European Court of Auditors

12, rue Alcide De Gasperi, Luxembourg, LUXEMBOURG

1.1.

Pursuant to Article 287 of the Treaty on the Functioning of the European Union, the Court of Auditors provides the European Parliament and the Council with a Statement of Assurance concerning the reliability of the accounts and the legality and regularity of the underlying transactions (‘the DAS’). The Treaty also authorises the Court to supplement this statement with specific assessments of each major area of EU activity.

1.2.

The aim of the work on the reliability of the accounts of the European Union is to obtain sufficient appropriate evidence to conclude on the extent to which revenue, expenditure, assets and liabilities have been properly registered and that the annual accounts faithfully reflect the financial position as of 31 December 2009, and the results of its operations and cash flows for the year then ended (see paragraphs 1.6 to 1.20).

1.3.

The aim of the Court’s audit work on the regularity of the transactions underlying the 2009 accounts is to gather sufficient appropriate evidence, of a direct or indirect nature, to give an opinion on whether they are in accordance with the applicable regulations or contractual provisions, and have been correctly calculated (see paragraphs 1.21 to 1.25 for an overview of the results and chapters 2 to 9 for more details).

1.4.

The Court analysed the reliability of Commission management representations, namely the Declarations of Directors-General and the Annual Activity Reports of the Commission’s services and the related Synthesis Report in order to assess the extent to which they provide a fair assessment of the quality of financial management, and in particular the extent to which reservations are complete and sufficient (see paragraphs 1.27 and 1.28 and ‘Reliability of Commission management representations’ in chapters 2 to 9).

1.5.

In addition, the Court examined the arrangements for making and reporting on recoveries and financial corrections (see paragraphs 1.32 to 1.50).

1.6.

The Court audited the annual accounts for the 2009 financial year, drawn up by the Commission’s Accounting Officer and approved by the Commission in compliance with Article 129 of the Financial Regulation of 25 June 2002 (8) and received by the Court on 23 July 2010. The accounts comprise the ‘consolidated financial statements’ — covering, in particular, the balance sheet setting out the assets and liabilities at the end of the year as well as the economic outturn account — and the ‘consolidated reports on the implementation of the budget’ — covering the revenue and expenditure for the year.

1.7.

The Court’s audit of the consolidated financial statements found them to be free from material misstatements. However, the Court draws attention to the following matters which were also reported in 2008 and previous years:

1.7.

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missing or incomplete representations by Accounting Officers for certain organisations whose accounts are consolidated with those of the Commission (see paragraph 1.8);

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the local financial management systems identified by the Commission’s Accounting Officer (see paragraphs 1.9 and 1.10);

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the treatment of pre-financing and accounts payable during the year and in the cut-off procedure (see paragraphs 1.11 to 1.13);

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the disclosures concerning recoveries following irregularities (see paragraphs 1.14 to 1.19).

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1.8.

The Commission’s Accounting Officer highlighted in the management representation letter concerning the consolidated accounts that the Accounting Officers of three consolidated entities had omitted or modified representations. In particular, the required information on the validation of the accounting and local systems was not provided (9).

1.8.

1.9.

Due to continuing problems in the management of suspense accounts and asset accounting procedures, the Commission’s Accounting Officer was still not able to validate the local systems of two Directorates-General (11).

1.9.

1.10.

Most of the Accounting Officer’s recommendations from previous years have been implemented. The remaining issues did not have a material impact on the reliability of the accounts in 2009, but their nature and significance are such that they should continue to receive the attention of the Commission, notably certain aspects of cut-off procedures, clearing and recording of pre-financings, timeliness of the recording of transactions and data consistency between local systems and ABAC.

1.11.

The Court audited representative samples of pre-financing representing 48 827 million euro after cut-off and of invoices/cost claims about 15 260 million euro. It identified accounting errors with an immaterial financial impact overall but a high frequency. This underlines the need for further improvement in the accuracy of the basic accounting data at the level of certain Directorates-General. The most common types of errors are:

1.11.

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missing or duplicate entries;

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booking of incorrect amounts;

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transactions booked to the wrong account.

1.12.

As regards accounting for amounts pre-financed, the Court also identified the following problems:

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The clearing of outstanding pre-financings is not always carried out correctly. A number of clearings were either not carried out at all or for incorrect amounts. This resulted in an immaterial overstatement in the pre-financing balance at the end of the year.

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Some Directorates-General in the Research family do not process the available information on progress made and related costs incurred and do not clear the corresponding pre-financing according to this progress, but use approximations when determining the cut-off (e.g. pro rata temporis).

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1.13.

As regards invoices/cost claims, some Directorates-General did not respect the requirement to register the invoices and cost statements within the five working days (12) after their reception.

1.13.

1.14.

The Court’s audit shows that the Commission’s reporting of figures on financial corrections and recoveries varies largely between its different services (see also paragraphs 1.37 to 1.50).

1.14.

1.15.

Some services present figures for financial corrections in progress only when a final position letter is issued, while others base their calculation on statistical estimates extrapolating past experience even including corrections for amounts for which the clearance procedure has not yet started.

1.15.

The reliability of this estimate is assessed on the basis of the comparison with the amounts of financial corrections in progress for the earlier years where this information is available.

1.16.

The information on the financial correction activities (withdrawals and recoveries) provided by the Member States, in the area of Cohesion and included in note 6 to the financial statements is not yet complete and reliable (see also paragraph 4.31).

1.16.

The Commission also refers to its reply to paragraph 4.31.

1.17.

Based on the examination of the certifying bodies’ work and the Commission’s analysis referring to this, the Court reiterates its doubts as regards the reliability of the receivables from Member States in the area of agriculture (EAGF debtors’ accounts) (13) (see also paragraph 3.54).

1.17.

1.18.

Although the explanatory notes to the annual accounts contain information that some payments are likely to be corrected at a later date by the Commission’s services or the Member States, the amounts and areas of expenditure which may be subject to further verification and clearance of accounts procedures are still not identified in the notes (14).

1.18.

In agriculture, a financial clearance decision is taken around six months after the end of the financial year in question, through which the Commission establishes the amount of expenditure recognised as chargeable to the EU budget for that year. This role of the financial clearance decision is not called into question by the fact that subsequently financial corrections may be imposed on Member States through conformity decisions. The amount of expenditure which is likely to be excluded from EU financing by such future conformity decisions is disclosed in a note to the financial statements.

1.19.

Given the complexity of recovery and financial correction mechanisms, the disparate nature of the elements treated therein and the need for a transparent and coherent presentation of the information (see also 1.37 to 1.50), the Commission should refine its financial reporting guidelines on revenue recognition and on contingent assets in order to lay down the accounting and disclosure requirements.

1.19.

There is no general guidance in the international standards on making these specific, non-accounting, disclosures. Nonetheless, taking into account the observations of the Court, the Commission has improved the presentation of this information.

1.20.

For the Galileo programme the ownership of all assets created, developed or acquired was legally transferred to the Union in July 2008, based on a joint regulation of the European Parliament and the Council (15). However, the transfer agreements made are not yet fully implemented. All expenditure incurred so far (approximately 2 000 million euro) is treated as research expenses. There is no impact on the balance sheet for 2009, but the Commission should continue its efforts to ensure that all necessary information is available at the time when the transfer takes place in order to safeguard assets effectively.

1.20.

1.21.

The Court provides specific assessments within chapter 2 on Revenue and chapters 3 to 9 on groups of Activity Based Budgeting (ABB) policy areas (see Table 1.1 ). Each specific assessment provides an introduction, findings and conclusions on the regularity of transactions, the effectiveness of systems as well as reliability of Commission management representations, and a follow-up of previous observations.

1.22.

For Revenue (16) (117 285 million euro), commitments for all policy groups and payments for the policy group Administrative and other expenditure (9 129 million euro), the Court estimates that the errors have a financial impact of less than 2 % of the total amounts (see Table 1.2 ) and concludes that the supervisory and control systems are effective (see also paragraphs 2.33 to 2.38 and 9.28 to 9.29).

1.23.

