

Analysis

14.
The proposed consolidation of all rural development
expenditure within a single budgetary framework would mean
that it would be possible to identify total spending on particular
rural development measures and overall spending on rural devel-
opment (1).
in
transparency (2).

a welcome

represents

increase

This

MANAGEMENT AND CONTROL

EAGF

Current situation and proposal

15.
The proposal introduces no significant changes to the
management and control of market expenditure. As at present
nearly all expenditure would be effected by the paying agencies of
the Member States.

For most expenditure the process would continue to be

16.
as follows:

(d)

the accounts and payments of the paying agency are exam-
ined 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 take a deci-
sion (financial or accounting 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 (the Commission ‘disallows’ such
expenditure in ‘conformity decisions’). When it disallows
expenditure the Commission reduces its payments to paying
agencies accordingly.

17.
Expenditure under EAGF, as under the present Guaran-
tee section, would be financed by non-differentiated appropria-
tions i.e. there would be no distinction between commitment and
payment appropriations.

(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.;

The draft regulation introduces, however, some new ele-

18.
ments and/or changes:

(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 on a monthly basis to the Commission which reim-
burses the paying agency (‘monthly payments’);

— in Member States where there is more than one paying
agency a coordinating body is already required to centralise
information to be made available to the Commission, to
ensure that it is provided on a consistent basis, and to
promote a harmonised application of Community rules.
Article 6 (3) of the draft regulation would introduce the need
for coordinating bodies to be subject to specific accreditation
by the Member States,

(1) At present, to ascertain the level of expenditure on, say, Processing and
Marketing in the EU-15, one has to take into account the non-
objective 1 EAGGF Guarantee part (budget heading 05 04 01 09) plus
the appropriate parts of the OP in objective 1 areas, which, moreover,
are not distinctly identifiable (unidentifiable part of budget head-
ing 05 04 02 01). A positive aspect of the inclusion of all rural devel-
opment expenditure under EAFRD is that Member States will be able
to use the amounts made available under modulation - switching some
expenditure
into rural development
(Article 12(2) of the proposal) for all rural development measures.
Under the current rules, such additional amounts are not available to
the rural development measures financed by EAGGF Guidance.
(2) The Treaty uses the terminology of ‘fund’. Nevertheless, from the point
of view of financial management, the proposed two ‘funds’ represent
subsets of the general budget and thus it would be sufficient to differ-
entiate them with the use of budgetary chapters.

from direct payments

— Article 8 (1)(c) of the draft regulation would introduce the
need for the person in charge of each paying agency to sign
and send to the Commission every year a ‘statement of
assurance’,

— Article 31(4)(a) of the draft regulation would allow the Com-
mission, under the clearance of accounts procedure sum-
marised in paragraph 16(f) above, to disallow EAGF expen-
diture that
is incurred up to 36 months before the
Commission notifies the Member State in writing of its
inspection findings (a ‘36 months rule’). This period is
24 months at present.

20.5.2005

EN

Official Journal of the European Union

C 121/7

Analysis

General

Other observations

The current payment process for EAGGF Guarantee is
19.
tried and tested. In the past the Commission has usually not pro-
posed changes to areas that worked reasonably well.

Detailed changes proposed (paragraph 18 above)

20.
The introduction of a specific accreditation requirement
(separate from the accreditation of paying agencies) for ‘coordi-
nating bodies’ could strengthen the chain of accountability for
CAP spending (see Opinion No 2/2004 on single audit, para-
graphs I, II and IV). This would however depend on the quality
and content of the rules for specific accreditation provided by the
Commission to the Member States and on how Member States
applied them.

