REPLY OF THE COMMISSION TO THE SPECIAL REPORT "AUDIT OF THE CLEARANCE OF ACCOUNTS PROCEDURE"
Date: 2010-09-10
Institutions: European Commission
Subjects: EU financing arrangements, State aid, administrative procedure, common agricultural policy, control of State aid

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EUROPEAN COMMISSION 

Brussels, 10.9.2010 
SEC(2010) 1012 final 

REPLY OF THE COMMISSION TO THE SPECIAL REPORT  

"AUDIT OF THE CLEARANCE OF ACCOUNTS PROCEDURE" 

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REPLY OF THE COMMISSION TO THE SPECIAL REPORT 

"AUDIT OF THE CLEARANCE OF ACCOUNTS PROCEDURE" 

EXECUTIVE SUMMARY 

III.  The  Commission  considers  that  within  the  overall  framework  for  the  management  and 
control of agricultural expenditure, the new work required from the certification bodies is an 
important and useful element for the purpose of gaining reasonable assurance on the legality 
and  regularity  of  the  underlying  transactions.  These  new  requirements  were  first  introduced 
for financial year 2007 and while modified and expanded for financial year 2008 have, since 
then, in substance remained unchanged. The new requirements were also discussed with the 
Certification Bodies in an annual conference. 

As  a  result  the  situation  in  financial  year  2009  (after  the  end  of  the  audited  period)  has 
improved substantially for all the new elements of assurance mentioned (i.e. those concerning 
legality and regularity of payments). 

IV.  The  conformity  clearance  procedure  is  designed  to  exclude  expenditure  from  EU 
financing which has been incurred in a way that has infringed EU law. In contrast, it is not a 
mechanism  by  which  irregular  payments  to  beneficiaries  are  recovered  which,  according  to 
the principle of shared management and the rules of Article 9(1)(a)(iii) of Council Regulation 
(EC)  No  1290/2005  and  Article  53b(2)(c)  of  the  Financial  Regulation,  is  the  sole 
responsibility of Member States. Where irregular payments to individual beneficiaries are or 
can  be  identified  as  a  result  of  the  conformity  clearance  procedures,  Member  States  are 
required to follow them up by recovery actions against these beneficiaries. 

Article  31(2)  of  Regulation  (EC)  No  1290/2005  provides  that  financial  corrections  shall  be 
determined  on  the  basis  of  the  nature  and  gravity  of  the  infringement  and  of  the  financial 
damage caused to the EU. Where possible, the amount is calculated on the basis of the loss 
actually caused or on the basis of an extrapolation. Where this is not possible, flat-rates are 
used  which,  in  accordance  with  the  legal  requirements,  take  account  of  the  severity  of  the 
deficiencies in the national control system in order to reflect the financial risk for the EU. The 
Commission's  system  thereby  establishes  a  clear  hierarchy  of  methods  to  be  used  and 
therefore, the Commission does not agree that in a given case there are "options" open to it as 
to  the  type  of  financial  correction  to  be  applied.  The  Commission  considers  that  there  is  a 
valid link between the amount of the correction and the amount of irregular payments made as 
a  result  of  the  deficiencies  in  the  system.  Conformity  clearance  includes  cases  where  the 
deficiencies found are limited to the control system in place and cannot be linked to individual 
irregular  payments  to  beneficiaries  but,  because  of  the  flat  rate  approach  taken  for  control 
deficiencies,  the  risk  to  the  EU  budget  is  covered,  e.g.  when  a  Member  State  does  not 
accomplish the minimum number of controls. 

Moreover, as agricultural expenditure is implemented under shared management, the Member 
States  are  better  placed  than  the  Commission  to  assess  and  provide  evidence  of  the  real 
financial loss or risk for the EU budget. The operational handbook explicitly recognises this 
and requires the Commission to take such evidence, if reliable, into account. A more precise 
calculation of the financial loss for the EU budget therefore requires the active co-operation of 
the Member State concerned at all levels of the conformity clearance procedure because only 
the Member State has all the necessary information to make such a calculation. Unfortunately, 
however, despite the Commission's requests, Member States often do not avail themselves of 
this  possibility.  Since  the  reform  of  the  system  in  1996,  flat-rate  corrections  account  for 

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slightly less than 70% of the amount of total corrections by value. However, the Commission 
considers it to be more appropriate to look at the number of cases with a financial correction 
where a flat-rate was used. Here, only 45% of all cases are based on a flat-rate approach and, 
if  the  last  ten  conformity  decisions  are  taken,  this  percentage  drops  further  to  37%.  This 
demonstrates  the  Commission's  continuous  effort  to  limit  the  use  of  flat-rates  as  much  as 
possible. 

Since the methodology used by the Commission to calculate financial corrections is based on 
its best estimate of the risk to the EU budget, it cannot by definition amount to a sanction. 

As part of this effort, the Commission recently set out to Member States the conditions under 
which it is prepared to limit the amount of any financial correction to the error rate found by 
the  Member  State,  in  the  transactions  at  final  beneficiary  level  and  reported  in  its  control 
statistics for the aid scheme concerned. 

Financial  corrections  are  an  accounting  correction  and  not  a  sanction  on  Member  States' 
authorities.  The  flat  rate  methodology  has  been  upheld  by  the  Court  of  Justice  as  being  in 
conformity  with  the  legal  rules  governing  the  conformity  work,.  In  particular,  the  Court  of 
Justice has confirmed that it is not up to the Commission to undertake the checks necessary to 
put a precise figure to the losses incurred, but rather it is for the Member State to show that 
the Commission's estimate was excessive.  

The  use  of  flat  rate  corrections  was  also  endorsed  by  the  European  Parliament  in  its  2007 
discharge  resolution  (§  83)  for  cases  where  Member  States  do  not  comply  with  their  legal 
obligations.  

Alternative methods for the calculation of financial corrections referred to by the Court would 
require  a  substantial  increase  in  audit  resources  which  would  not  be  in  line  with  any  cost-
benefit analysis.  

V. The financial clearance decision is taken around six months after the end of the financial 
year  in  question.  Through  this  decision,  the  Commission  establishes  the  amount  of 
expenditure recognised as chargeable to the EU budget for that year. The fact that the decision 
is  without  prejudice  to  subsequent  conformity  decisions  imposing  financial  corrections  on 
Member  States  is  explicitly  provided  for  in  Article  30  of  Regulation  (EC)  No  1290/2005 
which has the same legal status as the Financial Regulation. Moreover, in substance, it is fully 
compatible with the Financial Regulation, which for any other expenditure provides that the 
Commission can make ex-post checks up to 5 years after the discharge decision on the year in 
which the final payment was made. Otherwise, all budgetary expenditure would be considered 
provisional until an ex-post check is made or the 5-year period has lapsed.  

The  amount  of  expenditure  which  is  likely  to  be  excluded  from  financing  by  future 
conformity decisions is disclosed as a contingent asset in the Commission's accounting system 
and in a note to the financial statements. Together with the financial clearance decision, this 
disclosure  provides  the  European  Parliament  and  the  Council  with  the  information  they 
require for the discharge procedure. 

The observation of the Court relates to a fundamental principle of the clearance of accounts 
systems  as  provided  for  in  its  current  legal  basis,  which  the  Commission  is  bound  to  apply 
(since 1996). It was not objected to by any of the parties intervening in the adoption of the 
legislation.  As  such  the  observation  could  be  best  considered  in  the  context  of  a  possible 
review of the legislation. 

VI. The Commission considers the current system to function well and to achieve its overall 
objectives.  It  will,  however,  continue  to  improve  its  operations  in  practice  and,  where 

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necessary, submit appropriate proposals for further improvements to the European Parliament 
and the Council for the post-2013 period.  

INTRODUCTION 

2.  Article  42(1)  of  the  Implementing  rules  dealing  with  the  implementation  of  Articles  53b 
and 53c of the Financial Regulation defines that the purpose of the clearance of accounts shall 
be to ensure that expenditure by the Member States in the context of shared management […] 
and which may be chargeable to the EU budget is in order and consistent with the applicable 
EU rules. 

