31998Y1214(01)

SPECIAL REPORT No 21/98 concerning the accreditation and certification procedure as applied to the 1996 clearance of accounts for EAGGF-Guarantee expenditure, together with the replies of the Commission (submitted pursuant to Article 188c (4) (2) of the EC Treaty) (98/C 389/01)

EXECUTIVE SUMMARY

New procedures were applicable for the first time to the accreditation of paying agencies and the clearance of accounts concerning EAGGF-Guarantee expenditure for the budget year 1996. The Court reviewed and evaluated the work carried out by the Commission's services and checked whether the new rules had been applied properly. The new procedures should be evaluated not only on their results for the first year, but also on the initiatives taken in the meantime by the Commission and Member States to improve the situation.

Although Member States were required to accredit their paying agencies by 16 October 1995, at the beginning of the 1996 financial year only 50 out of 66 paying agencies had been accredited. 90 paying agencies were finally accredited in 1997, some of them being responsible for very little expenditure. Greater efforts should be made by some Member States to limit the number of paying agencies.

The Court's audit in 1997 revealed weaknesses at many of the paying agencies visited. Weaknesses in internal control, lack of security for EDP systems and shortcomings in the monitoring of delegated services by the paying agencies, as well as in the accounting, were identified, shortcomings that should have led the Member States concerned to take appropriate action. Certified accounts were supposed to be forwarded by 10 February 1997, but in many cases the Commission found that the certified accounts were submitted late or were unsatisfactory. Two Member States, (United Kingdom and Greece), did not present any certified account on time. In the case of Spain the certifying body did not manage to express an opinion concerning most expenditure incurred at regional level on time, and it was later audited by private external auditors.

To assist certifying bodies with their work the Commission made guidelines concerning certification of the accounts available to the certifying bodies, but that was done too late (in September 1996, when most of their audit work should have commenced). If they had been communicated in time, a number of misunderstandings and delays could have been avoided.

Because of the weaknesses and delays in some Member States, the clearance decision of 5 May 1997, which should have been taken by 30 April 1997, according to the Regulation, covered only 33 % of the expenditure. The rest was cleared under the decision of 30 July 1997, after supplementary auditing work had been carried out by the various certifying bodies.

In the end all of the certified accounts were cleared by the Commission, in spite of the varying quality of the accounts presented. However, in this decision, the Commission did not take into account most of the qualifications in the certificates totalling a minimum of ECU 43,3 million. Furthermore financial corrections of ECU 77,3 million previously made by the Commission's finance division in the context of its daily management of EAGGF-Guarantee expenditure were reduced to ECU 55,1 million in the clearance decision.

The decisions of clearance of accounts taken by the Commission on 1996 expenditures do not prevent the Commission from disallowing amounts at a later date on the basis of subsequent compliance audits. Appropriate internal control procedures at the Commission must ensure that corrections are adequately documented and that weaknesses identified will be systematically followed up during the subsequent compliance audit.

1. INTRODUCTION

The regulatory context

1.1. 1996 was the first year of the implementation of the new procedures for the certification of accounts of EAGGF expenditures and the accreditation of paying agencies. It required, both from the Member States and the Commission, great efforts to adapt themselves to the new legal aspects. The new procedures should not be evaluated only on the results for the first year. The Commission has pursued its efforts to get better certificates, especially by organising meetings with certifying bodies and by issuing new practical guidelines. This should have a positive impact in the years to come.

1.2. Paying agencies are the designated authorities of the Member States which administer EAGGF-Guarantee measures and make the relevant payments to the beneficiaries. Under Regulation (EEC) No 729/70 of 21 April 1970 (1) the Commission reimburses, on a monthly basis, the amounts spent and declared by the agencies, which totalled ECU 39 010,9 million in 1996.

1.3. A clearance-of-accounts decision determines the amount of each Member State's expenditure that is recognised as being chargeable to the EAGGF-Guarantee Section. It also takes into account any reductions and suspensions of advances for the year in question (2), including reductions for late payments, as referred to in the second subparagraph of Article 4(3) of Regulation (EC) No 296/96 (3).

1.4. The clearance-of-accounts procedures were modified for the first time for the EAGGF financial year 1996 (4). Council Regulation (EC) No 1287/95 of 22 May 1995 (5) (amending Council Regulation (EEC) No 729/70) and Commission Regulation (EC) No 1663/95 of 7 July 1995 (6) introduced the following new rules (7):

(a) only expenditure incurred by accredited paying agencies was to be eligible for Community financing;

(b) the number of paying agencies within each Member State was to be kept to a minimum; where more than one paying agency was accredited, a coordinating body had to be established;

(c) the competent Member State authorities (8) were required to accredit their paying agencies by the beginning of the EAGGF budget year 1996; before accreditation was granted, the competent authority was to verify that the paying agency fulfilled the stipulated requirements (9);

(d) the administrative structure, internal controls and organisational principles of the paying agency must provide sufficient assurance as to its proper functioning; an internal audit department must ensure that its system of internal control works effectively, and a technical department has to verify the facts on which the payments to beneficiaries are based;

(e) a certifying body, operationally independent of the paying and coordinating agencies, had to be appointed; this certifying body must certify that the annual accounts of the paying agency are true, complete and accurate; it has to carry out its examinations in accordance with internationally accepted auditing standards. According to Article 3 of Commission Regulation (EC) No 1663/95, the certificate has to be based on an examination of procedures and of a sample of transactions. It is to cover compliance of payments with Community rules only as regards the capability of the paying agencies' administrative structures to ensure that such compliance has been verified before a payment is made;

(f) the clearance-of-accounts decision does not prevent the Commission from disallowing expenditure at a later date whenever it finds that expenditure has not been effected in accordance with Community rules. Such disallowances are in principle the subject of separate Commission decision to exclude expenditure which does not comply with Community rules (compliance decision). However, this kind of decision cannot apply to expenditure incurred more than 24 months prior to the Commission's written communication to Member States in this regard.

1.5. According to the Regulation, the annual EAGGF-Guarantee accounts and the certificates and reports of the certifying bodies were to be sent to the Commission by 10 February of the following year. The Commission had to communicate to the Member States the results of its verification of the information submitted by 31 March and to take its decision concerning the clearance of the accounts by 30 April. However, two decisions concerning the clearance of accounts for 1996 were adopted by the Commission, on 5 May 1997 (10) and on 30 July 1997 (11), owing to the fact that some paying agencies and certifying bodies could not meet the deadlines for the presentation of their certified accounts and that the Commission asked for some extra work to be done by certain certifying bodies. Such an evaluation of the work of certifying bodies is inevitable if reliance has to be put on the work of other auditors. No decision to disallow expenditure incurred in contravention of Community rules has yet been taken under the new system.