21.
The introduction of a ‘statement of assurance’ signed by
the person in charge of a paying agency could improve the exist-
ing control system in the direction of the single audit model.
However, the proposal makes no suggestion as to the objective,
the content and scope of the statement. Its content should be
closely modelled on the equivalent statement generally required
under corporate governance requirements of, for example, listed
companies. This would imply that the head of the agency should
explain his/her responsibility for the accounts, conduct an annual
review of the effectiveness of the system of internal control and
report that he/she has done so. Such a review should cover all
controls, including financial, operational and compliance controls
and risk management. Such a statement cannot replace the work
of certifying bodies. Neither DG AGRI nor the certifying body
should place reliance on such a statement without additional cor-
roborative evidence. On a point of detail, the terminology sug-
gested would promote confusion with the statement of assurance
required of the European Court of Auditors and with the assur-
ance statement required of the Directors-General of the Commis-
sion. An alternative name should be chosen.

22.
The Court supported a ‘36 months rule’ in its Opinion
No 9/2002 (1). This modification would reduce the risk that
weaknesses detected in Member States’ systems may not be pena-
lised simply because the Commission has not been able to cover
all areas of expenditure within a two-year cycle. The Commission
should consider 36 months strictly as a limit, and should endeav-
our so far as possible to avoid delays in clearing accounts and
charging expenditure definitely to the budget.

(1) OJ C 285, 21.11.2002.

23.
The existing EAGGF Guarantee arrangements are capable
of improvement in an important respect which the Commission
has not proposed. Certifying bodies, which audit the paying agen-
cies accounts and the operation of the paying agencies’ internal
control procedures, limit their work to confirming the existence
of controls designed to ensure conformity of the payments, and
do not always carry out sufficient tests of compliance to confirm
that such controls function effectively. Nor do certifying bodies
carry out sufficient work at the level of the beneficiary of CAP
payments to confirm that payments are legal and regular.

24.
The Court maintains the view (set out in its Opinion
No 10/98 (2)) that certification of paying agencies by certifying
bodies should be based on internationally accepted auditing stan-
dards. A reference to internationally accepted auditing stan-
dards (3) should be introduced in Article 7 of the draft regulation.
The certification should cover legality and regularity of expendi-
ture at the level of the beneficiary and key controls of the paying
agency should be tested. When defining the intensity of these
checks, the related costs and the related benefits must be taken
into account. Such coverage would represent a stronger and
clearer chain of accountability for CAP spending. It would pro-
vide increased assurance to the Commission and would be con-
sistent with the concept of the single audit model (see Opinion
No 2/2004, paragraph 42). Changes to extend the scope of the
work of the certifying bodies could be usefully set out in either
Article 7 or Article 8(1)(c)(iii) of the draft regulation.

25.
The Court notes that responsibility for the accreditation
of paying agencies under CAP would remain with the Member
States. In its Special Report No 2/2004 (4) on Sapard (the financ-
ing mechanisms of this programme are in many aspects similar
to that of the CAP) the Court welcomed the Commission’s role in
giving accreditation: prior approval of the systems based on both
Sapard countries’ and the Commission’s audits, has ensured that
well-defined systems with key controls existed, at least on paper,
before any money could be spent. The Court considered this as
good practice.

(2) OJ C 401, 22.12.1998.
(3) Such as those produced by the International Federation of Accoun-
tants (IFAC) or the International Organisation of Supreme Audit Insti-
tutions (INTOSAI).
(4) OJ C 295, 30.11.2004.

C 121/8

EN

Official Journal of the European Union

20.5.2005

EAFRD

Current situation and proposal

— for each rural development programme the Commission
makes intermediate payments to the accredited paying
agency, on the basis of intermediate payment applications,
‘wherever possible three times a year’,

26.
The proposed management and control framework for
the EAFRD is based in part on that of the structural funds and in
part on that of the EAGGF Guarantee, and would provide a single
set of financial rules and a common control system for all rural
development expenditure.

27.
As explained in paragraphs 8 to 13 above and in figure 1,
the new EAFRD would bring together all rural development
expenditure:

— after receiving the final implementing report the Commis-

sion pays the outstanding balance,

— the total prefinancing amount is cleared when the rural
development programme is closed (a process which may take
several years).

— Guarantee expenditure: payment appropriations of 4,8 bil-
lion euro in 2004 paid through non-differentiated appropria-
tions (see paragraph 17 above),

Analysis

— Guidance expenditure: payment appropriations of 2,9 billion
euro in 2004 paid through differentiated appropriations (1).