In the policy groups Agriculture and natural resources (56 318 million euro), Research, energy and transport (7 966 million euro), External aid, development and enlargement (6 596 million euro) and Education and Citizenship (2 153 million euro (17)) the most likely error rate estimated by the Court is between 2 % and 5 % of payments made, but for the policy group Cohesion (23 081 million euro reimbursed certified expenditure), the most likely error rate is above 5 % (see paragraphs 3.70, 4.34, 5.45, 6.51 and 7.18 and Table 1.2 ). For these policy groups (18), the Court concludes that the supervisory and control systems are partially effective (see paragraphs 3.71 to 3.72, 4.36, 5.46 to 5.48, 6.52 and 7.19).

1.23.

Moreover, the conformity clearance procedures ensure that the risk to the EU budget is adequately covered. For the policy group Education and Citizenship, the Commission notes that the error rate for closures slightly exceeds 2 %.

In order to avoid the accumulation of pre-financing in its balance sheet, the Commission has proposed in May 2010 for the revision of the Financial Regulation, to ensure that advances and interim payments are cleared in a more timely manner.

For the policy group Research, energy and transport, the Commission welcomes the positive trend in the reduction of errors noted by the Court. This result is in line with the Commission's own findings.

For the policy group External aid, development and enlargement, the Commission welcomes the increase in the ‘frequency’ of transactions which the Court judges to be entirely ‘regular’ (83 %) in comparison with figures for 2008 and 2007.

In the Cohesion area, a significant reduction in the error rate has been noted compared to previous years. The frequency of errors has also decreased in the last three years, from 54 % in the Court's annual report for 2007 to 36 % this year, as noted in Annex 4.1 of the Court's report. (see also replies to paragraphs 1.26 and 4.34).

1.24.

For the policy group Economic and financial affairs (732 million euro) the Court estimates that the most likely error rate is less than 2 % of the total payments (see paragraph 8.30 and Table 1.2 ) and concludes that the supervisory and control systems are partially effective (see paragraph 8.31).

1.25.

The Court estimates that overall payments are materially affected by error (the most likely error rate estimated by the Court lies between 2 % and 5 %) and concludes that supervisory and control systems for payments are, in general, partially effective.

1.25.

1.26.

The Court’s audit results show, compared to 2008, an increase in its estimate of the most likely error concerning the payments for the policy group ‘Agriculture and natural resources’ (19) and a significant decrease in its estimate of the most likely error concerning the payments for policy group ‘Cohesion’ (20). Taken together, this confirms a continuing reduction in the most likely error rate, as estimated by the Court, for payments as a whole over recent years.

1.26.

For Agriculture and natural resources, the Commission’s view is that the error rate continues to oscillate around 2 %. For Cohesion, the reduction of the lower error limit from 11 % to 3 % seems to confirm the effectiveness of the reinforced control provisions in the 2007-2013 regulatory framework, as well as the first impact of the Commission’s 2008 action plan to strengthen its supervisory role, including suspension and correction procedures. Suspensions may imply a trade-off with full budget implementation.

The Commission will continue its efforts to ensure that the error rate is further reduced.

1.27.

All the Directors-General stated in their Annual Activity Reports that they had obtained reasonable assurance that the resources allocated to them had been used for the specified purposes and that the internal controls which they had introduced ensured the regularity of transactions. However, of the main Directorates-General or services who issued a declaration in 2009, 13 contain one or more reservations, the majority of which refer to weaknesses concerning the regularity of the underlying transactions (21).

1.28.

The Court found that the Director-Generals’ declarations and the Annual Activity Reports gave a fair assessment of financial management in relation to the regularity of transactions for ‘Revenue’ and for policy groups ‘Cohesion’, ‘Research, energy and transport’, ‘Education and citizenship’, ‘Economic and financial affairs’ and ‘Administrative and other expenditure’ (see paragraphs 2.32, 4.33, 5.44, 7.17, 8.29 and 9.11). For the policy group ‘External aid, development and enlargement’, Directorates-General for Humanitarian aid, for Enlargement and for External Relations gave a fair assessment (see paragraph 6.49), whereas the EuropeAid Cooperation Office only gave a partially fair assessment of financial management in relation to the regularity of transactions (see paragraph 6.50). For the policy group ‘Agriculture and natural resources’ the Court concludes that the Director-General’s declarations and Annual Activity Report only gives a partially fair assessment of financial management in relation to the regularity of transactions (see paragraphs 3.66 to 3.69).

1.28.

While the Court expresses an annual audit opinion on the legality and regularity of the underlying transactions, the opinion of the Directors-General focuses on whether funds have been used for their intended purpose, taking account of the multiannual nature of controls, and their effectiveness in detecting and correcting errors. Directors-General express a management opinion based on information which includes the Commission’s own audit work, reports and observations of the Court of Auditors and, where relevant, the results of Member States’ controls.

See also Commission replies in the sectoral chapters.

1.29.

By adopting the Synthesis Report the Commission assumes its political responsibility (22) for the operational implementation of the EU budget by its senior management (23). The report is the first to be adopted during the mandate of the current Commission. The Commission considers that for 2009 its efforts to enhance control mechanisms in order to ensure legality and regularity with a view to ‘obtaining an unqualified DAS’, continued with positive results.

1.30.

The Commission acknowledges that there are still areas which require improvement and proposes actions to address these concerns, such as:

1.31.

The Court previously identified other issues which remain unresolved:

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in several areas the scope or scale of reservations should be greater (see paragraphs 3.67 to 3.68, 6.50 and Annexes 3.3 and 6.3 ) (24);

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The Commission has expressed its satisfaction that the action plans designed by authorised officers by delegation (AODs) are adequate to address weaknesses and mitigate the risks identified.

As regards Agriculture, the Commission considers that the reservations included in the 2009 annual activity report of the Director-General for Agriculture and rural development regarding rural development measures under Axis2 and the IACS in Bulgaria and Romania are exhaustive and that their potential impact has been adequately reflected in points 3.2.1 and 3.2.2 of that report. As regards Greece, the reservation in previous years was justified by the high reputational risk for the Commission which resulted from the insufficient implementation of the IACS in Greece and not by the financial risk for the EU budget resulting from the deficiencies, which has always been covered by the financial corrections imposed on Greece through the conformity clearance procedures. As Greece had completed its action plan to remedy the deficiencies by the end of 2008, and the effective functioning of the IACS system is being assessed on an ongoing basis, it was therefore fully justified to lift the reservation.

As regards External aid, development and enlargement, the Commission welcomes the Court recognition of the improvement by all the Directorates-General in the policy group in the quality of the information provided in their annual activity reports (see paragraph 6.51).

The Commission considers that the reservations made by the Directors-General in their 2009 annual activity reports or the absence of reservations were in line with its internal guidelines and correctly addressed the inherent risks of programmes.

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data from Member States on recoveries or withdrawals is missing or incomplete (see paragraphs 1.16, 3.54 and 4.31) (25); and

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For Cohesion, see replies to paragraph 1.16.

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financial correction mechanisms are not yet fully effective (see paragraphs 1.37 to 1.50) (26).

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1.32.

In implementing the EU budget, the Commission has to ensure effective and efficient internal control over the reliability of reporting, the safeguarding of assets and information, the prevention and detection of fraud and irregularities and the management of the risks relating to the regularity of transactions, taking into account the multi-annual character of programmes and the nature of the payments concerned (27).

1.32.

1.33.

The Commission has the final responsibility for ensuring that supervisory and control systems provide reasonable assurance that errors in transactions underlying the accounts are either prevented or identified and corrected. It is also responsible for ensuring that reliable information is available for the purposes of its own management, for stakeholders and for the external auditors.

1.34.

Amounts incorrectly paid should be recovered (28). In practice:

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The Commission is only able to recover payments from beneficiaries where it directly manages expenditure (e.g. for most of the expenditure in the policy group Research, energy and transport).

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For expenditure subject to shared management (e.g. for most of the expenditure in the policy groups Agriculture and natural resources and Cohesion), decentralised management (e.g. in the area of Enlargement) and indirect centralised management (e.g. in the policy group Education and citizenship), the responsibility for recovering payments incorrectly made is delegated to Member States or third countries. For expenditure subject to joint management (e.g. in the area of Humanitarian aid) corrective mechanisms are defined in the agreements concluded with the international organisations. Nevertheless, in cases when the rules of EU expenditure schemes have been incorrectly applied the Commission can also make financial corrections (see paragraph 1.40).