The Court's audit scope

1.6. The Court checked whether the new rules on the accreditation of paying agencies and the certification of accounts had been applied properly. Particular attention was paid to the respect of accredition criteria by the Member States, the functioning of the internal audit unit of the paying agencies as well as the certificates issued by the certifying bodies. Furthermore, the Court reviewed and evaluated the work done by the Commission services in the context of its two clearance of accounts decisions on 1996.

2. ACCREDITATION OF PAYING AGENCIES

Structural development of paying agencies

2.1. All paying agencies should have been accredited by 16 October 1995, but at that date only 50 out of 66 paying agencies had ben accredited, and most of them on a provisional basis. With regard to the 1996 payments, 80 agencies were finally accredited, even though some of them were responsible for very limited expenditure. One paying agency did not declare any expenditure at all in 1996 and two declared less than ECU 100 000 (12). Five paying agencies accounted for nearly half of the total expenditure (13) and 25 agencies accounted for more than 90 % of the expenditure (see Table 1).

2.2. One of the objectives of the new regulation was to limit the number of paying agencies. However, the number of accredited paying agencies stood at 90 in 1997. The Court considers that greater efforts should have been made to comply with this objective, in particular as concerns the accreditation of additional regional paying agencies in a number of Member States.

2.3. In some cases, the Ministries of Agriculture granted accreditation to units within the Ministry (Belgium, some German Länder, in most of the Spanish regions, Ireland, Austria and Finland). France (with the exception of the services déconcentrés) and the Netherlands maintained centralised paying agencies for the various agricultural sectors. Germany established paying agencies in each of the Länder and some Länder even established several paying agencies (14). In 1996 Spain accredited 17 additional regional paying agencies (15). The United Kingdom accredited separate paying agencies for England, Wales (2 agencies), Scotland and Northern Ireland. Some Member States including Belgium and Austria (see Table 1) regionalised only a small portion of the Guarantee expenditure. In nearly all Member States, although payments may be effected at central level, regional authorities play an important role in the control and administration of the various aid schemes.

2.4. Council Regulation (EC) No 1287/95 (amending Regulation (EEC) No 729/70) stipulates that the paying agency shall execute the payments to final beneficiaries. No delegation is provided for. Although five German Länder (Baden-Württemberg, Brandenburg, Hessen, Lower Saxony and Saxony) accredited their Ministries of Agriculture as paying agencies, most of the payments were made by other public bodies within the administration of the Länder. In Spain, the paying agency FEGA claimed for payments which had actually been made directly by a number of regional authorities that had not been accredited paying agencies in 1996. The French central paying agency, services déconcentrés du Trésor et du Ministère de l'agriculture, de la pêche et de l'alimentation, does not make any payments centrally since they are made at regional level by each of the Départements, which are not accredited.

2.5. The minutes of the Council of Ministers meeting of 26 January 1995, Annex II (16), allows paying agencies in the German Länder to delegate the execution of certain payments, notably for accompanying measures, to additional imprest-account managers (Vorschußverwalter). Commission Regulation (EEC) No 1663/95 does not provide for the delegation of the payment function to other bodies.

Significant accreditation criteria

2.6. The authorities responsible for granting accreditation are decided by the Member States. Neither the authority responsible nor the paying agency has to be approved by the Commission (17). Commission Regulation (EC) No 1663/95 stipulates that Article 4(4) of Council Regulation (EEC) No 729/70 shall be applied in case of non-respect of any criteria of significant relevance to the paying agency's operation. According to this Article responsible authorities may not grant or maintain accreditation when one or more of the conditions for accreditation are not, or are no longer, fulfilled, unless the paying agency makes adjustments within a time limit. Its duration, as well as the length of the provisional accreditation, has to be decided by the authority responsible in the light of the problems found. The Regulation does not specify a time limit.

2.7. These significant criteria are described in a Commission working document, intended to assist certifying bodies and accreditation authorities to evaluate the seriousness of deficiencies found, (18) as:

(a) lack of written procedures;

(b) inadequate or absence of segregation of duties;

(c) failure to implement pre-payment checks;

(d) lack of satisfactory payment and accountancy procedures;

(e) unsatisfactory accounting procedures, such as the lack of audit trail, weaknesses in debtors ledgers and accounting for intervention stocks;

(f) inadequate computer security;

(g) non-functioning of internal audit;

(h) lack of agreements governing the authorisation functions and/or technical services.

Weaknesses affecting accreditation

2.8. The act of accreditation does not require formal approval by the Commission. However, to check whether the applicable conditions were met in respect of 1996, the Commission visited 36 paying agencies, concentrating on the most important ones (more than 80 % of the expenditure was covered). The visits revealed weaknesses which should have prevented the granting of full accreditation. Typical weaknesses (19) reported concerned the accounting and EDP systems, which were either inadequate or insecure, as well as deficiencies in the internal procedures and controls. Table 2 indicates the weaknesses reported in this respect.

2.9. Criteria of significant relevance were not officially communicated to the Member States until September and October 1996, one year after the initial deadline for accreditation, when the EAGGF financial year had nearly ended and paying agencies had already been accredited. However, this does not excuse the authorities responsible in the Member States from not having carried out their responsibilities properly.

2.10. Even in 1997 many of the reported problems remained unsolved. Up to the end of 1997 only Italy had withdrawn the accreditation of one paying agency (20) which was only responsible for one particular measure. The responsibility for this measure has been transferred to the central paying agency AIMA in order to meet the organisational requirements.

2.11. The Court audit, carried out in 1997, confirmed the Commission's findings (see Table 3). Although paying agencies' systems had generally improved, there were still major shortcomings at nearly all of the agencies visited. Weak internal control, lack of EDP security and inadequate monitoring by the paying agencies of delegated services, as well as accounting problems, were identified. These ought to have led to the application, by the Member States concerned, of Article 4(4) of Regulation (EEC) No 729/70, i. e. the withdrawal of accreditation by the authorities concerned or immediate remedial action.

3. CERTIFICATION OF ACCOUNTS

The certifying bodies

3.1. The legal status of the certifying bodies in the Member States varies significantly. National audit institutions, other public bodies, internal audit units and also private external auditors were appointed for this purpose (see Table 1).

3.2. The independence of certifying auditors is a basic requirement of international audit standards. According to Regulation (EC) No 1663/95 the certifying body must be operationally independent of the paying agency. However, the internal audit unit of the Danish paying agency was appointed as the certifying body. This approach was also taken in the case of several German and Austrian paying agencies. Internal audit units are not by definition independent vis-à-vis the paying agencies to which they belong, particularly when they form part of its hierarchical structure. However, the Commission accepted this situation.