30.
There is a strong case to be made for the use of differen-
tiated appropriations to finance expenditure from the Commu-
nity Budget where two conditions are met:

28.
The Commission proposes that all this expenditure
should be financed under one expenditure stream with differen-
tiated appropriations in future. The implications of these changes
are that:

— the expenditure concerned is genuinely multiannual (in the
sense that a project must be planned and executed over a
number of years),

— rural development expenditure would no longer be imple-
mented under different programming, implementation and
control systems,

— the ‘accompanying measures’ (Part A in figure 1), which
account for the greater part of rural development expendi-
ture and other rural development expenditure, currently
financed by the EAGGF Guarantee section (Part B in figure 1),
would no longer be dealt with in the way summarised in
paragraph 16 above.

The proposed process for most of the expenditure would

29.
be as follows:

— when a Member State’s rural development programme is
adopted, the Commission pays 7 % of the EAFRD contribu-
tion to the programme concerned to the paying agency(ies)
involved,

— this 7 % represents a pre-payment (reimbursable to the Com-
mission if there is no payment application for the rural devel-
opment programme within 24 months),

— expenditure is reported each quarter to the Commission,

— the budgetary framework is genuinely multiannual, involv-
ing commitment appropriations which cover the total cost
of the legal commitment entered into during the current
financial year.

31.
Rural development expenditure includes a range of mea-
sures with different characteristics. Some of these support multi-
annual investment expenditure. The greater part involves multi-
annual contractual obligations with annual payments and control
systems which frequently are similar to payments and control sys-
tems under the ‘first pillar’ of the CAP.

32.
As for the budgetary framework, although the Commis-
sion proposes the use of differentiated appropriations for EAFRD,
it does not propose a genuinely multiannual budgetary frame-
work. A genuinely multiannual approach would be to record a
commitment covering the total cost of
legal commitments
entered into during the current financial year. Instead the Com-
mission proposes (Article 23 of the draft regulation) to raise a
commitment for the entire amount expected to be disbursed in a
particular Member State in a given year, i.e. to have annual
tranches of commitments. As the Court argued in its Opinion
No 2/2001 (2), such a procedure is contrary to theory and good
practice in the use of differentiated appropriations (3).

(1) Differentiated appropriations are used to finance multiannual activi-
ties in certain budgetary areas. They comprise commitment appropria-
tions and payment appropriations.

(2) OJ C 162, 5.6.2001.
(3) See Opinion No 2/2001 paragraphs 29, 30 and 77.

20.5.2005

EN

Official Journal of the European Union

C 121/9

Conclusion

The Financial Regulation provides for two types of bud-

33.
get appropriation:

— differentiated appropriations (comprising commitment and
payment appropriations) used to finance multiannual expen-
diture, and

— non-differentiated appropriations which ensure the commit-

ment and payment of annual expenditure.

34.
Depending on the nature of the expenditure, the appro-
priate type of appropriation should be chosen for expenditure for
EAFRD. Given the diverse nature of EAFRD expenditure it is
important that the Commission applies the principles mentioned
in paragraph 30 correctly and consistently and that the relevant
management and control systems are transparent and effective.
The Commission’s proposal for annual tranches of budget com-
mitments, which negate the essential purpose of differentiated
appropriations and of a commitment budget, is however not
appropriate.

BUDGETARY DISCIPLINE

Current situation

Budgetary discipline rules aim to ensure the respect of

35.
the financial perspectives.

set

are

out

Council Regulation

The current legal requirements with regard to budgetary
36.
discipline
(EC)
in
No 2040/2000 (1). For each budgetary year the ‘agricultural
guideline’ constitutes the ceiling for agricultural expenditure
which the Commission has to set when it submits the preliminary
draft budget. The agricultural guideline covers sub-heading 1.a
(CAP expenditure) and 1.b (rural development and accompany-
ing measures) of the financial perspective, as well as a part of
heading 7 i.e. pre-accession aid for agriculture.