5.  The  Belle  working  group  set  up  by  the  Commission  in  1991  was  mandated  to  study  the 
operations  involved  in  the  clearance  of  accounts  procedure  in  order  both  to  assess  their 
effectiveness  and  efficiency  in  achieving  the  general  aims  of  the  CAP  and  the  Financial 
Regulation and, if necessary, to propose legislative and/or administrative means of enforcing 
those operations.  

(b) Each financial correction included in a conformity decision is linked to a specific financial 
year which is identified in the Annex of this decision. 

BOX 1 

(b)  The  checks  undertaken  by  the  PAs  are  based  on  management  and  control  systems  for 
which the minimum requirements are laid down by the Commission. 

6. Under the reformed system, the financial clearance decision is adopted by 30 April of the 
year  following  the  financial  year  concerned.  Thus  the  reformed  clearance  of  accounts 
procedure has significantly accelerated the timescale for clearing the PAs' accounts.  

PART I - THE FINANCIAL CLEARANCE OF ACCOUNTS 

21.  Reliance  on  the  work  of  other  auditors,  where  judged  appropriate,  is  foreseen  in 
International Auditing Standards and the Commission's guidelines. The CBs may rely on the 
work of the internal audit units (IAU) if they have sufficiently verified such work.  

An  audit  mission  in  November  2009  to  the  Danish  CB,  covering  primarily  financial  year 
2009, did not reveal any major deficiencies in either body with regard to working documents 
and checklists.  

With regard to the Court's observation in footnote 9 that in Denmark the IAU was involved in 
the selection process of the CB, which was finally contracted directly by the PA after proposal 
by the IAU, it  should be noted  that the CB's contract was renewed for financial years 2009 
and 2010 with the signatory being the Competent Authority. 

22.  In  the  majority  of  cases  the  Court’s  findings  relate  to  weaknesses  in  the  CBs’ 
documentation of their audit work, rather than the work itself. 

CBs  should  compile  sufficient  audit  evidence  in  support  of  their  findings.  The  Commission 
considers this issue as part of its risk analysis, although it can only assess this directly during 
its  visits  to  the  CBs  selected  for  audit.  Although  the  exact  layout  and  content  of  working 
papers and checklists should be left to the professional judgment of CBs, the Commission has 
made  (and  will  continue  to  make)  recommendations  in  this  key  area  where  it  finds 
weaknesses. 

Beyond the general requirements for substantive testing of expenditure according to guideline 
No  3,  CBs  are  required  for  SPS  to  check  that  the  payments  can  be  derived  from  the 
underlying  entitlements.  However,  there  is  no  requirement  to  verify  within  the  substantive 
testing the entitlements as such.  

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24. The guidelines have been revised for financial year 2009 to further clarify how the test of 
completeness and accuracy of the debtors' ledger and Annex III/IIIA of Regulation (EC) No 
885/2006  should  be  carried  out  and  reported  upon.  An  analysis  of  the  certification  reports 
with regard to financial year 2009 shows that since the Court’s audit improvements have been 
made in this respect.  

In addition to the work carried out by the CBs, the Commission has over the past three years 
audited 14 PAs in 11 Member States as regards their follow-up of irregularity cases and their 
reporting  under  Annex  III  of  Regulation  (EC)  No  885/2006.  In  general,  the  PAs  have 
adequate  procedures  in  place  to  protect  the  financial  interests  of  the  European  Union. 
Deficiencies  found  during  these  audits  are  being  followed  in  the  context  of  conformity 
clearance procedures. 
26. The Commission has recently put forward a system1 by which Member States can, from 
2010,  reinforce  the  overall  framework  for  gaining  reasonable  assurance  on  legality  and 
regularity  of  transactions  at  the  level  of  final  beneficiaries.  To  this  end,  CBs  should  extend 
their  work  beyond  the  present  requirements  by  fully  reperforming,  for  a  given  expenditure 
population, a representative sample of transactions which the PA in question has checked on-
the-spot.  The  work  would  cover  the  entire  handling  of  the  file,  from  receipt  of  the  aid 
application to the calculation and execution of the final payment. 

28.  The  Commission  agrees  that  further  improvements  can  and  should  be  made  and  it  is 
regularly raising the issue with the Member States. However, there is no requirement to test 
and assess each key and ancillary control that should be in place at the PA. 

29. In the view of the Commission, an opinion on the internal control procedures would not 
require  specific  testing  and  assessment  of  the  reliability  of  each  key  and  ancillary  control. 
Regulation  (EC)  No  885/2006  does  not  require  the  CB  to  conclude  on  whether  all  possible 
controls are operational, but it only requires the CB to review the paying agency's compliance 
with the accreditation criteria (Annex I of Regulation (EC) No 885/2006).  

However, CBs would be required to assess these aspects under the new system described in 
the Commission's reply to point 26.  

30. Where necessary the Commission has pointed out in formal communications to MS that 
delegated bodies shall also be identified and tested. There is, however, no requirement to visit 
and test every delegated body every year.  

31.  The  modification  aimed  at  clarifying  obligations  which  already  existed  before  and  at 
improving the reporting from the CBs.  

32. The Commission considers that the revised guidelines adequately specify the full scope of 
the  audit  task.  PAs  are  expected  to  reconcile  all  information  in  their  submitted  annual 
questionnaires  to  the  underlying  database  information.  CBs  are  to  check  that  this  has  been 
done  and  to  indicate  whether  discrepancies  have  been  found.  They  should  also  check  the 
existence and adequacy of the audit trail. 

To test the accuracy of the database, CBs must take a sample of at least 20 field inspection 
reports per set of statistics and check that the data they contain has been correctly entered into 
the database. 

1 

Document D/413722/2009. 

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CBs  are  required  to  clearly  conclude  on  the  above  elements.  Notwithstanding  the 
improvements  in  this  area  in  financial  year  2009,  the  Commission  will  consider  whether 
further clarification in the guidelines is needed. 

33. 

(a) PAs are expected to perform this reconciliation. CBs are expected to check that it has been 
done  properly.  This  was  made  very  clear  to  Member  States  in  the  summary  report  for 
financial year 20082 and recommendations have been made in this respect to Member States 
(PAs  and  CBs)  where  appropriate.  As  a  result,  the  Commission  considers  that  the  situation 
improved for financial year 2009. According to the reports of the CBs for financial year 2009, 
a complete reconciliation was accomplished for the majority of paying agencies. 

(b) – (c) Joint reply to points (b) and (c): 

The Commission acknowledges the deficiencies identified by the Court concerning financial 
year  2007  and  2008  and  has  raised  these  issues  with  the  Member  States  concerned.  As  a 
result,  the  Commission  considers  that  the  situation  has  improved  significantly  for  financial 
year  2009.  An  analysis  of  certification  reports  shows  that  in  around  90%  of  cases,  the  CBs 
carried  out  the  work  at  the  levels  required  by  the  Commission's  guidelines,  with  a  few 
exceptions. 

34.  For  the  reasons  set  out  below,  the  Commission  takes  the  view  that  the  shortcomings 
identified  do  not  place  significant  limitations  on  their  use  for  assurance  purposes  by  the 
Commission: 

–  The  error  rates  established  by  the  Commission  on  the  basis  of  the  control  statistics 

provided by the Member States are consistent over several years. 

–  An analysis of the certification reports with regard to financial year 2009 shows that clear 

improvements have been made by CBs. 

–  The statistical information is the result of a very large sample of applications checked3 and 
even if a safety margin of a 25 % increase in the error rates were applied, the residual error 
rates would still be below 2 %. 

–  The error rates established by the Court in its DAS 2008 exercise are consistent with the 
residual  error  rates  established  by  the  Commission  on  the  basis  of  the  control  statistics 
provided by the Member States.  