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For the 2007-2013 period, there is a standardized procedure for submission of recovery statements and the Commission expects that this reporting procedure will further improve the quality of information at its disposal. Member States are also required to distinguish corrections deriving from those as a result of EU audits.

1.35.

For several years the Court’s audit has focused on how the Commission executes its supervisory role and how it applies these corrective mechanisms. The Court has also examined to what extent national authorities and international organisations provide to the Commission correct information on financial corrections and recoveries made.

1.36.

The Court has regularly noted that the data on the corrective capacity of supervisory and control systems at the level of Member States have improved but are not yet complete and reliable, in particular in the area of Cohesion (29). The Commission, however, is reporting reliable figures as concerns its own activities. Since the 2005 discharge procedure, the European Parliament and the Council have encouraged the Commission and Member States to implement the improvements necessary to ensure completeness and accuracy of the information available, with the aim of providing reliable evidence to allow the Court to assess the effectiveness of multi-annual correction mechanisms for EU spending.

1.36.

In the Cohesion area, and for financial corrections executed by Member States following their own verification and audit work, the Commission depends on the quality of the information sent by Member States.

The Commission has made in the recent years notable efforts to improve the quality of information available on recoveries and withdrawals transmitted by Member States for Cohesion programmes. It has requested Member States to provide cumulative and yearly data on withdrawals and recoveries, despite that this is beyond the regulatory requirements. It has also audited on-the-spot the Member States' systems for recording and reporting corrections, with fairly good results. In case of identified needs for improvement, the Commission has formulated appropriate recommendations and ensures their follow-up.

1.37.

In the notes to the 2009 accounts the Commission has responded to these comments by including more detailed information about recoveries and financial corrections than it has done in the past (30). In particular it provides information broken down by the stage which recovery or financial correction procedures have reached (‘in progress’, ‘confirmed’ or, ‘implemented’ – see paragraph 1.42); by area of expenditure; where relevant by programming period; and in some cases by Member State concerned.

1.38.

The Court welcomes the provision of this information. It points out however that weaknesses in the presentation as well as in the coherence of the information and the amounts presented by Member States for Cohesion need to be addressed and that care should be taken when interpreting the information (see also paragraphs 1.14 to 1.19 and below).

1.38.

1.39.

Recovery from the beneficiaries of EU spending programmes of amounts incorrectly paid and other financial corrections are markedly different in focus and impact. Recoveries correct the receipt of irregular expenditure: in principle it is the recipients of such expenditure who repay sums incorrectly received; recoveries can therefore be seen as an error correction mechanism (31).

1.39.

1.40.

Financial corrections (including the clearance of agricultural expenditure) however, predominantly address weaknesses in management systems. They withdraw funding from Member States or third countries which fail to ensure that EU rules are correctly applied. The financial consequences of such corrections are usually borne by national taxpayers not beneficiaries of an expenditure scheme which has been wrongly applied. Financial corrections contribute to the protection of the financial interests of the EU, but neither in principle or practice can they however be regarded as a means of correcting individual payments which have been incorrectly made.

1.40.

Member States should recover incorrect payments from beneficiaries. Recovery is made either by obtaining repayment of the sums concerned from the beneficiary or setting off the sums to be repaid against further payments due to the same beneficiary.

Where undue payments to beneficiaries can be identified as a result of the EU controls, Member States are required to follow them up with recovery actions against these beneficiaries. However, even where recoveries from beneficiaries are not possible because the financial correction relates only to deficiencies in the Member States' management and control system and not to undue payments, these corrections are an important means to improve the Member States' systems and thus to prevent or detect and recover irregular payments to beneficiaries.

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

The Commission considers therefore that certain financial corrections can be seen as error correction mechanisms insofar as the amounts concerned are recovered from the final beneficiary.

1.41.

Though the Commission recognises the difference between recoveries and financial corrections in the notes to the financial statements, its presentation, in other documents such as the Synthesis Report, does not yet make sufficiently clear the distinction between the two mechanisms. Although for 2009 almost 90 % of the confirmed amounts (some 2 900 million euro out of a total of 3 319 million euro) and almost 80 % of the implemented amounts (some 1 400 million euro out of a total of 1 843 million euro) presented by the Commission relate to financial corrections usually borne by national taxpayers, the comments are at times presented as if they were wholly or mainly recoveries.

1.41.

The EU annual accounts present in a fair way the amounts of financial corrections deriving from Commission’s supervisory role.

Amounts presented as financial corrections indicate that the Commission has taken steps to protect the EU budget from unduly paid monies. Comments thereon aim at clarifying the procedure the Commission applies in doing this. These monies will eventually be recovered from beneficiaries through recovery procedures initiated by Member States, as it is in their interest to recover funds where possible.

The Commission also refers to its replies to paragraphs 1.36 and 1.40.

1.42.

The Commission presents data for three main stages in the process:

1.43.

The Commission makes clear that the data presented concerning the different stages of the corrective mechanisms in the policy group Cohesion refer only to recoveries and financial corrections which it has imposed.

1.44.

In this respect, attention is drawn to the fact that for the policy group Cohesion only 20 % of the amounts confirmed in 2009 (2 411 million euro) have been implemented (476 million euro) in the same year. Added to the amounts outstanding from previous years, a total amount of 2 332 million euro still remains to be implemented at year-end 2009. Unless further expenditure declarations are submitted by Member States in subsequent years, the remainder will be implemented only at the closure of the programmes (32).

1.44.

As the Court rightly points it out, implementation of financial corrections, from the recent years, will mainly occur at the closure of the programme where the regulatory ceiling for interim payments has been reached. Also, financial corrections confirmed during the life of the programmes may be implemented in subsequent payment claims. It is therefore difficult to make a direct link between amounts of financial corrections confirmed in a given year, and amounts implemented in the same year.

As a general rule, financial corrections confirmed during the life of the programmes are implemented in subsequent payment claims. As the ceiling for payments may have been reached for most programmes relating to the 2000-2006 period, it is inevitable that the deduction of the ineligible expenditure will be reflected only in the closure documents, which are due to be submitted by the Member State in 2010.

As soon as the Commission has evidence of the implementation of a correction by deduction of the ineligible expenditure from a closure payment request, it will report the financial correction as implemented. Detailed information on the implementation of financial corrections is provided in note 6 to the consolidated accounts.

Even though not all the individual financial corrections can be traced in the accounting system of the Commission, but only those with financial impact in terms of EU contribution, the financial corrections with evidence of implementation during 2010 will be reported as implemented in the accounts of the Commission for 2010.

The figures vary significantly between programmes and Funds, due to the nature and / or volume of the concerned corrections.

1.45.

In principle, if reliable information is available about the effect of corrective mechanisms in the past, it might be possible to estimate the likely effects of applying the same mechanisms in the future. It has also sometimes been incorrectly suggested that recoveries and corrections can be compared with or even netted off against the Courts estimates of error.

1.45.

The Commission has repeatedly confirmed that multiannual programmes are subject to multiannual control systems and that many errors detected by the Court in a given year would normally have been detected and corrected by Commission's systems in subsequent years. This can be demonstrated by calculating residual error rates at the time of closure of a programme, which have been shown in the past to be lower than during the implementation period.

The Commission agrees that a comparison of the Court's DAS error rates, which relate to an annual examination of transactions, with its own calculated error is not straightforward.

1.46.

However, reliable annual information about the effects of corrective mechanisms is not available. The notes to the financial statements do not systematically show how sums recovered are linked to specific years, and in some cases an accumulation or back-log of prior year corrections have been identified and recorded in the current financial year.

1.46.

In addition flat-rate corrections may be imposed in situations where weaknesses of control systems at Member States' level are identified but were not corrected by the Member State itself, with no relation to specific irregular expenditure or specific year.

It is therefore not possible to make a direct link between a financial correction and the year of the expenditure to which it relates.

Structural Funds are implemented in a multi-annual framework. If a financial correction has not been reported in year N it will be reported in year N+1, without this affecting the reliability of the procedure, whose main objective is to ensure that all irregular payments are corrected. This compensation between years within the programming period is necessary to give accurate, transparent and complete cumulative information on financial corrections.