37.
The current financial perspectives cover the period 2000
to 2006. They are set out in the Interinstitutional Agreement of
6 May 1999 between the European Parliament, the Council and
the Commission. They are consistent with the conclusions of the
Berlin European Council of 24 and 25 March 1999 (2).

The Court notes that there is some complexity in the
38.
planned arrangements for the control of CAP expenditure after
2006. On the one hand the Commission has proposed dividing
Community expenditure into five new headings in the next finan-
cial perspective instead of the eight headings at present. Heading
2 of the financial perspective 2007 to 2013 is called ‘Conserva-
tion and management of natural resources’. It would cover the
two pillars of the CAP, as well as expenditure on fisheries policy
and environment. The sub-heading ‘Agriculture — Market-related
expenditure and direct payments’ of heading 2 would include the
content of the current sub-heading 1.a.

(1) OJ L 244, 29.9.2000, p. 27.
(2) OJ C 172, 18.6.1999.

On the other hand, ceilings (until 2013) for the first pil-
39.
lar of the CAP were defined by the Brussels European Council of
24 and 25 October 2002. Following the agreement in Brussels,
the amount of market-related expenditure and direct payments is
to be stabilised until 2013 on the basis of the ceiling for sub-
heading 1.a foreseen for the EU-15 in 2006, with the addition of
the amount of the corresponding expenditure for the 10 new
Member States. Thus the overall expenditure of market related
expenditure and direct payments in nominal terms for each year
in the period 2007 to 2013 will be kept within this 2006 figure,
increased by 1 % per year.

40.
Council Regulation (EC) No 1782/2003, which sets out
the results of the CAP reform agreed in June 2003, also contains
budget discipline provisions. Article 11 provides that starting
with the 2007 budget, an adjustment of direct payments will be
decided by the Council on a Commission proposal, when fore-
casts indicate that current sub-heading 1.a of the financial per-
spective will be exceeded in a given budget year. The adjustments
are to be made by 30 June at the latest of the calendar year in
respect of which it applies.

The Commission’s proposal

The arrangements for budget discipline set out in the
41.
draft regulation reproduce and, in some respects, complement
some of the provisions of the existing budgetary discipline Regu-
lation (EC) No 2040/2000 and of Regulation (EC) No 1782/2003.
However, the intention appears to be not to maintain the agricul-
tural guideline.

42.
Articles 18(1), 19 and 20 of the draft regulation essen-
tially reproduce the provisions of Regulation (EC) No 2040/2000
which relate to

— legislative instruments with an impact on CAP spending

(Article 5(1) of Regulation (EC) No 2040/2000),

— actions which the Commission must take at different stages
of the budget procedure if there is a risk that CAP spending
will overshoot (Article 6 of Regulation (EC) No 2040/2000),

— the ‘early warning’ system for CAP spending.

43.
Article 18(4) of the draft regulation provides for the
Commission to adjust direct payments (paragraph 40 above) if
the Council has not done so by 30 June of the year in question.

44.
Article 17(2) of the draft regulation would enable the
Commission to reduce or suspend monthly payments to Mem-
ber States where there is a risk that a financial ceiling set by Com-
munity legislation has been exceeded. Under Article 19(4) of the
draft regulation the Commission would be authorised to distrib-
ute the available budgetary balance between Member States if the
reimbursement requests from Member States at the end of the
budgetary year exceed or are likely to exceed the net balance
available for EAGF expenditure.

C 121/10

EN

Official Journal of the European Union

20.5.2005

Analysis

EAGF

45.
The draft regulation in Articles 17, 18(4) and 19(4),
would permit a somewhat stricter application of budgetary disci-
pline. The Court welcomes these proposals.

46.
The disappearance of the agricultural guideline appears
to reduce one element of budgetary discipline: there would be no
overall ceiling on agricultural expenditure. The Court invites the
Council and Parliament to consider carefully the arguments for
and against retention of the agricultural guideline (1).