The Commission's guidelines

3.3. Commission Regulation (EC) No 1663/95 provides criteria of a very general nature as regards the certificate and the related audit report. The Commission only communicated detailed guidelines concerning these criteria for an experts group meeting in September 1996. However, the final version was distributed in all languages to the certifying bodies only in December 1996, at a time when part of the audit work had already been carried out (21). Accordingly, these guidelines - which are seen as very useful by the certifying bodies - had only a limited impact on the 1996 certificates, which provides a part of the explanation for the weaknesses found in many audit reports and the unsatisfactory certification work carried out in connection with the 1996 accounts which are described below.

Problems and delays in obtaining certified accounts

3.4. Regulation (EC) No 1663/95 stipulates that certified accounts have to be submitted to the Commission by 10 February 1997. The deadline was respected by most paying agencies, but in many cases the information was incomplete or the extent of the audit insufficient. The Commission was consequently not in a position to accept the certificates and/or the audit reports as the basis for the clearance-of-accounts decision. It therefore requested that supplementary work be carried out, which many paying agencies and their certifying bodies were unable to perform in time for the first clearance-of-accounts decision on 5 May 1997. The Commission fixed a later deadline, towards the end of June 1997. A second clearance-of-accounts decision was taken on 30 July 1997.

3.5. The internal German guideline for the certification audit in the German Länder allowed the sample to be limited to covering only certain categories of expenditure. Although this guideline had been sent to the Commission early in 1996, the Commission did not react at that time. The accounts and certificates were finally accepted by the Commission because additional audit work had been carried out at its request and finalised in time for the first clearance decision, with the exception of the accounts for Saxony and Rheinland-Pfalz, which were cleared under the second clearance decision.

3.6. In October 1997, the Court's audit of the accounts of three German Länder (Lower Saxony, Saxony-Anhalt and Schleswig-Holstein) revealed reconciliation problems in the area of co-financed measures. In addition, in the case of the Land of Saxony-Anhalt, an unqualified certificate was issued even though the certifying body had questioned the eligibily of an amount of DEM 13,8 million (approximately ECU 6,8 million) in its report.

3.7. The certified accounts for Greece were not delivered until the middle of April 1997, hence the corresponding expenditure could not be taken into account in the first clearance decision of 5 May. The accounts did not reflect the results of the certification audit, so the Commission corrected them and they were cleared under the second decision of 30 July 1997.

3.8. With regard to Spain, the certification reports revealed serious problems and the Commission asked for additional audit work to be carried out:

(a) in the case of the paying agency FEGA (declared expenditure ECU 4 196,4 million), substantive amounts were not certified because the certifying body had not been able to examine the procedures for payments of ESP 507 000 million (approximately ECU 3 165 million) made at regional level on behalf of the paying agency. Furthermore, no information was available concerning checks on export refunds and technical services;

(b) with regard to the paying agencies DGDR (declared expenditure ECU 43,6 million) and FROM (declared expenditure ECU 2,0 million), the certifying body could not express an opinion on expenditure incurred by the regions on the paying agencies' behalf;

(c) as for the region of Catalonia (declared expenditure ECU 71,2 million), the Commission requested that supplementary audit work be carried out and the sample size increased (22).

3.9. After additional confirmation had been provided by the Spanish authorities, all of the amounts were finally cleared under the second clearance decision.

3.10. To cope with the problems connected with expenditure claimed by FEGA, FROM and DGDR, but managed and/or paid at regional level, the Spanish authorities had appointed a private auditing firm to audit additional samples at regional level in June 1997. On the basis of its final report, dated 7 July 1997, all of the expenditure claimed was certified by the Spanish authorities on 11 July 1997 and 15 July 1997. However, the Court's audit of September 1997 revealed that there was no evidence of reconciliation between final payments by autonomous regions, the data in the accounts of FEGA and the amounts claimed from the Commission on the basis of funds transferred to regions.

3.11. In France the certifying body only became operational in October 1996, but even then was under-staffed. The first certificate issued was based solely on a review of reports concerning the systems and not samples of transactions, as required under Regulation (EC) No 1663/95. This situation was brought to the attention of the Commission by the French authorities. Complementary audit work based on the testing of transactions was therefore requested by the Commission, and the corresponding reports were made available in time for the second clearance decision.

3.12. In the case of three paying agencies in Italy (AIMA, DCCC and IGFOR) the Commission requested that additional audit work be carried out by the certifying bodies. The revised reports issued in June 1997 revealed two main problems:

(a) with regard to AIMA, the correctness of the alcohol stocks;

(b) in the case of DCCC, the revised audit report mentions that the sample size - determined on the basis of a confidence level of 95 % - amounted to 1 112 transactions. This initial sample size had been reduced (by the following percentages on the following grounds: 20 % for existing routines, 20 % for the staff's lengthy experience, 20 % for the staff's professionalism, 20 % because of existing internal controls and 12 % because of the EDP support) to 93. The Commission did not question these calculations and cleared the certified accounts;

3.13. Furthermore, Italy claimed expenditure on behalf of the Ministry of Agriculture, which was not an accredited paying agency. The Commission nevertheless accepted the claimed amount of ITL 1 895 331 293 (ECU 997 977,43) in its second decision concerning the clearance of the accounts.

3.14. The accounts presented by the Austrian paying agency AMA were cleared after additional audit work had been carried out. However, the Court's audit in October 1997 revealed weaknesses and problems with the reconciliation of the amounts claimed from the EAGGF-Guarantee and the bank accounts, owing to the various amounts that had been recovered by off-setting. These latter amounts need to be distinguished from recoveries made by off-setting in the national accounts.

3.15. The Commission also asked the certifying body in Portugal to carry out additional audit work because only 30 % of the sample transactions had been audited by the certifying body, owing to a lack of time. The amounts were finally cleared following supplementary audit work by the certifying body.

3.16. The paying agencies in the United Kingdom could not deliver reconciled annual accounts and, as a consequence, the certifying body could not issue any certificate on time. The corresponding documents were sent to the Commission in June 1997, followed by some supplementary information in July 1997. The necessary adjustments to the accounts, identified by the certifying body, had not been made by the paying agencies, hence the Commission corrected the latter's accounts in its clearance decision.

3.17. The audit by the Court in September 1997 (23) confirmed the persistent weaknesses in the accounting systems of the paying agencies mentioned by the certifying body :

(a) the failure to keep separate accounts in respect of EAGGF expenditure;

(b) the non-submission by each paying agency of periodic summaries of expenditure, including the monthly declaration to the Commission (24);

(c) the absence of debtors' ledgers and the lack of effective procedures to ensure that all payments for which transfers are not executed or cheques are not cashed and amounts recovered are promptly re-credited to the Commission. The Scottish paying agency did not reallocate the amounts for uncashed cheques to the Commission's accounts. Since there were no specific accounting records available, the amounts in question could not be quantified.