Nonetheless, the notes to financial statements present information on financial corrections confirmed and implemented in a specific year, as well as cumulative information.

In contrast, in agriculture (EAGF and EAFRD), financial corrections are linked to expenditure of a specific financial year and this link is disclosed in each conformity decision adopted by the Commission.

1.47.

Moreover the cycles of many correction mechanisms may last for many years and variations in elements influencing the corrective capacity of many supervisory and control systems (legal and organisational framework; modalities of recovery procedures; type, size and duration of projects, etc.) may affect the capacity to estimate the likely impact in the future.

1.48.

Finally, it should be recalled that the Commission’s corrective mechanisms mainly involve financial corrections other than recoveries (see paragraphs 1.39 and 1.40).

1.48.

1.49.

The Commission has taken steps in 2009 to increase and improve the information it provides on the corrective mechanisms applied to the EU budget. This is a positive development. However, the information it provides is not yet completely reliable because the Commission does not always receive reliable information from Member States. Furthermore, the need to refine the financial reporting guidelines pertaining to what information is to be included and how it should be treated should be examined. For some areas of expenditure, the Commission does not provide information reconciling the following: the year in which the payment concerned is made, the year in which the related error is detected and the year in which the resulting financial correction is disclosed in the notes to the accounts.

1.49.

A reconciliation of payments, errors and financial corrections made as suggested by the Court is not possible where the expenditure declaration system is cumulative over a multi-annual period or in some cases where they are systems corrections (see also reply to paragraph 1.50).

1.50.

The vast majority of the corrections by value involve financial corrections on Member States or third countries, rather than recoveries from individual beneficiaries who received EU funds incorrectly. In contrast, the errors detected by the Court’s testing are mostly amounts incorrectly claimed by, or paid to, beneficiaries. Taking this into consideration the Court concludes that it is not possible to make a meaningful comparison between its own estimate of error rates and the data for financial corrections and recoveries supplied by the Commission.

1.50.

The vast majority of the EU budget, some 80 %, is implemented in shared management where Member States are primarily responsible for ensuring the regularity of expenditure declared to the Commission and hence for detecting and correcting irregularities. In this management mode the Commission is also responsible for ensuring that the systems put in place by the national authorities are effective and, if not, the Commission may impose financial corrections. The system of financial corrections foreseen by the applicable legislation is therefore such that the Commission recovers/corrects from the Member States, which in turn have to recover the irregular payment from the beneficiary. However, where financial corrections are linked to systemic weaknesses they are usually based on flat or extrapolated rates, and not to errors identified at the level of beneficiaries.

As a consequence, a distinction must be made regarding:

The Commission agrees that a comparison of the Court's DAS error rates, which by virtue of the Treaty relate to an annual examination of a sample of transactions, with figures on financial corrections is not relevant. Due to the different types of financial corrections as indicated above, it is not possible, in the field of Cohesion, to make a direct link between a financial correction and the year of the expenditure to which it relates. However, the impact of the financial corrections can clearly be identified when calculating a residual error rate after the closure of a programme. For example, DG REGIO's non-statistical closure audit enquiry on a sample of 1994-1999 ERDF programmes finalised in January 2010 gives an indication that at closure, and after all financial corrections have been made, the overall risk of error was substantially reduced.

The Commission ensures the protection of the financial interests of the Union by applying the management and control systems and procedures as provided for in the financial and sector regulations decided by the legislator in order to prevent, detect and correct errors harming the EU budget.

2.1.

This chapter presents the Court’s specific assessment of Revenue which comprises own resources and other revenue. Key financial information on Revenue is provided in Table 2.1. Own resources constitute by far the main source of financing of budgetary expenditure (94,1 %).

2.2.

There are three categories of own resources (1): traditional own resources (customs duties collected on imports and sugar production charge — TOR), own resources calculated on the basis of value added tax (VAT) collected by Member States, and own resources derived from Member States’ gross national income (GNI).

2.3.

TOR are established and collected by the Member States. Three quarters of these amounts are paid to the Union, the remaining quarter being retained to cover collection costs. Each Member State sends to the Commission a monthly statement of established duties (the ‘A’ account statement) and a quarterly statement of those established duties which are not included therein (the ‘B’ account) (2).

2.4.

The VAT- and GNI-based own resources are contributions resulting from the application of uniform rates to Member States’ notionally harmonised VAT assessment bases or to the Member States’ GNI respectively, calculated in accordance with Union rules.

2.5.

In accordance with Decision 2007/436/EC, Euratom certain Member States benefit from a reduced call rate for VAT (3) and of a gross reduction in their annual GNI contribution (4) for the period 2007-2013. In addition the United Kingdom is granted a correction in respect of budgetary imbalances (‘the UK correction’) which involves a reduction in its payments of GNI own resources.

2.6.

The GNI-based own resource is used to balance the budget. Any understatement of GNI for a particular Member State — while not affecting the overall GNI-based own resource — has the effect of increasing the contributions from the other Member States, until the problem is identified and corrected.

2.7.

The Court’s overall audit approach and methodology is described in Part 2 of Annex 1.1 . For the audit of Revenue a representative statistical sample of 62 recovery orders taken from the Commission’s records of receipts of all revenue was tested at the Commission level (see Annex 2.1 ).

2.8.

The Court’s audit of transactions underlying the accounts cannot cover undeclared imports or those that have escaped customs surveillance.

2.9.

The Court carried out an assessment of supervisory and control systems in three Member States (5) and reviewed their accounting systems for TOR. It examined the flow of duties from establishment to declaration to the Commission, in order to obtain reasonable assurance that the amounts recorded were accurate. The auditors checked a random sample of 30 import declarations in each of these three Member States.

2.10.

For five recoveries concerning traditional own resources of the sample referred to in paragraph 2.7, the Court reconciled the selected monthly statements with the underlying accounting records of Member States (6).

2.11.

The Court assessed the supervisory and control systems at the Commission, including the latter’s inspections in Member States. The supervisory role of ACOR (7) was also assessed.

2.12.

The Court took into account the results from its specific audit carried out in 2008 and 2009 on simplified customs procedures for imports in nine Member States (8).

2.13.

VAT- and GNI-based own resources are based on macroeconomic statistics, for which the underlying transactions cannot be audited directly. For this reason the audit took as its starting point the receipt by the Commission of the macroeconomic aggregates prepared by the Member States, and then assessed the Commission’s systems for processing the data in order to determine the amounts to be included in the final accounts. The Court thus examined the drawing up of the budget and the correctness of the contributions by Member States.

2.14.

The audit also assessed the Commission’s supervisory and control systems which are intended to provide assurance that these resources are correctly calculated and collected, as well as the roles of the ACOR and GNI (9) Committees.

2.15.

The results of transaction testing are summarised in Annex 2.1 .

2.16.

The Court found that overall the Member States’ statements sent to the Commission were free from material error.

2.17.

The Court’s audit found the calculation of Member States’ contributions and their payment to be free from material error. However, in December 2009 the Commission detected an error in its calculation of provisional estimates of the UK correction for years 2008 and 2009, representing an overestimation of 138 million euro and 458 million euro respectively. As the UK correction for year 2008 was entered in the 2009 budget, Member States who finance it made a higher contribution than necessary in 2009. This will only be corrected when revised estimates are entered in the budget of following years.

2.17.

2.18.

The Court found that overall the transactions tested in respect of Other revenue were free from material error.

2.19.

The results of the examination of systems are summarised in Annex 2.2 .

2.20.

As in previous years (10), the Court highlighted problems in the procedures and systems which affect the amounts included in the B accounts which should be remedied. These concerned in particular delayed recovery of duties and late making available of recovered amounts (11), and unjustified write-off of customs duties (12).

2.20.

2.21.

In two of the Member States (13) audited the national authorities were not able to fully justify the amounts recorded in the B statements, because they did not match the underlying documents. Furthermore similar differences were identified by the Court in its reconciliation of the A accounts (14).

2.21.

2.22.