47.
In point 12 of the Interinstitutional Agreement on bud-
getary discipline and improvement of the budgetary procedure (2),
it is provided that ‘for the purposes of sound financial manage-
ment, the institutions will ensure as far as possible during the
budgetary procedure and at the time of the budget’s adoption that
sufficient margins are left available beneath the ceilings for the
various headings’. A similar provision in the draft regulation
would be appropriate in the Court’s view.

EAFRD

48.
In the Commission’s draft multiannual financial frame-
work 2007 to 2013 expenditure on rural development is no
longer shown under a distinctive subheading. The ceiling for the
resources available for commitments from EAFRD is set by Article
70(1) of the Council Regulation on support for rural develop-
ment, that is currently under discussion (3). This Article mentions
a total amount of 88,75 billion euro at 2004 prices that are to be
distributed by almost equivalent tranches each year for the period
2007 to 2013. The amounts set by the Commission as result of
modulation have to be added to these commitment tranches.

(1) Without calling into question the function of the agricultural guide-
line, the Court has in its Opinion No 9/99 (OJ C 334, 23.11.1999),
paragraphs 1 and 5 criticised the complexity of its calculation, the
imprecision of its definition and the consequent difficulty of monitor-
ing compliance. The current proposals to consolidate and standardise
the treatment of agricultural expenditure, together with the implemen-
tation of activity based budgeting should facilitate the calculation and
monitoring of the guideline.

(2) COM(2004) 498 final of 14.7.2004.
(3) See COM(2004) 490 final of 14.7.2004 ‘Proposal for a Council Regu-
lation on support of rural development by support of the European
Agricultural Fund for Rural Development (EAFRD)’.

TREATMENT OF IRREGULARITIES

EAGF

Current situation

49.
Member States are obliged to notify the Commission
when they detect irregular payments over 4 000 euro made under
the CAP and to attempt to recover such payments. Where recov-
ery is not possible the sums concerned are written off and the
losses are borne by the Community unless non-recovery is due to
the negligence of the Member State concerned. In its Special
Report No 3/2004 (4) (‘Recovery of irregular payments under the
common agricultural policy’) the Court showed that in practice
there is an unsatisfactorily low rate of recovery of irregular pay-
ments. In addition, the write off of reported irregular payments
has been very limited.

Proposal and analysis

The Commission proposes that the rules for EAGF should
50.
be carried over from EAGGF Guarantee but with some important
changes.

51.
The draft regulation proposes that if recovery has not
taken place within four years of the primary administrative or
judicial finding, (or within six years where recovery action is taken
in the national courts,) 50 % of the financial consequences of
non-recovery would be borne by the Member State concerned
and 50 % by the Community budget (see Article 32(5) of the draft
regulation). In cases of negligence on the part of the Member State
it would be possible for the Commission, as now, to charge the
full sum to the Member State concerned (see Article 32(4) of the
draft regulation).

While the Court underlines the primary importance of an
52.
efficient and effective recovery mechanism as an element of an
overall internal control system (5), it welcomes this redistribution
of the financial burden of non-recovery, which may encourage
swifter resolution of procedures in Member States. The Court also
welcomes the fact that the draft regulation:

— clarifies the Commission’s powers to charge the sums to be
recovered to the Member State in cases of negligence (6), and

(4) OJ C 269, 4.11.2004
(5) The internal control systems should actively contribute to improving
the financial management by including safeguards that remedial action
is taken and recoveries are made (see Opinion 2/04 on the single audit
model, paragraph VII and paragraph 36).

(6) Article 32(4) states:… ‘the Commission may decide to charge the sums
to be recovered to the Member States …’. It is the Court’s view that
the wording should be changed to ‘the Commission shall decide …’.

20.5.2005

EN

Official Journal of the European Union

C 121/11

— includes a new time limit: Member States must initiate appro-
priate administrative or judicial procedures to recover sums
wrongly paid within one year of the primary administrative
or judicial finding relating to the payment.