Problems in obtaining data on the amounts to be recovered

3.18. The guideline annexed to Commission Regulation (EC) No 1663/95 stipulates that the accounts are to record debtors. This is a criteria for accreditation. However, in 1996 most paying agencies were not able to identify the total of the amounts to be recovered, either because a debtors ledger did not exist or information was not held centrally.

3.19. The Commission then asked Member States to submit, with the April 1997 declaration of expenditure, a table (Table 105) indicating the amounts to be recovered. No information was submitted by Germany, Finland and Portugal. Incomplete information was submitted by the Netherlands (one paying agency was missing) and by the United Kingdom (the data for the five largest paying agencies were missing) (25). The Austrian paying agency AMA was able to quantify the amounts recovered, but not the amounts outstanding. The largest amount to be recovered was notified by the Italian paying agency DCCC: ITL 443 150 254 004 (about ECU 220 million), 98 % of which is accounted for by cases subject to legal proceedings.

4. THE CLEARANCE-OF-ACCOUNTS DECISIONS FOR 1996

The Commission's first clearance decision

4.1. In the first clearance-of-accounts decision (26) the Commission accepted all expenditure claimed by Belgium, Denmark, Ireland, Luxembourg, The Netherlands, Austria, Finland and Sweden, and most of the expenditure for Germany. In Italy's case, only the expenditure claimed by one small paying agency (Ente Risi) was accepted, whereas for Spain only the claims for the regions of Navarre and Basque Country were cleared. For the remaining paying agencies either additional audit work, requested by the Commission, was pending or the accounts were not sent in time.

4.2. The Commission's first decision concerning the integrality, exactitude and veracity of the accounts therefore covered only ECU 12 931,9 million, or some 33 % of the total expenditure of paying agencies for the financial year 1996.

The Commission's second clearance decision

4.3. With regard to the other paying agencies (representing 67 % of the total expenditure declared), the clearance-of-accounts decision was taken on 30 July 1997 (27). With the exception of certain adjustments and corrections indicated below, all certified accounts were cleared by the Commission. However, the Commission did not include in the amounts disallowed most of the qualifications in the certificates totalling a minimum of ECU 43,3 million. The analysis of the weaknesses detected by the certifying bodies in the paying agencies is shown in Table 4.

4.4. The two decisions do not prevent the Commission from disallowing expenditure at a later date on the basis of subsequent compliance audits. Such a disallowance may not involve expenditure effected prior to 24 months preceding the Commission's written communication of the results of its checks. To date, no clearance of accounts decision based on this compliance audit has been taken by the Commission.

Modification of the amounts declared

4.5. The sole amendments that were made to amounts claimed in the annual declarations and taken into account by the Commission were:

(a) adjustments to the annual declarations, in order to adapt the declared amounts to the amounts certified;

(b) financial corrections made by the Commission finance division responsible in respect of:

(i) late payments;

(ii) various items of ineligible expenditure in the monthly declarations.

4.6. Moreover, in some cases the financial corrections (28) were sometimes amended again by the Commission department responsible for the clearance of accounts (29). The absence of a clear-cut procedure in a system involving several Commission departments for successive corrections has led to confusion and a lack of transparency.

Adjustment to the annual declarations

4.7. Member States' accounts were adjusted by the Commission as follows:

(a) with regard to Greece, an amount of GRD 148 393 325 (approximately ECU 480 000) was deducted by the Commission, mainly because of discrepancies concerning public storage. This deduction by the Commission is far greater than the corrections suggested by the certifying body - GRD 21 202 319 (approximately ECU 68 000);

(b) In Spain's case, an amount of ESP 10 219 598 (approximately ECU 60 000) was added to take into account an amount declared as a correction to the annual declaration by the Spanish authorities;

(c) in the case of the Netherlands, NLG 411 675 (approximately ECU 190 000) were deducted to adjust the amounts declared to the amounts certified;

(d) as for Portugal, the Commission did not accept a claim for interest of PTE 294 990 678 (approximately ECU 1,5 million) under Regulation (EC) No 2975/95, as the legal basis was no longer valid;

(e) as regards the United Kingdom, negative adjustments of GBP 7 411 866,51 (approximately ECU 10,9 million) were made in order to reconcile the paying agencies's data with the certified accounts and to take into account various amounts previously considered ineligible by the Commission.

Financial corrections made by the finance division responsible

Corrections in respect of late payments

4.8. Commission Regulation (EC) No 296/96 stipulates that advances to Member States for expenditure made after the deadlines laid down in the corresponding regulations shall be reduced by between 10 % and 100 %, depending on the delays involved. There is a 4 % threshold up to which no reduction is made. The Commission can, however, apply smaller reductions in exceptional circumstances or for justified reasons. Checks on compliance with the deadlines are made three times a year (31 January, 30 April and 31 August) on the basis of the Member States' declarations. However, late payments in September and during the first half of October are to be included in the clearance-of-accounts decision, except where they are noted before the final decision concerning the financial year relating to advances is issued (30) and therefore booked only in the accounts of year 'n+1`. This procedure conflicts with the principle of budget annuality. The amount involved is ECU 4,5 million.

4.9. Table 5 shows the financial corrections for late payments for 1996 that were included in the second clearance-of-accounts decision.

4.10. With regard to Italy, in a letter dated 23 December 1996, the Commission made a commitment not to impose penalties in respect of late payments connected with all per-hectare subsidies, which totalled ITL 66 634 270 561 (approximately ECU 33,5 million), because the delays were due mainly to additional controls being carried out at the Commission's request (31).

4.11. In the case of the United Kingdom, the Commission applied a negative correction of GBP 177 683,03 (approximately ECU 0,3 million) for late payments. It should be noted that this calculation might be affected by the fact that the United Kingdom declared its expenditure on the basis of fundings and not on the actual payments which are made later.

Corrections for various items of ineligible expenditure

4.12. Some ECU 27,3 million was rejected as late as 14 July 1997, although a corresponding decision could have been taken earlier, and at least before the first clearance of accounts decision (32). Other amounts were rejected during 1996. Although the clearance decision should reflect these amounts, the Court's audit revealed that this was not always the case. Table 6 provides an overview of the financial corrections made in the context of the clearance-of-accounts decision.

4.13. With regard to Denmark, a negative correction of DKK 2 873 870,96 (aproximately ECU 380 000) established on 14 July 1997 in respect of public storage of bread-making wheat was not deducted under the clearance decision because the Danish accounts had already been cleared under the first decision of 5 May 1997. The Commission therefore omitted to make a correction under the second clearance decision.