With  regard  to  the  sampling  methodologies  used  by  the  PAs  in  selecting  claims  for  on-the-
spot  checks,  random  based  samples  are  normally  required.  Although  the  random  based 
samples do not follow a statistical methodology such as monetary unit sampling (MUS), the 
their 
samples  are  normally 
representativeness. 

to  provide  reasonable  assurance  as 

large  enough 

to 

35.  The  Commission  acknowledges  the  deficiencies  identified  by  the  Court  concerning 
financial  years  2007  and  2008  and  it  has  already  disclosed  the  information  in  the  AAR  of 
those years. It has raised these issues with the Member States concerned and considers that, as 
a result, the  situation has improved  significantly  for  financial  year 2009. An  analysis  of the 
CBs reports shows that they carried out the work at the levels required by the guidelines, with 

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AGR/2009/80073-00-03/EN of 3 April 2009 
SPS/SAPS:  600  315  applications  checked;  animals:  798  119  animals  checked  (suckler  cow  premium 
and special beef premium); export refunds: 13 023 declarations checked; 275 491 checks carried out on 
beneficiaries  for  area  related  rural  development  measures  (cfr.  Annual  Activity  Report  2009  of  DG 
Agriculture and Rural Development, footnote 33, page 61). 

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a few exceptions, in over 90% of the IACS cases (both Funds), concluding in 92% (EAGF) 
and  87%  (EAFRD)  of  these  cases  that  the  quality  of  the  on-the-spot  checks  was  at  least 
adequate.  For  the  non-IACS  populations,  CBs  met  the  work  requirements,  with  a  few 
exceptions,  in  over  80%  of  cases,  and  concluded  similarly  in  90%  (EAGF)  and  87% 
(EAFRD) of all cases. 

The Commission considers that these modifications have been introduced (the English version 
of  the  revised  guidelines  was  introduced  already  in  July  2008)  sufficiently  in  advance  to 
enable CBs to comply with the new guidelines. 

36.  The  Commission  agrees  that  further  improvements  can  and  should  be  made  and  it  is 
regularly pursuing the issue with the Member States. 

37. Even though the Commission agrees that, in general, a re-performance of a previous check 
provides  a  better  assessment  of  the  quality  of  the  on-the-spot  checks,  it  is  still  possible  to 
evaluate the control environment through inspections accompanied by the CB. In certain cases 
it may also not be possible to re-perform a check. These problems are inherent in many ex-
posts controls performed by external auditors. 

Moreover,  accompanied  field  inspections  would  reduce  the  administrative  burden  on  the 
farmer. 

38. For the reasons set out in its reply to point 34, the Commission considers that the Court’s 
findings  do  not  place  significant  limitations  on  the  use  that  can  be  made  of  the  control 
statistics for assurance purposes. 

The new system for the reinforcement of assurance referred to is not a reaction to weaknesses 
in the work of the CBs but, rather, an attempt to reinforce the assurance already given by the 
current system. 

41. By issuing the guideline No 4 on the statement of assurance, a common methodology is 
provided on how to draw up the SoA. It sets out the applicable legal provisions and provides 
recommendations from the Commission with a view to ensuring that the SoAs are drawn up 
on the basis of comparable criteria. 

43. The revised guideline on the SoA was presented to the Member States for the first time in 
June 2008 and finalised in July 2008. This was sufficiently in time for the directors of the PAs 
to  prepare  their  SoA  to  be  signed  by  January  2009.  An  earlier  revision  was  not  possible 
because the results of the previous year's exercise first needed to be evaluated. 

The  Commission  considers  that  the  guidelines  are  adequately  detailed.  Further  to  analysing 
the  SoAs  received  for  financial  year  2008,  the  guideline  was  further  revised.  The  2009 
revision  treats  in  separate  annexes  how  to  carry  out  the  analysis  of  the  control  statistics 
explicitly  requesting  detailed  information  where  the  error  rate  in  a  population  is  above  2%, 
where  the  comparison  with  the  situation  in  the  previous  financial  year  shows  a  significant 
deterioration or, where the error rate in a population is implausibly low and how to deal with 
the requirement to disclose the basis on which the statement of assurance is drawn. Templates 
for  transmission  of  control  statistics  were  provided  by  the  Commission  in  order  to  ensure 
uniformity of the data supplied by the Member States to the Commission. 

44. The requirement that each statement of assurance should be accompanied by a list of the 
documents  examined  and  the  work  performed  by  the  director  of  the  paying  agency  before 
signing his statement, was fulfilled in 75 out of 82 cases for financial year 2008. The analysis 
of the control statistics was provided in 32 cases and the comparison with the situation in the 
previous year in 24 cases. 

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The Commission analysis shows that, for the financial year 2009, the situation improved: all 
88 PAs provided a list of the documents examined and a summary of the work performed and 
83 PAs provided the required analysis of the control statistics. 

45-46.  

The assurance model underlying the SoAs follows from the Commission's guidelines and was 
discussed  at  the  first  meeting  with  the  directors  of  the  PAs  in  December  2007.  At  that 
occasion,  the  Commission  also  explicitely  stated  that  the  so-called  cascade  model  based  on 
"sub-SoAs" was insufficient  and  even  discouraged its use, in particular for the execution of 
payments. 

47. For financial year 2008, the analysis of the control statistics was provided in 32 cases and 
the  comparison  with  the  situation  in  the  previous  year  in  24  cases.  For  financial  year  2009, 
guideline No 4 has been revised with a view to improving this situation. In consequence, for 
this financial year, the required analysis of the control statistics was carried out by 84 out of 
88 PAs. 

48. The analysis of the control statistics is required to be carried out at aid scheme level, the 
threshold above 2% (at the level of a population) giving an indication for consideration of a 
reservation. However a reservation is only required if the following factors are cumulatively 
fulfilled: 

the examination of the qualitative aspects leads to a finding of significant deficiencies in a 

- 
national control system as defined in point 4.2 (Qualitative aspects ) of guideline No 4 and  

the amount of undue payments is estimated to exceed 2 % of the total payments made in 
- 
the  financial  year  in  question  under  any  of  the  populations  referred  to  in  point  4.3 
(Quantitative aspects) of guideline No 4 and 

- 

it has not been possible to counter the impact of the deficiencies by corrective measures. 

The director of the PA is expected to make a reservation only if all these three conditions are 
fulfilled. 

49.  For  the  reasons  set  out  in  its  reply  to  point  34,  the  Commission  does  not  question  the 
reliability of the control statistics.  

51.  It  is  correct  that  the  work  performed  in  the  context  of  the  certification  would  to  a  large 
extent provide an adequate basis also for the opinion on the SoA.  

However, 
accompanying the Statement of Assurance is adequate and it should provide an opinion: 

in  addition  check:  whether 

the  CB  should 

the  supporting 

information 

(if applicable) whether the Paying Agency Director's reservations have been correctly 

• 
disclosed; 

(if  applicable)  which  audit  population(s)  should,  in  its  opinion,  have  received  a 

• 
reservation, but did not; 

(if  applicable)  which  audit  population(s)  did  receive  a  reservation  that  was  not 

• 
required (i.e. the underlying issue(s) was/were not material); 

whether,  in  its  opinion,  the  SoA  complies  in  all  material  respects  with  Article  3  of 
• 
Regulation (EC) No 885/2006 (Commission guideline No 4) for the financial year 16/10/xx to 
15/10/xx+1. 

Thus, the Commission is of the view that the opinion provides added value. 

In financial year 2009, the French CB did follow the model required by guideline No 7.  

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52.  From  financial  year  2009  onwards,  the  CBs  have  been  better  placed  to  assess  this 
information because the revised guideline No 4 includes templates to be completed by the PA. 

PART II - THE CONFORMITY CLEARANCE OF ACCOUNTS 

54. The Court's graph 1 shows when the various conformity clearance decisions were adopted 
rather than the amounts excluded in respect of each financial year. The financial corrections 
on expenditure for each financial year, including estimates of future corrections, are shown in 
Commission Graph 1. 