The Commission has taken the view that, in cases where goods unlawfully introduced in the customs territory of the Community have been seized, there is no obligation to make an entry in the B accounts of customs debts incurred. In its judgement of April 2009 (15), the Court of Justice has considered that such seizures of goods must take place before those goods go beyond the first customs office situated inside that territory in order to lead to the extinction of the customs debts. Thus in the view of the Court of Auditors debts incurred on goods seized after this stage should indeed be entered into the accounts.

2.22.

2.23.

On-the-spot audits carried out by the Court revealed deficiencies in national customs supervision, in particular as regards the performance of risk analysis for the selection of traders and imports to be subject to customs controls (16). This increases the risk of irregularities remaining undetected which could lead to a loss of TOR.

2.23.

2.24.

Furthermore, in its recent special report (17) on simplified customs procedures for imports (18), the Court found significant control weaknesses in all Member States visited and a high frequency of errors in most of them. Considering that these Member States account for more than half of the total TOR collection and that about two thirds of all EU customs declarations are made using simplified procedures, these control weaknesses have an impact on the functioning of supervisory and control systems of Member States in the area of TOR. This in turn leads to the risk that incorrect amounts of TOR may be collected.

2.24.

The Commission has been taking action to assist the Member States with the evolving procedures. Detailed guidelines have been provided, as has training on how best to apply them. The results will be examined during monitoring visits to be made during 2010 and 2011. In addition throughout 2009 and 2010 the Commission has carried out specific inspections, in every Member State, of their Customs Control Strategies. On the basis of these inspections and the Court’s audit observations the Commission has already requested remedial action. It will prepare, in the course of 2010, a thematic report on the Customs Control Strategy in the Member States, incorporating the Court’s findings as well as those of the Commission. This will be discussed with Member States at ACOR with the objective of seeking improvements in this field.

2.25.

The starting point for the calculation of VAT-based own resources is the VAT actually collected in the Member States (19). A study to quantify and analyse the VAT gap in the EU-25 Member States (except Cyprus) (20), published by the Commission in September 2009, estimates the gap between accrued VAT receipts and a theoretical net VAT liability to be an average of 13 % for the period 2004-2006. For the Member States whose VAT base is not capped (21), if the VAT gap were eliminated, their VAT-based contribution to the EU budget would increase. This would reduce the GNI-based contributions, although the incidence on individual Member States would differ.

2.25.

2.26.

Reservations are a means to keep doubtful elements in the VAT statements submitted by Member States open for correction after the statutory time-limit of four years. In 2009 67 reservations were placed and 63 were lifted. At the end of the year, a total of 167 were in place (see Table 2.2 ). Even though the Court noted improvements in the lifting of long-outstanding VAT reservations, 20 of these were still in place at the end of 2009 covering years prior to 2000, compared to 34 at the end of 2008.

2.26.

2.27.

In its report on Greek government deficit and debt statistics (22) to the (Ecofin) Council, the Commission called into question the quality of Greek macroeconomic statistics, including those of National Accounts. The Commission and the Council raised doubts on the effective functioning of supervisory and control systems at the National Statistical Service of Greece, which also produces GNI data for the calculation of own resources.

2.27.

Greece has started addressing the issues raised in the Commission Report of 8 January 2010, with the adoption of a new law on the Hellenic Statistical System including the creation of a new statistical authority (ELSTAT) in order to guarantee the independence and integrity of statistics.

2.28.

In its previous Annual Reports (23), the Court expressed the opinion that differences in the supervisory and control systems in the National Statistical Institutes (NSI) of Member States could weaken the comparability, reliability and exhaustiveness of National Accounts. Eurostat has not yet completed its assessment of the supervisory and control systems in the NSI and has not yet adopted guidelines on the application of such systems in the Member States.

2.28.

2.29.

General reservations (24) existed at the end of 2009 on GNI data of EU-15 Member States in respect of the period 2002 to 2006, and on EU-10 Member States in respect of the period 2004 to 2006, pending the completion of the analysis of the updated or new GNI inventories.

2.30.

At the beginning of 2009 there were ten open specific (25) GNI reservations relating to the period 1995 to 2001. During 2009 the Commission lifted six reservations relating to Greece leaving a balance of four (26) at the year end.

2.30.

2.31.

In 2009 the Commission (Eurostat) carried out visits in 16 Member States to verify GNI inventories (27) and performed direct verification. However, this was restricted to a very small number of GNI components in the Member States visited. As set out in Eurostat guidelines, this direct verification approach is not normally expected to draw conclusions on all parts of GNI estimates.

2.31.

2.32.

The results of the review of Commission management representations are summarised in Annex 2.3 . The Court draws attention to the recent special report on simplified customs procedures for imports detailed in paragraph 2.24. The Commission will need to take account of the conclusions from this report together with the follow-up of its own findings from inspections of simplified procedures and Member States’ control strategy in its 2010 annual activity report.

2.32.

2.33.

Based on its audit work, the Court concludes that:

for the year ended 31 December 2009 were free from material error.

2.34.

Based on its audit work, the Court concludes that the supervisory and control systems were effective in ensuring the regularity of Revenue. However, the Court draws attention to the weaknesses which, while not being material to the effectiveness of the systems as a whole, require action as set out below.

2.35.

The Court’s audits continue to reveal problems with the use of the B accounts and therefore it recommends that the Commission continue its efforts to ensure their correct use, in particular regarding the timely establishment and making available of customs duties (paragraph 2.20).

2.35.

2.36.

The weaknesses identified by the Court’s specific audit on the effectiveness of controls on simplified procedures and in its other audit work in 2009 led the Court to conclude that supervisory and control systems of Member States in the area of TOR are only partially effective at ensuring that customs duties recorded are complete and correct (paragraphs 2.23 and 2.24).

2.36.

2.37.

Long-outstanding reservations still exist. The Commission should continue to press the Member States to provide quickly adequate information which would enable it to lift these reservations as soon as possible and make any necessary corrections to the Member States’ VAT bases (paragraph 2.26).

2.37.

2.38.

The Commission has not yet prepared assessment reports on GNI of Member States and set specific reservations on the period 2002 onwards. To do so, it should complete its verification of GNI inventories in Member States, taking into account its evaluation of supervisory and control systems in the NSI for the compilation of National Accounts (paragraphs 2.28 and 2.31). The Commission should also make clear the scope of the opinion it provides in its assessment of Member States’ GNI data (paragraph 2.31).

2.38.

2.39.

A follow-up of previous observations is presented in Annex 2.4 .

3.1.

This chapter presents the Court’s specific assessment of Agriculture and Natural Resources, which comprises policy areas 05-Agriculture and rural development, 07-Environment, 11-Maritime Affairs and Fisheries and 17-Health and Consumer Protection. Key information on the activities covered and the spending in 2009 is provided in Table 3.1.

3.2.

Under the Treaty, the Commission has overall responsibility for implementing the EU budget. For agricultural and rural development virtually all expenditure is carried out under shared management whereby implementation tasks are delegated to Member States. For the other areas, budgetary appropriations are spent under the direct and indirect management of the Commission with the exception of the European Fisheries Fund which is under shared management on the basis of multi-annual programmes.

3.3.

The objectives (1) of the common agricultural policy as set out in the Treaty are to increase agricultural productivity, thus to ensure a fair standard of living for the agricultural community, to stabilise markets, to assure the availability of supplies and to ensure that supplies reach consumers at reasonable prices.

3.4.

The EU budget finances the common agricultural policy expenditure mainly through two Funds (2): the European Agricultural Guarantee Fund (hereinafter ‘EAGF’), which fully finances EU direct aid and market measures (3) as explained hereunder, and the European Agricultural Fund for Rural Development (hereinafter ‘EAFRD’), which co-finances at varying rates rural development programmes.

3.5.

The main measures financed by EAGF are:

—

Interventions in agricultural markets: the principal measures are intervention, storage and export refunds and other measures such as specific support for the wine, fruit and vegetable and food programmes (in total amounting to 3 988 million euro) and Sugar Restructuring Fund (3 018 million euro).

—

Payments made from the Sugar Restructuring Fund were financed by contributions from producers holding quota which are revenue assigned to the EAGF.

3.6.