4.14. For public storage in Italy, there were uncertainties as to the exact amounts to take into account in the clearance decision. Total expenditure may be around ECU 0,4 million lower than the amount finally reimbursed by the Commission. A compliance audit should be carried out to establish the correct amount (33).

4.15. The evaluation of the various calculations and amounts that were finally covered by the clearance-of-accounts decision revealed that the approach applied prior to the decision being taken was not always consistent. Furthermore, there was an apparent lack of documentation justifying the second clearance decision, partly due to extreme time pressure and the limited number of staff assigned to this task. Lastly, the amounts declared were cleared, despite the existence of qualified certificates or the weaknesses described in the audit reports.

4.16. Disallowances of expenditure ('financial corrections`) were based mainly on previous decisions taken by the finance division in the context of its daily management of EAGGF-Guarantee expenditure. Their negative and positive corrections for 1996 totalled ECU 77,3 million out of which, however, only ECU 55,1 million was taken into account in the clearance decision (see Table 6).

4.17. Table 7 details by paying agency and by amount the clearance-of-accounts decision of 5 May 1997 and that of 30 July 1997.

5. CONCLUSION

5.1. Both the Member States and the Commission made significant efforts to comply with the new Regulation. However, the Court's audit revealed the existence of major shortcomings in a number of paying agencies to which accreditation had been granted (see paragraph 2.11).

5.2. With regard to the compliance of EAGGF expenditure to Community rules, no decision to disallow expenditure incurred in contravention of community rules has yet been taken under the new system (paragraph 1.5). Such a decision cannot be made in respect of expenditure effected more than 24 months prior to the Commission's written communication (paragraph 1.4 (f)). At this moment, a final judgement of the financial consequences cannot be made.

5.3. The clearance-of-accounts decision of 5 May 1997 covered only 33 % of the expenditure, because some certified accounts were communicated late or were considered unsatisfactory (see paragraph 4.2). In some cases the certificate and accompanying report were unsatisfactory, which meant the Commission had to ask that additional audit work be carried out (see paragraphs 3.4 - 3.17). The regulation should be amended in order to stipulate the possibility of applying penalties when certificates or the certified accounts are presented late or are incomplete.

5.4. With regard to the second clearance decision of 30 July 1997, some of the information only arrived during the course of July, so that the Commission had little time to examine it in depth and to document it properly (see paragraphs 3.10, 3.16 and 4.14).

5.5. The evaluation of the various calculations and amounts that were finally included in the clearance-of- accounts decisions revealed that the approach applied to the decisions being taken was not always consistent (see paragraphs 4.10, 4.11 and 4.13).

5.6. It is important that weaknesses identified are systematically followed up under the compliance clearance procedure (see paragraphs 4.6 and 4.15).

5.7. The Commission communicated important documents to the Member States late. If the documents had been communicated earlier, a number of misunderstandings and problems connected with the certification of accounts could had been avoided (see paragraphs 2.9 and 3.3). Decisions on the basis of Regulation (EC) No 296/96 must be taken earlier, so that they may be accounted for in the clearance-of-accounts decision (see paragraph 4.12).

5.8. In a number of cases the certification is carried out by the paying agency's internal auditors who are by definition not independent, which they are required to be, both under the Regulation (see paragraph 3.2) and the internationally accepted auditing standards.

5.9. While the certified accounts submitted by the paying agencies were of varying quality, the Commission accepted all of the accounts presented by the Member States for 1996, despite the qualifications in the certificates. The Commission claims that the compliance of expenditure may be subject to subsequent clearance decisions, in accordance with Article 5 (2) (c) of Regulation (EEC) No 729/70. To date no decision of this type based on compliance audit has been taken by the Commission (see paragraph 4.3 - 4.4).

5.10. The aim of Council Regulation (EC) No 1287/95 (amending Council Regulation (EC) No 729/70) was to minimise the number of paying agencies. However, sometimes even very small units that could not possibly meet the requirements of the Regulation were set up. Greater effort should be made to reduce the number of paying agencies (see paragraphs 2.1 - 2.3).

5.11. As regards the corrections for late payments (Commission Regulation (EC) No 296/96), the system of having separate procedures for corrections in the advance payments up to August, on the one hand, and for September and October corrections under the clearance decision, on the other, breaches the rule of annuality (see paragraph 4.8).

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 14 and 15 October 1998.

For the Court of Auditors

Bernhard FRIEDMANN

President

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(1) OJ L 94, 28.4.1970, p. 13.

(2) See Commission Regulation (EC) No 896/97 of 20 June 1997 amending Commission Regulation (EC) No 1663/95 (OJ L 182, 21.5.1997, p. 8).

(3) OJ L 39, 17.2.1996, p. 5.

(4) 16.10.1995 to 15.10.1996.

(5) OJ L 125, 8.6.1995, p. 1.

(6) OJ L 158, 8.7.1995, p. 6.

(7) See also opinion of the Court of Auditors No 5/94 of 15 December 1994, OJ C 383, 31.12.1994.

(8) The authority responsible is the authority granting the accreditation, which is the Ministry of Agriculture in most Member States. In Germany and Spain the authorities responsible included the authorities of the Länder or autonomous regions.

(9) Provisional accreditation is possible in cases where problems arise in fulfilling accreditation criteria. The authority responsible has to fix a time limit for improvement in the light of the seriousness of the problem(s) detected.

(10) Commission Decision 97/316/EC of 5 May 1997 (OJ L 138, 29.5.1997, p. 24).

(11) Commission decision 97/609/EC of 30 July 1997 (OJ L 245, 9.9.1997, p. 25).

(12) Germany - Bavaria: StMLU; Austria - Vorarlberg: Landesamt; Netherlands: MVO.

(13) The largest agencies in terms of expenditure claimed during 1996 were AIMA (Italy), FEGA (Spain), ONIC (France), IBEA (United Kingdom) and GEDIDAGEP (Greece).

(14) The authorities of the German Länder are also the authorities responsible for granting accreditation to their paying agencies (Annex II to Council document 4427/95 on the Coreper meeting of 18.1.1995 concerning declarations).

(15) Three of the 17 new agencies had already started operating as paying agencies in 1996 (Catalonia and Basque Country Navarre), whereas the remainder started operating as of the budget year 1997.

(16) The Council, Agrifin 12, Fin 30, 4427/95 of 26 January 1995: Results of the Committee of Permanent Representative Work on 18 January 1995.

(17) The Court's suggestion was not taken into account (see Opinion No 5/94 of 15 December 1994, OJ C 383, 31.12.1994).

(18) Working Document VI/5168/96 (rev.1), ACC 83 c.