56. The Central Risk Analysis serves as a planning tool. In fact agricultural expenditure of the 
year  N-2  was  allocated  to  76  different  audit  fields,  each  audit  field  is  subject  to  a  similar 
management and control system. As the expenditure under these audit fields was effected by 
different paying agencies, for planning purposes, 1 807 audit field/paying agency pairs were 
identified. For these audit field/paying agency pairs the following risk factors are taken into 
account: materiality (amounts of declared expenditure), last audit year (period elapsed since 
the  last  audit  of  the  measure  in  question),  inherent  risk  of  the  measure  in  question,  control 
system risks (risk associated with the control system), paying agency risk (risk related to the 
paying  agency)  and  finally  taking  into  account  the  OLAF  risk  (related  with  OLAF 
denunciations and irregularities) and the Court of Auditors risk (related with the findings from 
the ECA). The composite risk is calculated by audit field/paying agency pair by multiplying 
materiality and the "weighed risk" which is a weighted average of the various risk indicators 
mentioned above. Based on the composite risk, the ranking of the audit field/paying agency 
pairs is established for the whole Directorate. 

57-58.  

For financial year 2009, the part of the expenditure covered by the Commission's conformity 
audits increased to 61%4. The Commission considers this to be an impressive and sufficient 
coverage and, therefore, does not consider that, as a result of the risk analysis, only a limited 
number  of  measures  and  PAs  identified  as  priorities  are  subject  to  conformity  audits. 
Moreover, for direct aids, which in financial year 2009 accounted for 72% of total agricultural 
expenditure  and  are  covered  by  the  IACS,  all  Member  States  with  the  exception  of 
Luxembourg were audited over the past three years. 

59. The 24 month rule is a deliberate choice of the EU legislator with a view to ensuring legal 
certainty  for  Member  States.  It  is  inherent  in  the  application  of  this  rule  that  certain 
expenditure  cannot  be  subject  to  financial  corrections  although  it  may  be  affected  by 
deficiencies.  The  Commission  has  repeatedly  proposed  an  extension  of  this  time  limit,  but 
these proposals were turned down by both the Council and the European Parliament. 

60. The Commission considers that a complete coverage of all audit areas over, say, a three 
year period would not be possible even with significantly increased resources, and would go 
against  the  single  audit  concept5.  It  would  be  inefficient  to  devote  human  and  financial 
resources to the audit of audit  field/paying agency  pairs with limited expenditure and a low 
risk. Therefore, the Commission carries out its conformity audit work on the basis of a central 
risk  analysis,  which  incorporates  all  the  necessary  risk  factors  and  is  in  line  with 
internationally accepted auditing standards. 

BOX 3 

4 

5 

26.5%  for  "Intervention  on  agricultural  markets",  70.9%  for  "Direct  aid"  and  43.6%  for  "Rural 
development". 
This would require the audit of some 1.800 audit areas over this time span in order to avoid that certain 
parts thereof can no longer be corrected due to the 24 month rule. 

EN 

9 

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In the case referred to by the Court, the Commission has reacted on time to the information 
received  and  the  risk  has  been  correctly  covered.  Therefore,  the  Commission  does  not 
consider  that  the  EUR  100  million  referred  to  by  the  Court  should  have  been  subject  to  a 
financial correction. 

The  24  month  rule  is  a  deliberate  choice  of  the  EU  legislator  with  a  view  to  ensuring  legal 
certainty  for  Member  States.  It  is  inherent  in  the  application  of  this  rule  that  certain 
expenditure  cannot  be  subject  to  financial  corrections  although  it  may  be  affected  by 
deficiencies.  The  Commission  has  repeatedly  proposed  an  extension  of  this  time  limit,  but 
these proposals were turned down by both the Council and the European Parliament. 

61.  For  direct  aids,  which  in  financial  year  2009  accounted  for  72%  of  total  agricultural 
expenditure  and  are  subject  to  the  IACS,  all  Member  States  with  the  exception  of 
Luxembourg were audited over the past three years 2007-2009 and, thus, within a time span 
which prevents the exclusionary effect of the 24 month rule. 

The  number  of  audit  field/paying  agency  pairs  is  the  consequence  of  the  large  number  of 
different  control  systems  for  the  various  agricultural  aid  schemes  and  the  number  of  PAs 
established  by  the  Member  States.  Direct  aids,  however,  only  represented  12  audit  fields  in 
the 2008 risk analysis.  

63. The Commission considers that the use of flat rates is fully in line with the objective of the 
conformity  clearance  and  the  most  effective  and  efficient  way  of  achieving  this  objective, 
notably  if  the  deficiencies  found  concern  only  the  Member  State's  management  and  control 
system. It takes account of the fact that it is not possible to take a statistically valid sample in 
the  context  of  each  of  the  around  150  conformity  missions  carried  out  by  DG  AGRI  each 
year.  The  Commission  estimates  that  such  substantive  testing  would,  in  fact,  require  on 
average some 100 individual files to be audited in each case, thus amounting to more than 15 
000 files per year.  

The use of flat rate corrections has been upheld by the Court of Justice as being in conformity 
with the legal rules governing the conformity work.,  

64.  For  all  the  32  conformity  decisions  adopted  from  1996  to  the  end  of  2009,  slightly  less 
than  70%  of  the  total  amount  of  financial  corrections  were  determined  by  using  flat  rates. 
However, the Commission considers it to be pertinent to look at the number of cases rather 
than  the  amounts  involved  because  each  conformity  audit  is  equally  important  within  the 
overall annual audit programme. Here, flat rates were used in only 45% of all cases and, if the 
past ten decisions are taken, this percentage decreases further to 37%. This demonstrates the 
Commission's  continuous  efforts  to  calculate  or  extrapolate  the  financial  loss  for  the  EU 
budget whenever this is possible. 

As part of this effort, the Commission recently set out to Member States the conditions under 
which it is prepared to limit the amount of any financial correction to the error rate found by 
the  Member  State,  in  the  transactions  at  final  beneficiary  level  and  reported  in  its  control 
statistics for the aid scheme concerned. 

65.  The  Commission  considers  that  by  focusing  on  the  functioning  of  Member  States' 
management and control systems, the system based audit approach is the most effective and 
efficient way of achieving this objective. To supplement this work by a substantive testing of 
a representative sample of individual payments in the context of each of the around 150 on-
the-spot  conformity  audits  carried  out  by  DG  AGRI  each  year  would  require  a  substantial 
(more than twofold) increase in the current audit resources which would not be in line with 
any cost-benefit analysis. The increase would be even higher (fivefold) if the Commission had 
to carry out such substantive testing on all audit fields over, say, a three year period.  

EN 

10 

   EN 

Nor  would  it  take  account  of  the  fact  that  independent  audit  bodies  are  certifying  the  PAs' 
accounts  and  the  functioning  of  their  internal  control  procedures  and  are  verifying  and 
validating  their  control  statistics,  an  element  covering  the  legality  and  regularity  of  the 
underlying transactions which is currently being further reinforced. 

Nor would it be possible to limit such substantive testing to cases where the "consequences 
are quantifiable and significant" as those conclusions cannot be drawn at the time of the audit 
and,  if  it  were  implemented  towards  the  end  of  the  procedure  such  substantive  testing  may 
well be irrelevant and/or impossible.  

66.  Flat  rate  corrections  reflect  the  degree  of  financial  risk  for  the  EU  budget  which  results 
from the deficiencies in the Member States' management and control systems. Therefore, the 
Commission  considers  that  there  is  a  correlation  between  the  flat  rate  used  and  the  level  of 
irregular  payments  to  final  beneficiaries.  The  guidelines  in  working  document  VI/5330/97 
have  established  a  clear,  objective  and  stable  system  for  the  application  of  the  flat-rate 
corrections, avoiding subjectivity as well as unequal treatment. 

The  Commission's  operational  handbook  explicitly  states  that  the  system  of  flat  rate 
corrections is used to link the weaknesses identified to the risk for the EU budget and that this 
risk  is  the  overriding  element  in  the  assessment  of  the  level  of  financial  corrections. 
Therefore,  the  auditors  are  required  to  assess  whether  there  are  any  factors  which  would 
mitigate,  or  amplify  the  risk.  The  conformity  decisions  provide  ample  examples  that  this 
assessment is taking place and, where justified, leads to a reduction or increase of the level of 
financial corrections. 