The European Agricultural Fund for Rural Development (EAFRD) co-finances Rural Development expenditure which covers a large number of measures such as agri-environmental schemes, compensatory amounts for farming in less-favoured areas, investments in farms, and infrastructure in rural areas (8 992 million euro) (7). In 2009, in the framework of the so called CAP Health Check (8) and the European Economic Recovery Plan (9), additional funding has been channelled via Rural Development to finance priorities such as broadband internet infrastructure, climate change, renewable energies, water management, biodiversity and measures accompanying restructuring of the dairy sector. However, no expenditure has been incurred under the latter measures during 2009.

3.6.

The figure (8 992 million) relates to payment appropriations for chapters 0504 and 0505, which includes:

3.7.

Under all EAGF direct aid schemes covered by Council Regulation (EC) No 1782/2003 (10) and certain EAFRD aid schemes, beneficiaries of EU aid have to fulfil ‘cross compliance’ requirements. These requirements relate to the protection of the environment, the public, animal and plant health, animal welfare (Statutory Management Requirements) and to the maintenance of agricultural land in good agricultural and environmental condition (GAEC) (11). EU legislation provides that when non-compliance with those requirements is noted, a reduction or exclusion (12) shall be applied on the overall amount of direct payments made in respect of the applications submitted in the course of the calendar year of the finding. The Court’s testing of payments to farmers includes only a limited number of cross compliance requirements (see paragraph 3.17, third indent). When infringements are detected they are classified as non-quantifiable errors and therefore not included in the error rate calculation.

3.8.

Only farmers are eligible for EU area aid. A farmer is defined to be a person who carries out an agricultural activity. An agricultural activity is defined as the production, rearing or growing of agricultural products including harvesting, milking, breeding animals and keeping animals for farming purposes, or maintaining the land in good agricultural and environmental condition (GAEC) (13). According to the relevant EU rules, if no other agricultural activity is carried out by the applicant, the maintenance of land in GAEC constitutes the minimum agricultural activity required of the applicant to be eligible for aid.

3.9.

Expenditure under both funds is channelled through some 80 national or regional paying agencies. Before these paying agencies can claim any expenditure from the EU-budget, they must be accredited on the basis of criteria laid down by the Commission. These paying agencies make payments to the beneficiaries and prior to doing so, they must, either directly or through delegated bodies, satisfy themselves of the eligibility of the aid applications. The accounts and payments of the paying agencies are examined by independent audit bodies (certification bodies) which report to the Commission in February of the following year.

3.9.

3.10.

The Union’s policy on the environment should contribute to protecting and improving the quality of the environment, human health, and rational utilisation of natural resources, including at international level. The Financial Instrument for the Environment (LIFE) (14) is the most important instrument in terms of funding covering the EU contribution for projects in the Member States in favour of nature and biodiversity, as well as environment policy, governance, information and communication.

3.11.

The European Fisheries Fund (15) is the main instrument for the policy area Maritime Affairs and Fisheries. The Common Fisheries Policy pursues the same objectives as the Common Agricultural Policy (see paragraph 3.3).

3.12.

Concerning Health and Consumer Protection, the EU contributes, on the one hand, to human, animal and plant health protection and, on the other hand, to consumer welfare.

3.13.

For EAGF the expenditure mainly consists of reimbursement of subsidies paid to farmers and other beneficiaries by the Member States.

3.14.

For EAFRD and EFF, an advance corresponding to 7 % of the EU contribution to each programme was paid after the adoption of the programme by the Commission (16). In 2009, the payments charged to the EAFRD concerned only interim payments whereas for the EFF they comprised also advances.

3.15.

Payments for Health and Consumer Protection do not include advances, Member States are reimbursed on the basis of their declared expenses. For Environment, pre-financing of up to 40 % of the EU contribution for a LIFE project, as established in the grant agreement, is foreseen.

3.16.

In the area of EAFRD budgetary appropriations for 1 650 million were cancelled at the end of 2009 (17) primarily as a consequence of a slowdown in Member States’ expenditure due to difficulties in providing national co-financing and, in the case of Romania and Bulgaria, lack of experience in the implementation of rural development programmes (18).

3.16.

3.17.

The Court’s overall audit approach and methodology is described in Part 2 of Annex 1.1. For the audit of policy group Agriculture and Natural Resources the following specific points should be noted:

3.18.

The results of transaction testing are summarised in Annex 3.1 . On this basis the Court’s estimate of the most likely error for Agriculture and Natural Resources lies between 2 % and 5 %.

3.18.

Moreover the risk to the EU budget is adequately covered by the conformity clearance procedure.

3.19.

In 2009, out of 241 transactions examined, 66 (27 %) (20) were affected by error. 42 (64 %) (21) of these transactions were affected by quantifiable errors notably concerning eligibility and accuracy. Examples of the types of error are given below.

3.20.

In the EAGF, out of 148 transactions sampled, 35 (24 %) (22) were affected by errors. 24 (69 %) of these transactions were affected by quantifiable errors. With regard to Rural Development expenditure, out of 80 transactions sampled, 25 (31 %) were affected by errors. 16 (64 %) of these transactions were affected by quantifiable errors.

3.20.

3.21.

Examples of eligibility errors found by the Court are the following:

—

a rental contract for 57 hectares of the above mentioned pasture land,

—

a ‘back to back’ contract ceding the grazing rights back to the lessor.

3.22.

Most of the quantifiable errors were accuracy errors (87 % in EAGF and 81 % for Rural Development) and furthermore, most of the accuracy errors were over-declarations of eligible land. Other examples of accuracy errors found by the Court were the following:

3.23.

As for non-quantifiable errors, the Court found for example, in EAGF, that parcels were not clearly identified in the application , payments were made after the legal deadline and the date on which claimants have to have exclusive use of the parcel claimed was not specified. In EAFRD, the Court noted a case where certain conditions applying to an aid paid for organic farming had not been fully complied with.

3.23.

3.24.

As regards Environment, Maritime Affairs and Fisheries, and Health and Consumer Protection, out of 13 transactions sampled, 6 (46 %) were affected by errors. 2 (33 %) of these transactions were affected by quantifiable errors.

3.24.

With regard to one transaction in the area of Maritime Affairs and Fisheries, the Commission’s calculation of the interim payment was a correct application of the applicable rules for the calculation of such payments as laid down in Article 76 of Council Regulation (EC) No 1198/2006 which does not allow the Commission to use a different method of calculation at its discretion.

3.25.

Concerning the Financial Instrument for Fishery Guidance (FIFG), the Court found cases of projects completed outside the eligibility period.

3.25.

3.26.

The Court also found non-quantifiable errors.

3.27.

The main control system to ensure the regularity of transactions is the Integrated Administration and Control System (IACS) (25).

3.28.

IACS consists, in each Member State, of databases of holdings, applications, agricultural parcels and where payments are still linked to the number of animals a database of animals, as well as a register of entitlements in those Member States implementing the SPS. The system provides for several eligibility controls: an administrative check of all claims, cross-checks with databases to prevent the same land/animals from being claimed twice and a minimum rate of 5 % on-farm inspections to be carried out by the paying agencies.

3.29.

IACS covers SPS, SAPS and all area related coupled aid schemes as well as animal premia schemes. In the case of EAFRD, and especially for agri-environment and less favoured areas, verification of certain key elements such as surface and number of animals is made through IACS while other requirements are governed by specifically designed controls (26).

3.30.

The Court assessed eight IACS systems under the EAGF and eight specific control systems under the EAFRD (see paragraph 3.17).

3.31.

The Court’s audit covered compliance with the provisions of the relevant regulations and an assessment of the effectiveness of the systems in ensuring regularity of transactions. The following elements were examined:

(I)

Administrative procedures and controls to ensure correct payment including quality of databases.

(II)

Control systems based on on-the-spot checks.

(III)

Systems to ensure implementation and control of Cross-compliance.

(III)

3.32.

While the IACS system is in principle well designed, the Court’s annual IACS systems audits carried out in recent years show that the effectiveness of IACS is adversely affected by inaccurate data in the databases, incomplete cross checks or incorrect or incomplete follow up of anomalies. In respect of financial years 2006-2008 the Court examined the operation of IACS systems related to SPS or SAPS in 20 paying agencies in 17 Member States and reported the results in its Annual Reports. For one paying agency IACS was assessed to be effective, for 12 partially effective and for seven, significant weaknesses were identified which led the Court to conclude that the system was not effective.