(19) Working Document VI/8950/96 of 19 November 1996: Report on the application of Regulation (EC) No 1663/95 in respect of the accreditation of paying agencies.

(20) The responsibilities of the paying agency IGFOR (Ministero del Tesoro) have been transferred to AIMA.

(21) According to the Commission's guidelines on the certificate concerning the paying agencies' 1996 expenditure, materiality should be in the range of 0,5 to 1 % with a confidence level of 95 %. The minimum materiality reporting level was fixed at ECU 50 000.

(22) The initial certificate was based on 40 samples. The second document, following supplementary audit work, was based on 1 661 samples.

(23) The Court's audit concerned the paying agencies SOAFD (Scotland), MAFF (England) and the International Board (United Kingdom).

(24) A statement has been issued to the effect that separate claims may only be submitted from the EAGGF budget year 1998 onwards.

(25) The total debtors figure for the paying agencies that submitted their records amounted to ECU 489 million.

(26) Commission Decision 97/316/EC of 5 May 1997 (OJ L 138, 29.5.1997, p. 24).

(27) Commission Decision 97/609/EC of 30 July 1997 (OJ L 245, 9.9.1997, p. 25).

(28) Division DGVI/G/2: Management of agricultural expenditure.

(29) Division DGVI/A1/3: Clearance of accounts.

(30) Article 4(3) of Commission Regulation (EC) No 296/95.

(31) No provision was made in the accounts for this Commission commitment (observed by the Court in the context of the DAS 1996).

(32) The amounts in question concern corrections for Denmark (-DKK 2 873 870,96, approximately ECU 0,4 million), France (- FRF 2 540 376,36, approximately ECU 0,4 million), Greece (- GRD 1 577 481 460, approximately ECU 5,1 million) and Italy (- ITL 41 350 131 560, approximately ECU 21,4 million), totalling approximately - ECU 27,3 million.

(33) If there were doubts concerning the necessary corrections that were already partly or fully anticipated in respect of the annual claim, no accounts clearance decision should have been taken until additional clarification had been obtained. Alternatively, the final judgement could have been made in the context of the compliance audit.

COMMISSION'S REPLIES

GENERAL COMMENTS

The Court's report concerns the clearance of accounts in the first year of the reform of the clearance of accounts procedure (1).

Inevitably, difficulties were experienced in the first year of a major reform. Certain paying agencies took a long time to make the changes required to meet the accreditation criteria listed in the Annex to Regulation (EC) No 1663/95. A very small number failed to prepare their accounts in time for the deadlines. Certain certifying bodies failed to complete their audits by the deadlines or performed audit work which was insufficient in volume or scope.

During most of this first year, the Commission monitored the Member States' accreditation procedures particularly closely. They ensured that the criteria were being uniformly applied, and that paying agencies were putting the requisite, often very substantial, improvements in place within reasonable time limits, as laid down by Article 4(4) of Regulation No 729/70.

From the end of the first year, the Commission concentrated more on monitoring the work of the certification bodies. They ensured that all worked to high professional standards, that a uniform level of audit work was being performed, and that the financial effect of the auditors' findings was being evaluated. They insisted that the required audit work be completed before agreeing to propose that the accounts concerned be cleared, with the result that the accounts of many paying agencies could not be cleared until three months after the Regulation time limit.

The very considerable efforts made by all concerned in the Member States, and by the Commission, bore fruit in 1997, when virtually all paying agencies were fully accredited, all accounts and reports were received in good time and all accounts were cleared within the time limit. In 1998, the Commission continues to give the highest priority to ensuring the continued success of the reform, in the expectation that the improved controls will result in a high level of compliance with Community rules, and in as low a rate of irregularity as can be expected in the complex environment of the CAP.

EXECUTIVE SUMMARY

The reformed procedure requires each paying agency to assume full responsibility for the payments it executes and to ensure that claims are properly checked before authorisation. If, for reasons peculiar to the Member State concerned, a paying agency cannot discharge this responsibility in respect of any category of expenditure, then the department which can discharge it must be designated as paying agency and must satisfy the accreditation criteria. As a result of the reform, the control structures in each Member State are less fragmented and far more transparent, and the responsibilities of each department concerned are now clearly defined. This does not mean that there is no further scope for reduction in the number of paying agencies, and the Commission will encourage Member States to keep to the lowest possible number.

The Commission insists that in their subsequent year's audit report the certification bodies follow up the corrective measures required of each paying agency and, if a risk of loss to the Fund persists, it will take an appropriate decision under the compliance procedure. In the audits of the 1997 accounts, many of the shortcomings were found to have been remedied.

The Member States showed a much higher level of compliance with the legal requirements in the procedure for clearing the 1997 financial year, and the accounts of virtually all the paying agencies were cleared within the time limits. The guidelines to which the Court refers were discussed with representatives of each Member State in September 1996, in reasonably good time to assist the auditors. The Commission's close monitoring of the accreditation procedures had until then prevented attention being devoted to the certification procedure.

Shortcomings detected in relation to compliance with the accreditation criteria do not, in themselves, prevent the Commission from clearing the paying agencies' accounts. Deadlines must be set by which each paying agency concerned must take corrective action, any irregularities occasioned by the failures must be recovered and any financial consequences will be drawn in a later compliance decision under Article 5(2)(c) of Regulation (EEC) No 729/70. The Member States continuously submit new information which leads to adjustments in the amounts of correction applied at each stage of the various procedures.

The Commission closely monitors the effectiveness of the corrective measures required of each paying agency and recovery of any undue payments occasioned by the shortcomings. If a risk of loss to the Fund persists, it will take an appropriate decision under the compliance procedure. Many of the shortcomings have been found to have been remedied.

2. ACCREDITATION OF PAYING AGENCIES

Structural development of paying agencies

2.1 to 2.3. The Commission regrets that not all paying agencies had been accredited by the Member States by 16 October 1995, the day on which the reform took effect. To refuse payments to paying agencies that had not met this deadline would, however, have been disproportionate to the desired effect. The Commission considered that it was more important that the review of procedures prior to accreditation was properly carried out, even if it meant that formal accreditation was granted later than strictly required.

Before the reform, many paying agencies merely centralised accounting information received from departments or bodies over which they had no powers of control or enquiry (those in Greece, Spain, Italy and the UK in particular). The Court itself reported on this unsatisfactory situation (AR 1990). The reformed procedure requires each paying agency to assume full responsibility for the payments it executes and to ensure that claims are properly checked before authorisation. If for reasons peculiar to the Member State concerned, a paying agency cannot discharge this responsibility in respect of any category of expenditure, then a department which can discharge it must be designated as paying agency and must satisfy the accreditation criteria. In Germany and Spain, for example, the constitution gives the regional governments autonomous powers which must be respected by national government departments. The paying agencies established at national level cannot assume responsibility for claims administered by the regional authorities, so these regions are required to designate departments which can take on this responsibility. They must ensure that the departments concerned comply with the accreditation criteria and that their annual accounts are certified. In order to meet the objective of keeping the number of paying agencies down to a strict minimum, each Member State is, however, encouraged to designate only one paying agency in each independent region.