Moreover, as agricultural expenditure is implemented under shared management, the Member 
States  are  better  placed  than  the  Commission  to  assess  and  provide  evidence  of  the  real 
financial loss or risk for the EU budget. The operational handbook explicitly recognises this 
and requires the Commission to take such evidence, if reliable, into account. A more precise 
calculation of the financial loss for the EU budget therefore requires the active co-operation of 
the Member State concerned at all levels of the conformity clearance procedure because only 
the Member State has all the necessary information to make such a calculation. Unfortunately, 
however, despite the Commission's requests, Member States often do not avail themselves of 
this  possibility.  The  Court  of  Justice  has  confirmed  that  it  is  not  up  to  the  Commission  to 
undertake the checks necessary to put a precise figure to the losses incurred, but rather it is for 
the Member State to show that the Commission's estimate was excessive. 

In this context, the Commission has recently set out to Member States the conditions under 
which it is prepared to limit the amount of any financial correction to the error rate found by 
the  Member  States  in  the  transactions  at  final  beneficiary  level  and  reported  in  its  control 
statistics for the aid scheme concerned. 

BOX 5  

In the case in hand, the testing of representative sample of files, suggested by the Court would 
have potentially treated the UK differently to other Member States. In order to treat Member 
States equally, such substantive testing would have to be carried out systematically, at least in 
all  cases  where  there  is  a  potential  financial  correction.  Such  an  approach  would  require  a 
significant increase in audit resources and is not in line with a cost-benefit analysis. This is 
why  the  Commission  has  decided  on  an  system  based  audit  approach  with  a  hierarchy  of 
corrections of which the flat rate approach is but one and which has been upheld by the Court 
of Justice. Furthermore, Member States are in all cases invited to calculate more precisely the 
financial loss for the EU budget but they do not always avail themselves of this possibility. 
Nevertheless,  the  Commission  developed  an  alternative  method  in  order  to  better  determine 

EN 

11 

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the  real  residual  risk  and  has  set  this  out  to  Member  States  (see  point  104  e  final 
subparagraph).  

See also replies in 65 and 66.  

67.  In  its  2007  discharge  resolution,  the  Parliament  explicitly  requested  that  "flat-rate 
corrections are applied to those Member States which fail to meet their obligations"6.  

To date the percentage of financial correction (by value) determined on the basis of flat rates 
amounts to slightly less than 70%.  

Moreover, in December 2009, the Commission set out to Member States the conditions under 
which it is prepared to limit the amount of any financial correction to the error rate found by 
the  Member  State,  in  the  transactions  at  final  beneficiary  level  and  reported  in  its  control 
statistics for the aid scheme concerned. 

68. The 1996 reform introduced an annual financial clearance to be completed by 30 April of 
the  year  n  +  1  and  the  24  month  rule  for  conformity  clearance.  By  doing  so,  a  major 
contribution  was  made  to  the  discharge  procedure  (and  now  the  AAR)  taking  into  account 
their timing To conclude the conformity clearance work within such a timetable would impair 
the conformity clearance process. 

69.  The  time  needed  for  completing  the  conformity  procedure  depends  on  a  number  of 
factors, some of which are outside the Commission's responsibility and control. Such factors 
include, for example, the complexity of the case, requiring additional work or even additional 
missions,  the  respect  of  deadlines  by  the  Member  States,  translation  requirements  and  the 
follow-up  of  the  recommendations  of  the  Conciliation  Body.  Furthermore,  quite  often  the 
target  is  exceeded  in  order  to  fully  respect  the  Member  State's  right  of  defence,  which  is  a 
fundamental  principle  of  the  conformity  clearance  procedure  and  explicitly  required  by 
Article 42(2)(c) of the Implementing Rules to the Financial Regulation. 

71.  Member  States  are  aware  of  any  deficiencies  found  shortly  after  the  mission  and  can 
immediately take corrective action. The audit results are known and taken into account for the 
AAR  for  the  year  concerned.  The  length  of  time  to  determine  the  amount  of  the  financial 
correction is a secondary issue if the deficiencies have already been notified and corrected.  

Shortening the deadlines for the conformity clearance procedure would impact negatively on 
the Commission's ability to carry out the necessary audit work which would be neither in the 
interests of the EU nor of the Member States. The Commission will nevertheless continue to 
work at reducing the time needed to complete conformity clearance procedures. 

72.  None  of  the  parties  involved  in  the  legislative  procedure  proposed  any  changes  to  the 
conciliation  procedure  in  their  opinions  on  the  Commission's  proposal  for  a  Council 
Regulation on financing of the common agricultural policy, which was subsequently adopted 
as Regulation (EC) No 1290/2005. 

In  2006,  the  Commission  adopted  measures  to  reduce  the  number  of  cases  going  to 
conciliation  by  doubling  the  threshold  above  which  cases  are  considered  admissible.  The 
Conciliation Body has not seen the increase in cases which would be commensurate with the 
increase in size of the EU. 

6 

See  paragraph  83  of  the  European  Parliament  resolution  of  23  April  2009  on  the  discharge  for 
implementation  of  the  European  Union  general  budget  for  the  financial  year  2007,  Section  III  – 
Commission (P6_TA(2009)0289). 

EN 

12 

   EN 

                                                 
The Commission considers the conciliation procedure to be a useful element in the conformity 
procedure.  This  is  demonstrated  by  the  Conciliation  Body's  impact  on  the  financial 
corrections  proposed.  In  28%  of  cases  a  reduction  of  more  than  10%  in  the  amount  of 
financial correction resulted from the procedure, in 13% of cases, there was a reduction of less 
than 10% while in 3.5% of cases the Commission decided to withdraw its correction. 

73. Whether the time-target can be met in a given case depends on a number of factors, some 
of  which  are  outside  the  Commission's  responsibility  and  control.  Such  factors  include,  for 
example,  the  complexity  of  the  case,  requiring  additional  work  or  even additional missions, 
the respect of deadlines by the Member States and the follow-up of the recommendations of 
the Conciliation Body. Quite often, the target is exceeded in order to fully respect the Member 
State's  right  of  defence,  which  is  a  fundamental  principle  of  the  conformity  clearance 
procedure. 

At the end of 2009, only 10 audits carried out in the years 2004 and before, allowing financial 
corrections of expenditure from the period prior to 2003, had not been closed. The financial 
corrections  related  to  these  audits  as  regards  expenditure  from  the  period  prior  to  2003  are 
estimated to be around EUR 15 million. This means that the conformity work on expenditure 
incurred in the years prior to 2003 had largely been completed. 

PART III – THE CLEARANCE OF ACCOUNTS PROCEDURE AS A WHOLE 

76-77.  

The financial clearance decision is taken around six months after the end of the financial year 
in  question.  Through  this  decision,  the  Commission  establishes  the  amount  of  expenditure 
recognised as chargeable to the EU budget for that year. The fact that the decision is without 
prejudice  to  subsequent  conformity  decisions  imposing  financial  corrections  on  Member 
States is explicitly provided for in Article 30 of Regulation (EC) No 1290/2005 which has the 
same legal status as the Financial Regulation. Moreover, in substance, it is fully compatible 
with the Financial Regulation, which for any other expenditure provides that the Commission 
can make ex-post checks up to 5 years after the discharge decision on the year in which the 
final  payment  was  made.  Otherwise,  all  budgetary  expenditure  would  be  considered 
provisional until an ex-post check is made or the 5-year period has lapsed.  

The  amount  of  expenditure  which  is  likely  to  be  excluded  from  financing  by  future 
conformity decisions is disclosed as a contingent asset in the Commission's accounting system 
and in a note to the financial statements. Together with the financial clearance decision, this 
disclosure  provides  the  European  Parliament  and  the  Council  with  the  information  they 
require for the discharge procedure. 