3.33.

For its 2009 audit of eight paying agencies, the Court found the systems to be effective in ensuring the regularity of payments in only one agency, partially effective in four agencies, and ineffective in the remaining three (Greece, Cyprus and Malta).

3.32.-3.33.

The effectiveness and constant improvement of the IACS is confirmed by the results of the conformity audits which the Commission has carried out over the past years in all Member States but Luxembourg as well as by the low error rate indicated in the control statistics which it receives from Member States and which are verified and validated by the certification bodies. This low error rate is also in line with that of the Court itself in its 2008 Annual Report.

The Commission found that for claim year 2008, significant deficiencies existed in the IACS in Bulgaria and Romania. As a result these two Member States established action plans in 2009 which have been closely followed by the Commission.

Other Member States have deficiencies of a lesser nature in their IACS which do not render their systems ineffective but, rather, perfectible and for which they have taken or are taking action.

All these deficiencies are followed up through conformity clearance procedures which ensure that the risk to the EU budget is adequately covered.

3.34.

Concerning the eight Rural Development supervisory and control systems audited, the Court found that three of the control systems implemented were effective and five of them were only partially effective in ensuring the regularity of payments.

3.34.

The control system for the other Member States audited by the Commission in 2009 was found to be effective. However, there is scope for improvement for the following items:

3.35.

The Court’s principal audit findings are outlined in the following paragraphs. The results of the examination of systems are summarised in Annex 3.2 .

3.36.

Administrative checks must be undertaken on all applications for support and payment claims, and cover all elements that are possible and appropriate to control by administrative means (27). The administrative checks must include cross-checks wherever possible and appropriate, inter alia with data from the IACS databases. The Court’s audit verified whether the databases were complete and reliable as well as the adequacy of checks in identifying anomalies and taking corrective action. The most important systems weaknesses found are set out below.

3.37.

The Land Parcel Identification System (LPIS) is a database in which all the agricultural area (reference parcels) of the Member State is recorded. The Court found significant deficiencies of LPIS in three Member States that affect the effectiveness of administrative cross checks as illustrated hereunder:

Examples

LPIS-GIS technology became mandatory in 2005. In Greece until and including the claim year 2008 the LPIS-GIS did not contain any graphical information (ortho-photos) showing the actual eligible area of the reference parcels recorded. LPIS-GIS was still not fully operational for carrying out the necessary cross-checks as of December 2009.

In Lithuania the Court found that the authorities failed to eliminate ineligible features of a total area of 13 700 ha from the eligible area of parcels recorded to be 100 % eligible in the LPIS.

In Cyprus new ortho-photos were taken and analysed in 2008. The analysis showed that more than 39 000 reference parcels were affected by changes of land use and as a result the area eligible to SAPS aid dropped by more than 7 000 ha (i.e. 5 % of the agricultural area). Although updated information was available, the Cypriot authorities decided to base payments for claim year 2008 on the outdated 2003 ortho-photos.

3.37.

The Commission accepts that there were problems with the Greek IACS in claim year 2008. However the financial risk for the past is covered by the conformity clearance procedure by which, until now, some 866 million EUR has been or is being excluded from EU financing.

The LPIS-GIS became available in accordance with the action plan at 31 December 2008 and the roll out was done prior to the start of the 2009 claim period. The problem in 2009 was caused by the late digitisation of parcels by farmers and measures have been taken to rectify the situation in the meantime by the fixation of a cut off date for the digitisation.

The Commission is following up the deficiencies which have existed in the Lithuanian LPIS-GIS since 2005 through conformity clearance procedures. However, the Lithuanian authorities have meanwhile informed the Commission that corrective measures have been implemented in the LPIS-GIS in December 2009.

The Commission has been following the deficiencies in the LPIS-GIS of Cyprus since 2005. As a result of the missions carried out, Cyprus took remedial action so that as of 2009 the system is considered to be effective. This situation is followed up under the conformity clearance procedure.

3.38.

The Court also found in two Member States (Italy, Spain) that the most recent ortho-photos available were not used for capping the eligible areas for calculating the payments.

Examples

In Italy (Emilia Romagna) and Spain (Basque Country) the eligibility rate for poor pasture land is not based on the most recent information available (ortho-photos or on-the-spot inspection) but on what the farmer had claimed before SPS was introduced. In the cases examined, both Italian and Spanish farmers were allowed to claim the higher historical eligibility rate for poor pasture land which on the latest ortho-photos shows significantly lower eligibility rates. Differences have lead to granting aid for significantly more than the actual eligible area.

3.38.

Member States are obliged to recover any amounts from previous years if over-declarations are detected afterwards as a result of updated ortho-photos. Where the Commission considers that a Member State is not sufficiently proactive in protecting the EU budget, it follows up the situation under the conformity clearance procedure.

Italy is in the process of finalising a total refresh of their LPIS. This implies that new ortho-images will cover the whole country, that the images will be renewed every third year, and that the reference parcels will be systematically assessed, including field visits where necessary. Over-declarations established following the refresh are being recovered. The Commission considers this approach to be a major step forward.

As regards Spain, the Court looked at imagery that had not yet been processed. This imagery was made available to farmers for their 2008 claim lodging.

The Commission actively follows up the measures taken to rectify past over-declarations.

3.39.

The Court has observed in several Member States (Cyprus, Greece, Italy, Slovakia and Lithuania) that the claim database did not allow the nature and timing of modifications or corrections made to be identified. In the absence of a reliable audit trail the Court cannot assess the correct application of EU penalties.

Examples

In Greece the bulk of administrative cross checks and of the necessary corrections of the claim data is carried out under a procedure that leaves no audit trail and does not lead to the application of penalties. In Cyprus conflicting information regarding dates and content of amendments of claims was shown on the paper claim and in the database.

3.39.

Member States have been reminded in the Agriculture Funds Committee to ensure full audit trail in their IT applications.

3.40.

A reliable entitlements database is a prerequisite for correct SPS payments. Member States are also required to respect the overall national ceilings both for SPS and SAPS. The Court found a ceiling overshoot (Cyprus) although this did not affect the EU budget; and an inaccurate allocation of entitlements (Malta).

3.41.

With regard to the correctness of payments, the Court found substantial deficiencies in one Member State leading to cases of forest claimed as permanent pasture (Greece). Moreover, Greece continues to allow the claimed area to exceed the eligible area of the reference parcel as recorded in the LPIS by applying a tolerance margin of 5 % not foreseen in the regulation. This observation was already reported by the Court in 2005. Furthermore, the Court found cases of payments to beneficiaries being made without known anomalies having been resolved (Italy) and without cross-checking the area claimed against the eligible area recorded in LPIS (Spain). In addition, examples were found of systematic incorrect calculation of aid and inadequate application of area and late claim penalties.

3.41.

The Spanish authorities confirm that in claim year 2008, the LPIS-GIS was indeed only used for a part of the cross-checks, but that they have remedied this situation as from claim year 2009.

3.42.

Administrative checks concern the correctness of the declarations made by the claimant and the fulfilment of the eligibility requirements for the granting of the aid (28). Such controls include cross-checks with data already available to the administration, for example in the IACS databases.

3.43.

The audit found errors in the determination of the exchange rate used to convert to euro amounts of aid paid in national currencies (United-Kingdom, Czech Republic), and weaknesses in the calculation of aid reductions following on-the-spot checks (Germany (Bavaria)). Weaknesses were also found in the technical checks on reduction of nitrate pollution (Greece) and compliance with a specific eligibility condition such as adequacy of agricultural machinery relative to the land farmed (Bulgaria).

3.43.

The Court’s observation regarding Germany (Bavaria) does not affect the EU budget because the reduction of the part of the aid paid from the EU budget was correctly calculated.

The weakness found by the Court in Bulgaria is followed up through a conformity clearance procedure.

3.44.