— where a Member State considers that an amount cannot be
(totally) recovered it must report it to the Commission,

53.
Under the Commission’s proposal the Member States
would continue to be able to retain 20 % of the amounts recov-
ered as flat rate recovery costs, unless the irregularity or negli-
gence is the fault of the Member State (see Article 32(2) of the
draft regulation.) However, in the Court’s view Member States
should not be permitted to deduct the 20 % recovery costs before
the cost sharing procedure described in paragraph 51 above
because in such cases recovery has not yet taken place. Thus the
reference to ‘the deduction provided for in paragraph 2’ should be
removed from the last sentence of the first sub-paragraph of
Article 32(5) of the draft regulation.

EAFRD

Current situation

54.
For rural development expenditure the current position
is mixed, reflecting the fact that currently rural development
expenditure falls partly under the EAGGF Guarantee section and
partly under the EAGGF Guidance section.

55.
For all rural development expenditure financed under the
Guarantee section the current situation is as discussed in para-
graph 49 above.

For the part of rural development financed by the Guid-

56.
ance section structural fund rules apply:

— Member States have to report on a quarterly basis to the
Commission any irregularities (over 4 000 euro) which have
been subject of initial administrative and judicial investiga-
tions as well as the follow up of irregularities previously
notified,

— in the first instance, it is the responsibility of the Member
State to investigate and to recover any amounts lost as a
result of an irregularity detected,

— the Commission decides in consultation with the respective
authorities of the Member State concerned who shall bear the
financial consequences.

57.
In practice, similar problems as discussed for the Guar-
antee section exist e.g. a low rate of recovery, inadequate criteria
for deciding who should bear the costs, etc.

Proposal and analysis

58.
The Commission proposes that structural fund rules on
irregularities, including the reuse of funds recovered, be applied
to all rural development expenditure (as laid down in para-
graph 56 above).

As explained in paragraph 31 above, rural development
59.
expenditure frequently involves payment and control arrange-
ments which are similar to those for direct payments under EAGF.
It would be more logical to treat cancelled and recovered amounts
in such cases in the same way as under EAGF.

A similar provision to that described in paragraph 51
60.
above is proposed in respect of this Fund. However the distribu-
tion of the financial burden of unrecovered amounts will only be
effected four years after the closure of a rural development pro-
gramme, which, for expenditure in the period 2007 to 2013,
could be as late as 2019. This will almost certainly be longer than
the period allowed under EAGF. The Court believes that it would
be more appropriate to fix an earlier deadline.

61.
As for EAGF, Article 33(5) of the draft regulation would
clarify the cases of negligence on the part of the Member State for
which the Commission may charge the full sum to the Member
State concerned (1). However, draft Article 33(5) should, in the
view of the Court, also introduce the same one year time limit to
initiate the appropriate administrative or judicial procedures as is
provided for EAGF.

— Community funds released via recovery and/or correction
may be re-used by the Member State for the assistance con-
cerned and before closure of that programme,

(1) Article 33(5) states:… ‘the Commission may decide to charge the sums
to be recovered to the Member States …’. It is the Court’s view that
the wording should be changed to ‘the Commission shall decide …’.

C 121/12

EN

Official Journal of the European Union

20.5.2005

OTHER COMMENTS

Consistency between financial years

62.
Article 26(6) of the proposed regulation states that
EAFRD intermediate payment applications in respect of expendi-
ture incurred from 16 October onwards are to be booked to the
following year’s budget. This is a new rule for expenditure cur-
rently financed from the EAGGF Guidance section. It would align
the EAFRD financial year with that for EAGF, whereas for EAGGF
Guarantee at present, payments made by paying agencies after
that date would be reimbursed by the Commission in January of
the following year. The Court notes and regrets that the Commis-
sion has not proposed harmonisation with the rest of the Gen-
eral Budget where the financial year is the calendar year.

— considers that the Commission’s proposal in respect of the
management of the EAGF include some potentially helpful
changes but need further improvement in the light of the
Court’s opinion on the single audit,

— notes that the Commission’s proposals in respect of budget
discipline and the treatment of irregularities also include
some welcome changes but are in some respects capable of
improvement,

— regards as inappropriate the Commission’s proposal for
annual tranches of budget commitments under EAFRD.