This role of the financial clearance decision was already set out explicitly in the memorandum 
of  March  1993  by  which  the  Commission  approved  the  guidelines  for  the  reform  of  the 
clearance of accounts system which became applicable in 1996 (SEC (93) 306) and was not 
called  into  question  by  any  of  the  parties  involved  in  the  adoption  of  the  subsequent 
legislation. 

78.  

(a) Each financial correction included in a conformity decision is linked to a specific financial 
year which is identified in the Annex to this decision. 

(b) As already indicated in the reply to point 73, by the end of 2009, the conformity work on 
expenditure incurred prior to 2003 had largely been completed. 

The  financial  statements  include  the  pertinent  information  concerning  the  financial 
corrections of the year. 

EN 

13 

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See also reply to points 76-77. 

79. What the Court describes as limitations are, rather, positive features inherent to a system 
which has proven its value in safeguarding the financial interests of the EU.  

80.  Conformity  clearance  decisions  disclose  the  amounts  excluded  from  EU  financing  per 
year of expenditure and per Member State. The amounts per Member State are disclosed in 
note 6 to the financial statements 2009 of the Commission. 

Annex 36 to the Commission Staff Working Document accompanying the financial report on 
the  EAGF  2008  financial  year  provides  information  on  the  financial  corrections  made  on 
expenditure  from  each  financial  year.  Information  on  the  distribution  of  these  corrections 
between  Member  Sates  and  between  sectors  is  provided  in  the  Commission's  fact  sheet 
"Managing  the  agricultural  budget  wisely",  which  is  published  under  the  following  internet 
address: 

http://ec.europa.eu/agriculture/publi/fact/index_en.htm. 

81. The financial clearance decision is taken around six months after the end of the financial 
year  in  question.  Through  this  decision,  the  Commission  establishes  the  amount  of 
expenditure recognised as chargeable to the EU budget for that year. The fact that the decision 
is  without  prejudice  to  subsequent  conformity  decisions  imposing  financial  corrections  on 
Member  States  is  explicitly  provided  for  in  Article  30  of  Regulation  (EC)  No  1290/2005 
which has the same legal status as the Financial Regulation. Moreover, in substance, it is fully 
compatible with the Financial Regulation, which for any other expenditure provides that the 
Commission can make ex-post checks up to 5 years after the discharge decision on the year in 
which the final payment was made. Otherwise, all budgetary expenditure would be considered 
provisional  until  an  ex-post  check  is  made  or  the  5-year  period  has  lapsed.  The  amount  of 
expenditure which is likely to be excluded from financing by future conformity decisions is 
disclosed  as  a  contingent  asset  in  the  Commission's  accounting  system  and  in  a  note  to  the 
financial statements. Together with the financial clearance decision, this disclosure provides 
the European Parliament and the Council with the information they require for the discharge 
procedure.  

The  financial  statements  already  include  all  the  information  required  by  the  Financial 
regulation and the accounting rules. See also reply to paragraph 76-77. 

82. Under the reformed system, the financial clearance decision is adopted by 30 April of the 
year  following  the  financial  year  concerned.  Thus  the  reformed  clearance  of  accounts 
procedure has significantly accelerated the timescale for clearing the PAs' accounts.  

83. With the adoption of the annual financial clearance decision, the Commission accepts the 
accounts  of  the  accredited  paying  agencies  and  the  corresponding  expenditure  therefore 
becomes  definitive.  This  acceptance  is  not  called  into  question  by  the  possibility  of 
subsequent  financial  corrections  under  the  conformity  clearance  process.  The  amount  of 
expenditure  which  is  likely  to  be  excluded  from  EU  financing  by  such  future  conformity 
decisions  is  disclosed  as  a  contingent  asset  in  the  Commission's  accounting  system  and 
disclosed in a note to the financial statements of the Commission.  

The financial statements give all the information required by the Financial Regulation and the 
accounting  rules.  In  particular  they  include  as  a  contingent  asset  an  estimate  of  future 
financial corrections.  

84.  The  Financial  Regulation  and  the  sectoral  regulations  regarding  agriculture  give  the 
Commission the right to make checks on all expenditure for some years after it is incurred. 
The  accounts  should  not  imply  that,  because  of  this  right,  all  the  expenditure  concerned 

EN 

14 

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remains to be accepted. Where the amounts of potential recoveries are quantifiable, they are 
disclosed in notes 5.3 and 5.4 to the consolidated accounts. 

These conformity clearance decisions disclose the amounts excluded from EU financing per 
year of expenditure and per Member State. The amounts per Member State are disclosed in 
note 6 to the financial statements 2009 of the Commission. 

85. The purpose of recording the contingent assets in the Commission's accounts is to disclose 
the  (potential)  receivables,  based  on  the  results  of  its  audits,  and  has  not  been  intended  to 
provide any assurance as to the legality and regularity of the underlying transactions. 

The  amount  included  in  the  contingent  asset  corresponds  to  the  best  estimation  of  the 
expenditure which is likely to be excluded from EU financing by future conformity decisions. 
This amount is disclosed in a note to the financial statements of the Commission, divided into 
EAGF and EAFRD.  

88.  The  annual  accounts  present  all  information.  required  by  the  accounting  rules  and 
financial  regulation.  In  particular,  the  amount  of  expenditure  which  is  likely  to  be  excluded 
from  EU  financing  by  future  conformity  decisions  is  disclosed  as  a  contingent  asset  in  the 
Commission's accounting system and in a note to the financial statements of the Commission 
The accounts are not amended by subsequent conformity decisions. The financial effect of a 
conformity  decision  falls  in  the  financial  year  in  which  the  decision  is  executed  and  does, 
thus, not amend the accounts of previous financial years. 

89.  The  conformity  clearance  is  designed  to  exclude  expenditure  from  EU  financing  which 
has  not  been  executed  in  compliance  with  EU  rules,  thus  shielding  the  EU  budget  from 
expenditure  that  should  not  be  charged  to  it.  In  contrast,  it  is  not  a  mechanism  by  which 
irregular payments to beneficiaries are recovered, which according to the principle of shared 
management is the sole responsibility of Member States, as referred to in Article 9(1)(a)(iii) 
of Council Regulation (EC) No 1290/2005 and Article 53b(2)(c) of the Financial Regulation. 

The  Commission  considers  that  the  conformity  clearance  has  over  the  years  proven  to  be  a 
strong  incentive  for  Member  States  to  improve  their  management  and  control  systems  and, 
thus, to prevent or detect and recover irregular payments to final beneficiaries as reflected by 
the decreasing error rates at the final beneficiary level. 

90. 

(a) The conformity clearance is not a mechanism by which irregular payments to beneficiaries 
are recovered, which according to the principle of shared management and the rules of Article 
9(1)(a)(iii) of Council Regulation (EC) No 1290/2005 and Article 53b(2)(c) of the Financial 
Regulation  is  the  sole  responsibility  of  Member  States.  Where  irregular  payments  to 
individual  beneficiaries  are  or  can  be  identified  as  a  result  of  the  conformity  clearance 
procedures, Member States are required to follow them up by recovery actions against these 
beneficiaries.  

(b)  Even  where  financial  corrections  only  relate  to  deficiencies  in  the  Member  States' 
management  and  control  and  not  to  irregular  payments,  these  corrections  are  an  important 
means to improve the Member States' management and control systems and, thus, to prevent 
or  detect  and  recover  irregular  payments  to  final  beneficiaries.  The  conformity  clearance 
thereby  contributes  to  the  legality  and  regularity  of  the  transactions  at  the  level  of  the  final 
beneficiaries.  Moreover,  agricultural  legislation  provides  for  effective,  dissuasive  and 
proportional sanctions to be imposed on beneficiaries who have received irregular payments. 

91. Financial corrections are not sanctions on Member States as the Commission said already 
in the memorandum of March 1993 by which it approved the guidelines for the reform of the 

EN 

15 

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clearance  of  accounts  system  which  became  applicable  in  1996  (SEC(93)  306).  The  current 
conformity clearance mechanism, including the use of flat-rate corrections, has been upheld 
by  the  Court  of  Justice,  which  implies  that  it  is  not  a  sanction  mechanism  as  sanctions  on 
Member States are the prerogative of the Court of Justice.  