The Member States must, each year, carry out on-the-spot checks covering for most aid schemes at least 5 % of all beneficiaries (29). The Court’s audit focussed on the adequacy of risk analysis procedures to select beneficiaries for such checks, the quality of the checks and the adequacy of the corrections made. The Court’s audit revealed specific weaknesses in the on-the-spot checks.

3.45.

In EAGF, the Court identified cases of incorrect application of measurement tolerances (Malta, Italy), inadequate quality and insufficient coverage of on-the-spot inspections (Greece).

3.45.

3.46.

In EAFRD, the Court found weaknesses concerning precision and completeness of control reports (Germany (Bavaria), Romania), the global evaluation of the results of the controls (Bulgaria) and the respect of deadlines for reporting to the Commission on the controls carried out (Germany (Bavaria), France).

3.46.

3.47.

Cross compliance requirements consist of Statutory management requirements (SMRs) and GAEC standards (see paragraph 3.7). Whilst SMRs are specified in various EU Directives and regulations, GAEC standards are to be defined at national level.

3.48.

The Court found shortcomings in the definition of what is required to maintain land in GAEC and the control of these conditions.

3.48.

3.49.

During its on-the-spot visits the Court observed, on the basis of the limited audit (see paragraph 3.17, third indent) cross compliance infringements in around 5 % of the payments subject to cross compliance obligations. The infringements observed related to both SMRs (groundwater pollution, registration of animals, animal welfare, improper use of plant protection products), and GAEC (encroachment of unwanted vegetation).

3.49.

3.50.

50 % of any undue payment which the Member States have not recovered from the beneficiaries within four years, or within 8 years in the case of legal proceedings, will be automatically charged to their national budget (30) (so called 50/50 rule) (31). Member States are obliged to continue their recovery procedures. In 2009, the 50/50 rule was applied (32), hence amounts not recovered dating from 2000 or 2004 were cleared (eight and four years old respectively): 31,4 million euro was charged to the Member States while 20,1 million euro was borne by the EU budget.

3.50.

3.51.

In its Annual Activity Report 2009 (33), DG AGRI reports having achieved by the end of financial year 2009 an overall recovery rate of 42 % of the 1 266 million euro outstanding at the end of financial year 2006. According to the Commission, in the period 2007-2009 Member States recovered 121 million euro directly from beneficiaries and an additional 411 million euro was recovered from the Member States by the Commission applying the 50/50 rule. The Court observes that the 121 million euro recovered from the beneficiaries corresponded to less than 10 % of the total recoveries.

3.51.

3.52.

As the management of expenditure on agriculture is, in the main, shared between Member States and the Commission, aid is paid by the Member States, which are then reimbursed by the Commission (34). The final recognition of expenditure is determined through a two-stage procedure called the clearance of accounts. The two stages consist of an annual financial decision and multi-annual conformity decisions taken by the Commission.

3.53.

On 30 April 2010 the Commission took three financial clearance decisions for the expenditure made under EAGF, EAFRD and TRDI and cleared all paying agencies accounts, except those shown in Annex 3.5 . These decisions are mainly based on certificates provided by independent auditors (certification bodies). The Court’s audit did not detect expenditure incorrectly cleared in the financial clearance decisions.

3.54.

The Court noted shortcomings in the last three years regarding the reliability of the debtors’ accounts. For financial year 2009 the Commission has initiated financial corrections in respect of 13 paying agencies in 10 Member States for 14,8 million euro, representing some 1,43 % of the 1 037 million euro that were to be recovered at the end of financial year 2009.

3.54.

3.55.

Conformity decisions are taken following additional verifications by the Commission of the expenditure declared by the Members States. They cover a number of years and have the objective of excluding expenditure from EU financing where the Commission has found that it ‘has been incurred in a way that has infringed EU rules’ (35).

3.56.

In previous annual reports the Court has criticised the fact that the Member States administrations, and not the final beneficiaries, are charged with the financial corrections. In addition, the method provided for in the rules for calculating the conformity adjustments as applied by the Commission, involving considerable use of flat-rate corrections, means that the amounts thus recovered are not directly related to the real amount of irregular payments. The conformity clearance system continued unchanged in 2009.

3.56.

The conformity clearance is designed to exclude expenditure from EU financing which has not been effected in compliance with EU rules. 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.

Where undue payments to beneficiaries can be identified as a result of the conformity clearance, Member States are required to follow them up with recovery actions against these beneficiaries. However, even where recoveries from beneficiaries are not needed because the financial correction relates only to deficiencies in the Member States’ management and control system and not to undue payments, these corrections are an important means to improve the Member States’ systems and thus to prevent or detect and recover irregular payments to beneficiaries.

Financial corrections are determined on the basis of the nature and gravity of the infringement and the financial damage caused to the EU. 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 take account of the severity of the deficiencies in the national control systems in order to reflect the financial risk for the EU. The Commission therefore considers there to be a valid link between this type of financial corrections and the level of irregular payments to final beneficiaries.

The use of flat rates has been accepted by the Court of Justice as being in conformity with the legal rules governing the conformity work and endorsed, under certain circumstances, by the European Parliament in its 2007 discharge resolution (paragraph 83).

Finally, while the legal rules governing the conformity clearance system have remained unchanged, the Commission has taken action to improve its operation, including new guidelines on financial corrections and the proposal on the reinforcement of assurance referred to by the Court in paragraph 3.62.

3.57.

The inspection results reported to the Commission by paying agencies assess the regularity of claims submitted by farmers and since 2007 have to be verified by the certification bodies. On the one hand, the certification bodies are requested to give an opinion on the quality of the on-the-spot inspections by checking a sample of at least 10 inspections for each of the following four populations: EAGF-IACS, EAGF-non IACS, EAFRD-IACS and EAFRD-non IACS. On the other hand, they are asked to verify and validate the Member States’ control statistics. In his AAR 2009, the Director General of DG AGRI indicates that the verification by the certification bodies of the quality of the on-the-spot inspections was largely (around 90 %) positive for the different populations and that as regards the accuracy of control statistics the opinion of the certification bodies was positive for 70 % of the EAGF population and for only 54 % of the EAFRD population.

3.58.

The Commission guidelines leave the certification bodies the choice to either accompany or to re-perform 10 on-the-spot inspection. The certification body reports analysed by the Court showed that only six re-performed inspections, while 23 accompanied inspections and the remainder do not specify their approach. The Court considers that re-performance of a previous inspection would provide a better basis for assessing the quality of inspections procedures as the presence of the certification body may influence the behaviour of the inspectors being assessed.

3.58.

An analysis of the certification bodies’ reports with regard to financial year 2009 shows that the certification bodies checked in total around 3 700 controls. Where the certification bodies carried out the checks required:

3.59.

Furthermore, the certification bodies do not always provide detailed information on the results of inspections that were re-performed. The Court considers that such information would be useful for the Commission to allow it to reliably assess the quality of the work carried out by the certification bodies.

3.59.

3.60.

The Court notes that for a number of paying agencies the certification bodies could not confirm the reliability of the control statistics either because the reports were incomplete or were not made available.

3.60.

3.61.

In 2009 the Commission offered Member States the possibility of asking certification bodies to re-perform a representative sample of checks and verify that these on-the-spot checks have been appropriately followed up. If the certification body on this basis is able to confirm the accuracy of a Member State's control statistics, then the Commission will accept that the resulting error rate represents the maximum risk possible, i.e. financial corrections for the year in question can never be higher than that level. These provisions are scheduled to enter into force in 2010 for financial years 2011 onwards.

3.61.

Moreover, the Commission notes that the re-performance would not be limited to the on-the-spot checks, but would cover the entire handling of the file, from receipt of the aid application to the calculation and execution of the final payment, including the application of any sanctions (substantive testing).

3.62.

Environment, Maritime Affairs and Fisheries as well as Health and Consumer Protection are managed by the Commission under specific control systems. The audit examined the internal control system relating to the animal disease and eradication programmes (36) managed by DG SANCO.

3.63.

In this context 30 randomly chosen payments for the animal disease eradication and monitoring programmes were tested. The audit revealed that there is neither a systematic segregation of functions nor a clear definition and distinction of the roles and duties of the initiating and verifying officers. The same is true for the veterinary and the financial officers. Moreover, key controls are not implemented on the basis of a periodically reviewed formal risk analysis.