As a result of the reform, the control structures in each Member State are now less fragmented and far more transparent and the responsibilities of each department concerned are now clearly defined. This does not mean that there is no further scope for reduction in the number of paying agencies, and the Commission will encourage Member States to keep to the lowest possible number.

2.4. Each Member State has developed different structures for the implementation and control of EAGGF Guarantee schemes. As far as possible, the Commission has attempted to accommodate these different structures, provided the objectives laid down in the accreditation guidelines are met.

2.5. The Commission accepted the accreditation of the paying agencies which allow payments by imprest-account holders only on condition that the amounts concerned are limited, and that the central department could issue binding instructions, would keep detailed central accounts and was in a position to supervise implementation both through its technical departments and by internal audit.

Significant accreditation criteria and weaknesses affecting accreditation

2.6 to 2.11. The Commission will give detailed consideration to the Court's findings as presented in its Table 3. As some of the comments on that table indicate, significant improvements have been made throughout 1997 and 1998. The Commission stresses that the clearance of accounts for 1996 is based on the certification of accounts. Failure to meet all the accreditation criteria does not, in itself, prevent a clearance certificate being issued.

The Commission found that during 1996 there were still major shortcomings at a number of paying agencies. In each case where such shortcomings were established, the Commission sent letters to the Member States requesting them, where necessary, to apply Article 4(4) of Regulation (EEC) No 729/70 and to inform the Commission of the remedial measures decided on and the deadlines fixed for each of them. Some of the action required, such as concluding protocols with other bodies in the case of delegation of duties, the recruitment and training of additional internal audit staff and the development of new accounting systems, cannot be completed in a very short space of time. In many such cases, only provisional accreditation was granted, and the Commission has continued to monitor the paying agencies to ensure that progress is being made and deadlines are respected. A much improved situation prevailed when the 1997 accounts were cleared.

3. CERTIFICATION OF ACCOUNTS

The certifying bodies

3.2. The Commission agrees that in principle the certifying body should be fully independent of the paying agency. However, for small paying agencies, the Commission accepted that the administrative burden should be kept to the minimum, and did not insist that separate departments be created to undertake internal audits and the certification of accounts. In all such cases, the Commission required additional assurances from the Member States as to the independence of the departments certifying the accounts. So far, there has been no evidence of certifying bodies, in their reports, giving a biased view of the situation as regards the accounts and the proper functioning of such paying agencies. The Commission has followed the work of these certifying bodies closely and, if there is evidence of certifying bodies behaving improperly (in not disclosing problems in their reports to the Commission, for example), then a change of auditors will be required. To date, and despite a large number of on-the-spot inspections, no evidence of this sort has emerged.

The Commission's guidelines

3.3. Regulation (EC) No 1663/95, together with its Annex, provides the framework for the auditing of EAGGF accounts. The many missions carried out by the Commission in respect of the accreditation procedure were used as an occasion to discuss audit issues with the certifying bodies appointed by the Member States.

On the basis of the experience gained from the accreditation missions, the Commission found it useful to supply the certifying bodies with further information as to what was expected of them. This was particularly relevant for smaller and newer paying agencies which had not yet been audited by the Commission. An expert group meeting for the certifying bodies was therefore held on 9 September 1996, before most of the audit work for the certification of the accounts was done. At the meeting the detailed guidelines to which the Court is referring were made available to, and discussed with, the representatives of the certifying bodies. The Commission is constantly evaluating how the certification process can be improved.

Problems and delays in obtaining certified accounts

3.4. The Commission insisted on receiving reliable accounts and evidence of satisfactory audit work before clearing the accounts, even though this meant delaying a decision on a number of paying agencies. The deadlines for clearance of the 1997 accounts were met, and only one decision was taken (on 29 April 1998) to clear all the paying agencies' accounts materially.

3.5 to 3.17. The Commission stresses that the accounts of all paying agencies were cleared only after sufficient evidence was obtained, where necessary by means of further audit missions, and that these accounts were materially true, complete and accurate. As regards the comments on Italy at point 3.13, the Commission, after carrying out its checks, included the amount concerned in the negative expenditure declared by the Ministry of Agriculture and considers this a reasonable solution. In 1997 this expenditure was no longer declared by the Ministry but by a properly registered paying agency.

3.18 to 3.19. The Member States are not yet legally obliged to supply the table referred to by the Court at point 3.19. After a trial period, the Commission intends to draw up legislation to make the reporting of debts compulsory, so that it has figures for the sums owing to the Community.

The situation regarding the recording and recovery of debts remains unsatisfactory in many paying agencies. The Commission has now issued a further guideline on this subject, and has begun internal discussions on the possibility of applying corrections in respect of long-outstanding cases. Audit missions during 1998 are concentrating further on this matter.

4. THE DECISIONS CONCERNING CLEARANCE OF ACCOUNTS FOR 1996

The Commission's first clearance decision

4.1 to 4.2. The delays experienced in respect of 1996 did not occur in the clearance of 1997, on which, in the case of virtually all paying agencies, the decisions were taken within the statutory time limit.

The Commission's second clearance decision

4.3. Only expenditure that has clearly been committed in breach of the rules can be excluded from clearance under the budgetary discipline provisions. The qualifications referred to by the Court have been or will be followed up by the Commission and, where necessary, financial corrections will be proposed under the compliance procedure provided for in Article 5(2)(c) of Regulation (EEC) No 729/70.

4.4. The 24-month time limit for applying corrections in cases of non-compliance is reckoned as from the date of notification of the Commission's findings. In respect of all relevant cases, letters have been sent to the Member States. These are being followed by bilateral discussions and then, if necessary, by a report from the conciliation body. This procedure, which is designed to ensure that corrections proposed by the Commission are fair and equitable and to allow the Member States a proper right of reply, takes a considerable amount of time.

Modification of the amounts declared

4.5 to 4.6. The Commission accepts that there were some difficulties due to this being the first year of application, where the new procedures overlapped with the old. The situation has been and continues to be improved. Furthermore, the Member States continuously submit new information which leads to adjustments in the amounts of correction applied at each stage in the various procedures.

Adjustment to the annual declaration

4.7(a) Following a control mission, the Commission was unhappy with some of the evidence presented. A further reduction was therefore made to the accounts.