CONCLUSIONS AND RECOMMENDATIONS 

93.  The  Commission  welcomes  the  Court's  conclusion  that  the  clearance  of  accounts 
procedure,  as  regards  the  reliability  of  the  accounts,  provides  reasonable  assurance  and 
sufficient information for the Commission to take its annual financial clearance decision 

94.  The  Commission  acknowledges  the  shortcomings  identified  by  the  Court  concerning 
financial years 2007 and 2008 and has raised these issues with Member States. As a result, for 
financial  year  2009,  the  situation  has  improved  for  all  the  new  elements  of  assurance 
mentioned. 

In  the  view  of  the  Commission,  an  opinion  on  the  internal  control  procedures  would  not 
require  specific  testing  and  assessment  of  the  reliability  of  each  key  and  ancillary  control 
(conformity aspects). The CB is only to check that the PA has an administrative organisation 
and a system of internal control complying with the criteria set out in Annex I to Regulation 
(EC) No 885/2006.  

For  the  reasons  set  out  in  its  reply  to  point  34,  the  Commission  considers  that  the  control 
statistics are sufficiently reliable to be used for assurance purposes. 

For  the  reasons  set  out  under  point  51  above,  the  Commission  is  of  the  view  that  the  CBs' 
opinions on the SoA do provide added value.  

95.  The  Commission  does  not  consider 
the 
implementation  of  the  conformity  clearance  procedure.  The  Court's  criticism  essentially 
relates  to  the  design  of  the  procedure  as  such  and  not  to  its  implementation  which,  as  the 
Commission  has  set  out  in  its  replies  to  points  76-77,  78b,  and  81,  is  fully  in  line  with  the 
current  rules,  as  acknowledged  by  the  Court  of  Justice,  and  has  over  the  past  15  years 
demonstrated its value in excluding non-conform expenditure from EU financing. 

that  significant  shortcomings  affect 

96.  For  financial  year  2009,  the  part  of  the  expenditure  covered  by  the  Commission's 
conformity  audits  increased  to  61%7.  The  Commission  considers  this  to  be  a  sufficient 
coverage and, therefore, that the risk analysis results in an adequate number of measures and 
PAs identified as priorities for conformity audits. 

The Commission considers that a complete coverage of all audit areas over, say, a three year 
period  would  not  be  possible  even  with  significantly  increased  resources,  and  would  go 
against the single audit concept. It would be disproportionate to devote human and financial 
resources to the audit of audit field/paying  agency pairs  with limited expenditure and a low 
risk. Therefore, the Commission carries out its conformity audit work on the basis of a central 
risk  analysis,  which  incorporates  all  the  necessary  risk  factors  and  is  in  line  with 
internationally accepted auditing standards. 

Moreover, for direct aids, which in financial year 2009 accounted for 72% of total agricultural 
expenditure  and  are  covered  by  the  IACS,  all  Member  States  with  the  exception  of 
Luxembourg were audited over the past three years. 

7 

26.5%  for  "Intervention  on  agricultural  markets",  70.9%  for  "Direct  aid"  and  43.6%  for  "Rural 
development". 

EN 

16 

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The  24  month  rule  is  a  deliberate  choice  of  the  EU  legislator  with  a  view  to  ensuring  legal 
certainty  for  Member  States.  It  is  inherent  in  the  application  of  this  rule  that  certain 
expenditure  cannot  be  subject  to  financial  corrections  although  it  may  be  affected  by 
deficiencies.  The  Commission  has  repeatedly  proposed  an  extension  of  this  time  limit,  but 
these proposals were turned down by both the Council and the European Parliament. 

97.  The  Commission  considers  that  by  focusing  on  the  functioning  of  Member  States' 
management and control systems, the system based audit approach is the most effective and 
efficient  way  of  achieving  its objective  of  sound  financial  management.  To  supplement  this 
work by a substantive testing of a representative sample of individual payments in the context 
of each of the around 150 on-the-spot conformity audits carried out by DG AGRI each year 
would require a substantial (more than twofold) increase in the current audit resources which 
would  not  be  in  line  with  any  cost-benefit  analysis.  The  increase  would  be  even  higher 
(fivefold) if the Commission had to carry out such substantive testing on all audit fields over, 
say, a three year period.  

Nor would it be possible to limit such substantive testing to cases where the consequences are 
quantifiable and significant as those conclusions cannot be drawn at the time of the audit and, 
if it were implemented towards the end of the procedure such substantive testing may well be 
irrelevant and/or impossible. (See reply to paragraph 65).  

Flat rate corrections reflect the degree of financial risk for the EU budget which results from 
the  deficiencies  in  the  Member  States'  management  and  control  systems.  Therefore,  the 
Commission  considers  that  there  is  a  correlation  between  the  flat  rate  used  and  the  level  of 
irregular  payments  to  final  beneficiaries.  Conformity  clearance  includes  cases  where  the 
deficiencies found are limited to the control system in place and cannot be linked to individual 
irregular  payments  to  beneficiaries  but,  because  of  the  flat  rate  approach  taken  for  control 
deficiencies,  the  risk  to  the  EU  budget  is  covered,  e.g.  when  a  Member  State  does  not 
accomplish the minimum number of controls. 

98.  The  main  objective  of  the  1996  reform  of  the  clearance  of  accounts  procedure  was  to 
enforce  the  effectiveness  and  efficiency  in  achieving  the  general  aims  of  the  CAP  and  the 
Financial Regulation.  

At the end of 2009, the conformity work on expenditure incurred in the years prior to 2003 
had largely been completed. 

99. Each financial correction included in a conformity decision is linked to a specific financial 
year which is identified in the Annex to this decision. 

100. The financial clearance decision is taken around six months after the end of the financial 
year  in  question.  Through  this  decision,  the  Commission  establishes  the  amount  of 
expenditure recognised as chargeable to the EU budget for that year. The fact that the decision 
is  without  prejudice  to  subsequent  conformity  decisions  imposing  financial  corrections  on 
Member  States  is  explicitly  provided  for  in  Article  30  of  Regulation  (EC)  No  1290/2005 
which has the same legal status as the Financial Regulation. Moreover, in substance, it is fully 
compatible with the Financial Regulation, which for any other expenditure provides that the 
Commission can make ex-post checks up to 5 years after the discharge decision on the year in 
which the final payment was made. Otherwise, all budgetary expenditure would be considered 
provisional until an ex-post check is made or the 5-year period has lapsed.  

The  amount  of  expenditure  which  is  likely  to  be  excluded  from  financing  by  future 
conformity decisions is disclosed as a contingent asset in the Commission's accounting system 
and in a note to the financial statements. Together with the financial clearance decision, this 

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disclosure  provides  the  European  Parliament  and  the  Council  with  the  information  they 
require for the discharge procedure. See replies to paragraphs 76-77. 

101. With the adoption of the annual financial clearance decision, the Commission accepts the 
accounts  of  the  accredited  paying  agencies  and  the  corresponding  expenditure  therefore 
becomes  definitive.  This  acceptance  is  not  called  into  question  by  the  possibility  of 
subsequent  financial  corrections  under  the  conformity  clearance  process.  The  amount  of 
expenditure  which  is  likely  to  be  excluded  from  EU  financing  by  such  future  conformity 
decisions  is  disclosed  as  a  contingent  asset  in  the  Commission's  accounting  system  and 
disclosed in a note to the financial statements of the Commission. 