The Court’s principal observations on the detailed provi-

II.
sions of the draft regulation are as follows:

Transitional arrangements

(i) Management and control of EAGF

Article 39(1)(a) of the proposed regulation states that, in
63.
respect of rural development programmes for the period 2000 to
2006 financed by EAGGF Guarantee, payments to beneficiaries
shall cease no later than 15 October 2006. By way of an excep-
tion (Article 39(1)(c)), expenditure in respect of rural develop-
ment measures incurred over the period 16 October to 31 Decem-
ber 2006 shall be charged to the EAFRD budget in the years 2007
to 2013. This appears to mean that payments due to beneficia-
ries after 2006 under five-year commitments entered into from
2003 onwards, which are likely to be significant, will not be
charged to the EAFRD budget and thus not be co-financed at all.
This would cause financial and legal problems in the Member
States: Article 48 appears to provide a procedure for dealing with
such problems.

Minor points

64.
In (draft) Article 8(2), first subparagraph ‘and the Court
of Auditors’ should be added to the last sentence, so that the
Court can carry out its responsibilities.

65.
The last sentence of Article 33(3)(c) of the English ver-
sion of the draft regulation should read: ‘and provided the funds
are NOT reallocated to operations which have been the subject
of a financial correction’. In addition, Article 33(5)(b) refers to
paragraphs 2(a) and 2(c) of the same article. This should be
changed to paragraphs (3)(a) and (c).

SUMMARY

I.

The Court:

— welcomes the increase in transparency that would result
from grouping all rural development expenditure under one
budget heading,

— The proposal would not change the framework for the
management and control of expenditure in support of
agricultural markets and incomes. Of
the detailed
changes proposed:

— the introduction of a specific accreditation require-
ment for coordinating bodies could strengthen the
chain of accountability for CAP spending (para-
graph 20),

— the objective, the content and the scope of the pro-
posed ‘statement’ by the head of each paying agency
should be modelled on the equivalent statements
required under corporate governance arrange-
ments; in this way it could improve the existing
control system in the direction of the single audit
model (paragraph 21),

— the Commission should have proposed changes to the
extent and scope of the work of certifying bodies – tak-
ing account of the related costs and benefits – in order
to strengthen and clarify the chain of accountability for
CAP spending in line with the concept of the single audit
model and to make clear that certification of paying
agencies should be based on internationally accepted
auditing standards (paragraphs 23 and 24).

(ii) Management and control of EAFRD

— Depending on the nature of the expenditure the appro-
priate type of appropriation (differentiated or non-
differentiated) should be chosen. The proposal put for-
ward by the Commission (to use differentiated
appropriations with commitments for annual
instal-
ments of the total national programme) does not con-
stitute an appropriate budgetary framework (paragraphs
33 and 34).

20.5.2005

EN

Official Journal of the European Union

C 121/13

(iii) Budgetary discipline

— Articles 17, 18(4) and 19(4) of the draft regulation
would allow for a stricter application of budgetary dis-
cipline (paragraph 45),

— the Council and Parliament should consider carefully the
arguments for and against retention of the agricultural
guidelines (paragraph 46).

(iv) Irregularities

— the draft regulation helpfully clarifies the Commission’s
powers to charge sums to be recovered to the Member
State in cases of negligence and includes a new time
limit (paragraphs 51 and 52),

— cancelled and recovered amounts for some measures
under EAFRD should be treated in the same way as
under EAGF (paragraph 59),

— The proposed redistribution of the financial burden of
non-recovery of irregular payments under EAGGF is
welcome (paragraph 51),

— the one year time limit for initiating the appropriate
administrative or judicial procedures (proposed for
EAGF) should apply also to EAFRD (paragraph 61).

This Opinion was adopted by the Court of Auditors in Luxembourg on 17 March 2005.

For the Court of Auditors
Hubert WEBER
President