4.7(b) The amount added to the Spanish declaration was part of the amount certified by the certifying body and the Commission was therefore able to accept it.

4.7(e) The Commission very carefully examined the many adjustments made to the accounts of the paying agencies in the United Kingdom, and refused the expenditure wherever the explanation given was inadequate.

Financial corrections made by the responsible finance division

4.8. The legal requirements laid down in the rules for budgetary discipline mean that reductions following late payments in September and during the first half of October cannot be decided on in time to be booked in the same financial year.

4.11. In recognition of accounting realities, the accreditation criteria allow paying agencies to book expenditure up to five days before it is executed. If these five days are at the end of a month, then this practice may have the effect of changing the reference month for the calculation of corrections in respect of late payments. The United Kingdom should not exceed this limit.

4.12 to 4.13. The corrections effected pursuant to Article 7(6) of Regulation (EC) No 296/96 relate to the public storage accounts sent to the Commission as 13th declarations on 20 December pursuant to Article 5(2) of the same Regulation and drawn up for the whole financial year.

Article 7 of Regulation (EC) No 1663/95 requires corrections to the Member States' accounts such as those mentioned by the Court to be notified to them by 31 March of the following year and charged by the Commission in a decision before 30 April. The notifications regarding 1996 expenditure were late, but the deadlines were met in the 1997 clearance procedure.

Such corrections may relate both to the accounting aspects and to questions of conformity detected in the course of the year or on inspection of the 13th declaration and incorporated by the Member States or not incorporated in the account clearance declaration.

Where a Member State's clearance declaration does not incorporate these corrections, they are confirmed during the accounts clearance if this takes place after the decision taken under Regulation (EC) No 296/96. This was done with Greece, France and Portugal.

If, on the other hand, a Member State has not incorporated the corrections but the accounts clearance decision has already been taken, the financial effects are in any case shown in the accounts for the same year but against the budgetary heading concerned rather than the heading for clearance. This happened with Denmark (see point 4.13). The deduction of advances was made in August 1997, and will be confirmed under the compliance conformity clearance procedure.

4.14. The Commission will follow up the case in the context of the compliance audits.

4.15. All qualifications in the accounts were carefully examined in the short time available (see reply to point 4.3) and, where there was clear evidence of non-compliance, corrections were or will be made. Where the qualifications were either based on an incorrect evaluation by certifying bodies, or where more evidence was needed, no correction was made in this clearance decision, but this is without prejudice to subsequent compliance decisions.

4.16. The Member States continuously present new information which leads to adjustments in the amounts of correction applied at each stage in the various procedures. The Member States mainly concerned by the reduction in the corrections made in the monthly advances and the annual decision were Denmark and Italy. A reply regarding Denmark is given in point 4.13. The Italian case is explained in the Court's text in point 4.10 (a refund of ECU 33,5 million) and by the many adjustments required to Italy's declarations of public storage expenditure.

5. CONCLUSION

5.1. All major shortcomings identified in 1996 have been thoroughly analysed in respect of undue payments, and their follow-up has been closely monitored. Significant improvements were noted when clearing the 1997 accounts.

5.2. As explained in the reply to 4.4, the procedure for applying conformity corrections takes the time necessary to allow for the exercise of the Member States' rights of reply and appeal to the conciliation body. It is expected that the total corrections for 1996 will be of the same order of magnitude as in previous years. If the clearance reform is successful, the level of corrections should fall in later years, as Member States improve their level of compliance with Community rules.

5.3 to 5.4. Two clearance decisions had to be taken for 1996. However, in view of the radical reform of the rules for the clearance procedure, of the fact that certification audits had to be conducted for the first time, and of the findings resulting from the analysis of both certification reports and accounts, it was necessary, in the case of a number of paying agencies, to require that supplementary audit work be carried out. Since a proposal for clearance of the accounts can only be made on the basis of satisfactory evidence that they are accurate, all information received needed time to be examined carefully before conclusions were drawn.

The clearance decision for the 1997 financial year was taken on 29 April 1998 and covered expenditure by virtually all the paying agencies. A regulation allowing the application of penalties where clearance documents are late or incomplete is currently being prepared.

5.5. The Commission considers that each case was dealt with correctly in accordance with the information available at the time of each decision, and refers to the replies to the relevant paragraphs.

5.6. The Commission insists that in their subsequent year's audit report the certification bodies follow up the corrective measures required of each paying agency, and, if a risk of loss to the Fund persists, it will take an appropriate decision under the compliance procedure.

5.7. The documents to which the Court refers were guidelines for the certification bodies and accreditation authorities which were discussed with representatives of each in September 1996, in reasonably good time to assist the auditors. The Commission's close monitoring of the accreditation procedures had until then prevented attention being devoted to the certification procedure.

5.8. The Commission accepts that the same body undertakes internal audits and certifies paying agencies' accounts only on the strict condition that the certification audits are carried out in a professional and independent manner, that such audits have the required scope, and that the reporting is complete. The Commission has monitored the work of these certifying bodies closely and, if there is evidence of certifying bodies behaving improperly (in not disclosing problems in their reports to the Commission, for example), then a change of auditors will be required. To date, and despite a large number of on-the-spot inspections, no evidence of this sort has emerged.

5.9. Where necessary, financial corrections will be proposed under the conformity procedure provided for in Article 5(2)(c) of Regulation (EEC) No 729/70. The 24-month time limit for applying corrections in cases of non-conformity is reckoned from the date of notification of the Commission's findings. For all relevant cases letters have been sent to the Member States. These are followed by bilateral discussions and then, if necessary, by a report from the conciliation body. This procedure, which is designed to ensure that corrections proposed by the Commission are fair and equitable and to allow the Member States a proper right of reply, takes a considerable amount of time.

5.10. The reformed procedure requires each paying agency to assume full responsibility for the payments it executes, and to ensure that claims are properly checked before authorisation. If for reasons peculiar to the Member State concerned, a paying agency cannot discharge this responsibility in respect of any category of expenditure, then the department which can discharge it must be designated as paying agency and must satisfy the accreditation criteria. As a result of the reform, the control structures in each Member State are less fragmented and far more transparent, and the responsibilities of each department concerned are now clearly defined. This does not mean that there is no further scope for reduction in the number of paying agencies, and the Commission will encourage Member States to keep to the lowest possible number.

5.11. The legal requirements laid down in the rules for budgetary discipline mean that reductions following late payments in September and during the first half of October cannot be decided on in time to be booked in the same financial year.

(1) Regulation (EC) No 1287/95 of 22 May 1995 (OJ L 125, 8.6.1995) amending Council Regulation (EEC) No 729/70, and Commission Regulation (EC) No 1663/95 of 7 July 1995 (OJ L 158, 8.7.1995).