102.  Financial  corrections  are  not  sanctions  but  an  exclusion  from  EU  financing  of 
expenditure  which  has  not  been  effected  in  conformity  with  EU  rules.  These  financial 
corrections  are  not  "negotiable",  but  are  determined  by  the  Commission  on  the  basis  of  the 
principles  set  out  in  its  working  document  VI/5330/97  and  the  information  received  in  the 
course  of  the  administrative  procedure  leading  to  the  conformity  decision.  The  Member 
State's  participation  in  this  procedure  is  part  of  the  principle  "audi  et  alteram  partem", 
allowing  the  Member  State  to  give  its  opinion  and  to  present  its  point  of  view,  and  the 
Commission is and should be  willing to  listen  to the Member  State's arguments and to take 
these  into  account.  The  number  of  financial  corrections  upheld  by  the  Court  of  Justice 
demonstrate that the amounts are, in general, clear and indisputable. 

103.  The  conformity  clearance  is  not  a  mechanism  by  which  irregular  payments  to 
beneficiaries are recovered which, according to the principle of shared management and the 
rules of Article 9(1)(a)(iii) of Council Regulation (EC) No 1290/2005 and Article 53b(2)(c) of 
the Financial  Regulation,  is  the  sole  responsibility of Member States.  However,  where such 
irregular payments are, or can be, identified as a result of the conformity clearance procedure, 
Member States are required to follow them up by recovery actions against the beneficiaries. 

104. The Commission considers the current system to function well and to achieve its overall 
objectives.  It  will,  however,  continue  to  improve  its  operations  in  practice  and,  where 
necessary, submit appropriate proposals for further improvements to the European Parliament 
and the Council for the post-2013 period. 

(a) The Commission considers that, in general, the rules and responsibilities of the different 
parties are sufficiently clearly defined in the existing regulations while taking account of the 
need to maintain the necessary flexibility. It will, however, consider whether to define in more 
detail the role of the CBs in the rules for the post-2013 period. 

(b) The existing rules already provide for a time limit for the adoption of the annual financial 
clearance decision. Time limits for the conclusion of conformity clearance procedures would 
go  against  the  objective  of  protecting  the  EU's  financial  interests  as  they  would  exclude 
financial correction after the deadline has elapsed. Therefore, the Commission does not intend 
to propose the introduction of such additional time limits. 

(c) The financial clearance decision is taken around six months after the end of the financial 
year  in  question.  Through  this  decision,  the  Commission  establishes  the  amount  of 
expenditure recognised as chargeable to the EU budget for that year. The fact that the decision 
is  without  prejudice  to  subsequent  conformity  decisions  imposing  financial  corrections  on 
Member  States  is  explicitly  provided  for  in  Article  30  of  Regulation  (EC)  No  1290/2005 
which has the same legal status as the Financial Regulation. Moreover, in substance, it is fully 
compatible with the Financial Regulation, which for any other expenditure provides that the 
Commission can make ex-post checks up to 5 years after the discharge decision on the year in 

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which the final payment was made. Otherwise, all budgetary expenditure would be considered 
provisional until an ex-post check is made or the 5-year period has lapsed.  

The  amount  of  expenditure  which  is  likely  to  be  excluded  from  financing  by  future 
conformity decisions is disclosed as a contingent asset in the Commission's accounting system 
and in a note to the financial statements. Together with the financial clearance decision, this 
disclosure  provides  the  European  Parliament  and  the  Council  with  the  information  they 
require for the discharge procedure. 

This role of the financial clearance decision was already set out explicitly in the memorandum 
of  March  1993  by  which  the  Commission  approved  the  guidelines  for  the  reform  of  the 
clearance of accounts system which became applicable in 1996 (SEC (93) 306) and was not 
called  into  question  by  any  of  the  parties  involved  in  the  adoption  of  the  subsequent 
legislation.  

See also reply to paragraph 97. 

(d) The estimated amount of expenditure which is likely to be excluded from EU financing by 
future conformity decisions is disclosed as a contingent asset in the Commission's accounting 
system and disclosed in the note to the financial statements of the Commission. It would not 
be appropriate to make an assessment by Member State or by budget area of these amounts, 
which  are  at  present  a  best  estimate  and  may  change  when  a  final  decision  is  taken,  nor  to 
include such detailed information in the financial statements.  

The  conformity  clearance  decisions  identify  the  amounts  excluded  from  EU  financing  per 
year of expenditure and per Member State. The amounts per Member State are disclosed in 
note 6 to the financial statements 2009 of the Commission. 

(e) Under the reformed system, the financial clearance decision is adopted by 30 April of the 
year  following  the  financial  year  concerned.  Thus  the  reformed  clearance  of  accounts 
procedure has significantly accelerated the timescale for clearing the PAs' accounts.  

The  time  needed  for  completing  the  conformity  procedure  depends  on  a  number  of  factors, 
some of which are outside the Commission's responsibility and control. Such factors include, 
for  example,  the  complexity  of  the  case,  requiring  additional  work  or  even  additional 
missions,  the  respect  of  deadlines  by  the  Member  States  and  the  follow-up  of  the 
recommendations of the Conciliation Body. Furthermore, quite often the target is exceeded in 
order to fully respect the Member State's right of defence, which is a fundamental principle of 
the  conformity  clearance  procedure  and  explicitly  required  by  Article  42(2)(c)  of  the 
Implementing Rules to the Financial Regulation. 

The  use  of  flat  rates  is  fully  in  line  with  the  objective  of  the  conformity  clearance  and  the 
most effective and efficient way of achieving this objective. It takes account of the fact that it 
is  not  possible  to  take  a  statistically  valid  sample  in  the  context  of  each  of  the  around  150 
conformity  missions  carried  out  by  DG  AGRI  each  year.  Nor  would  it  be  possible  to  limit 
such substantive testing to cases where the "consequences are quantifiable and significant" as 
those  conclusions  cannot  be  drawn  at  the  time  of  the  audit  and,  if  it  were  implemented 
towards  the  end  of  the  procedure  such  substantive  testing  may  well  be  irrelevant  and/or 
impossible.  

Furthermore,  as  agricultural  expenditure  is  implemented  under  shared  management,  the 
Member States are better placed than the Commission to assess and provide evidence of the 
real financial loss or risk for the EU budget. The operational handbook explicitly recognises 
this  and  requires  the  Commission  to  take  such  evidence,  if  reliable,  into  account.  A  more 
precise  calculation  of  the  financial  loss  for  the  EU  budget  therefore  requires  the  active  co-
operation of the Member State concerned at all levels of the conformity clearance procedure 

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because only the Member State has all the necessary information to make such a calculation. 
Unfortunately, however, despite the Commission's requests, Member States often do not avail 
themselves of this possibility.  

Moreover,  the  flat  rate  methodology  has  been  accepted  by  the  Court  of  Justice  as  being  in 
conformity  with  the  legal  rules  governing  the  conformity  work..  In  particular,  the  Court  of 
Justice has confirmed that it is not up to the Commission to undertake the checks necessary to 
put a precise figure to the losses incurred, but rather it is for the Member State to show that 
the Commission's estimate was excessive.  

The Commission has recently put forward a system by which Member States can, from 2010, 
reinforce the overall framework for gaining reasonable assurance on legality and regularity of 
transactions  at  the  level  of  final  beneficiaries.  To  this  end,  CBs  should  extend  their  work 
beyond the present requirements by fully re-performing, for a given expenditure population, a 
representative sample of transactions which the PA in question has checked on-the-spot. The 
work  would  cover  the  entire  handling  of  the  file,  from  receipt  of  the  aid  application  to  the 
calculation and execution of the final payment. 

(f) Financial corrections imposed on Member States through conformity clearance decisions 
are  not  sanctions  but  an  exclusion  from  EU  financing  of  expenditure  which  has  not  been 
effected in conformity with EU rules. This is also confirmed by the jurisprudence of the Court 
of Justice. 

(g)  The  Commission  will  continue  to  supervise  the  work  of  the  certification  bodies  through 
specific audit visits. 

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R
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Graph 1 - Amounts excluded in respect of each  financial year 
(incl. estimates of future corrections)

800

700

600

500

400

300

200

100

0

1999

2000

2001

2002

2003

2004

2005

2006

2007

Financial Year

Estimated on basis of historic average

Corrections under preparation

Decisions 30-32

Decisions 1-29

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