Select Committee on European Scrutiny Eighth Report


REFORMED CLEARANCE OF ACCOUNTS PROCEDURE


(22115)
5653/01

Special Report No. 22/2000 by the Court of Auditors on evaluation of the reformed clearance of accounts procedure.


Legal base:
Document originated: 6 December 2000
Forwarded to the Council: 23 January 2001
Deposited in Parliament: 13 February 2001
Department: Agriculture, Fisheries and Food
Basis of consideration: EM of 27 February 2001
Previous Committee Report: None
To be discussed in Council: No date set
Committee's assessment: Politically important
Committee's decision: Cleared

Background

  25.1  The clearance of the European Agricultural Guidance and Guarantee Funds (EAGGF) accounts has two main elements — financial accounting clearance (based upon their accuracy as regards the payments made to farmers) and compliance clearance (based upon the effectiveness of the control procedures used by Member States). Until 1996, the clearance of accounts decision was based mainly on Commission audits, which focussed on implementation in the Member States, but these audits could also lead to corrections in expenditure declared by the Member States, and, when all the corrections for a given year were known, they were included in a single clearance of accounts decision taken by the Commission.

  25.2  Because this led to long delays in such decisions, the Commission set up a working party in 1991 to consider ways of reforming the system, and this eventually led in 1996 to the adoption of the present arrangements, which are said to be based on prevention rather than punishment, and on greater cooperation between Member States and the Commission. In particular, they introduce two fundamental changes: separate financial and conformity decisions, and the establishment of a conciliation procedure.

  25.3  The main features of the new system are the accreditation of paying agencies by the competent authorities in the Member States, and the annual certification of paying agency accounts, which forms the basis for the Commission's financial clearance decision. The certificate must state whether the certifying body has gained reasonable assurance that the paying agency's accounts are true, complete and accurate. Under the timetable laid down, the certifying body must produce a report and certificate for each of its paying agencies by 31 January of the following year, and submit these to the Commission by 10 February. The Commission has until 31 March to verify this information and inform the Member State of its position: it then has to take a financial clearance decision by 30 April. Compliance clearance can lead to expenditure being excluded from Community financing because it does not comply with the requisite rules, but although decisions are not subject to any deadlines, they can only be applied retrospectively for a maximum of two years preceding notification to the Member State concerned.

The current document

  25.4  The purpose of this Special Report by the Court of Auditors is to evaluate the new arrangements, which it has done under the following headings.

— Accreditation

  25.5  As regards the number and nature of paying agencies, the Court notes that the relevant Council Regulation states in general terms what is required for a paying agency to be accredited, requires the Member States to limit the number of such agencies to the minimum necessary, but does not specify what form they should take. The Court notes that, as a consequence, there are various different types of paying agency, many of them quite small, and that, although the total number has fallen from 91 in 1998 to 86 in 2000, Italy has said that it intends to create up to 20 regional paying agencies. It suggests that, given the already difficult task of meeting the deadlines in paragraph 1.3, further proliferation will require the Commission either to dedicate more resources to this task, or risk diluting its coverage and/or delaying its financial clearance decision beyond the regulatory deadline.

  25.6  As regards meeting the accreditation criteria, the Court recalls that earlier reports have identified a number of weaknesses, such as poor internal controls, inadequate monitoring of delegated services, and accounting problems, and it says that, although some improvements have been made, important weaknesses persist. These include properly recording debtors in the books of account, and the recovery of large-value debts by the European Anti-Fraud Office (OLAF); the need for paying agencies to have an adequate internal audit service; and the need for any delegation of functions — including those involving national customs authorities — to be clearly defined, and effectively enforced. The Court is also concerned about the sanctions available for poor performance by a paying agency. Accreditation can only be withdrawn by the Member States, with the Commission being confined to reducing monthly advances where it considers that a Member State is not doing enough to improve the situation.

— The certifying bodies

  25.7  The Court notes that the relevant Community legislation requires a certifying body to be operationally independent of the paying agency, and to base its certificate on an examination of procedures and a sample of transactions. It says that during 1999 it visited 18 certifying bodies, which together were responsible for certifying 48 paying agencies (which in turn accounted for some 70% of total expenditure declared in 1998). Of those certifying bodies seen, the Court says that eleven fully meet the necessary requirements, but it also observes that there has been an improvement in the overall quality of the reports produced by the certifying bodies for the years 1996-98.

  25.8  Areas where the Court found shortcomings included independence (where in some cases the paying agency's own internal audit unit was the certifying body); auditing standards (where the retention of audit working papers and documentation relating to sampling was often inadequate); sampling (in terms of both the sample size, and the use of the paying agencies themselves to carry out this task); error evaluation (which was in some cases incomplete or inconsistent); and inadequate control over local offices and use of on-the-spot inspections. It also noted that, although the number of accounts qualified by the certifying bodies had decreased from 21 to 13 over the 1996-98 period, the expenditure in those accounts qualified in 1998 remained "unacceptably high" at 11,700 million euros (30%).

— Conformity decisions

  25.9  The Court notes that the financial clearance decision taken in respect of a given EAGGF year does not prevent the Commission from later disallowing expenditure that it considers to have been inconsistent with Community rules. It also notes that, whilst certifying bodies are not required to certify the legality and regularity of the expenditure declared by the paying agencies, their reports often contain observations of this nature, and thus provide an input to the unit in the Agriculture Directorate General responsible for conformity decisions. Where that unit's inspections show that the operation of agricultural subsidies has been unsatisfactory, the Commission can impose corrections, either on a flat rate proportion of the expenditure in question, or, where possible, on the basis of specific quantification of erroneous payments. The Court points out that the combined value of the first three conformity decisions taken during 1999 for the 1996-1998 EAGGF years, and including one relating to the application of the Over Thirty Months Scheme in the UK, totalled a "relatively modest" 207 million euros. However, it also comments that later conformity decisions may also cover 1996 expenditure, and that it is thus too early to draw conclusions on the total value of corrections for even the first of these years under the new clearance system.

— The conciliation procedure

  25.10  The Court points out that this begins after the Commission has sent its observations to the Member State, which then has an opportunity to reply and discuss the proposed correction with the Commission. At that point, the Commission informs the Member State of the value of the correction it intends to apply, and the Member State has thirty days in which to decide whether to take its case to the conciliation body, though it may instead go straight to the European Court of Justice (ECJ). The conciliation body has four months to issue its opinions, but these are not binding on the Commission's final clearance of accounts decision.

  25.11  In observing the operation of the conciliation body so far, the Court says that it has failed to bring about definitive settlements, but that, although the Commission has recognised that conciliation was "essentially unrealistic", it has rejected any idea of arbitration, which would involve giving the body's opinions a binding character. It also comments that the four-month deadline has been exceeded in about 20% of cases considered by the body, and that it could find no evidence that conciliation has enabled the Commission to reach decisions more quickly. It noted that, during the period under review, corrections corresponding to 1,636 million euros were submitted for conciliation, resulting in a reduction of 275 million euros (17%); and that, of the cases considered, the body agreed with the Commission in 26% of them, agreed in 50% that a lower level of correction was warranted, but in 10% was unable to reach a decision. In the latter two instances, the Court notes that, contrary to what had been expected, many of the cases were referred to the ECJ, and it suggests that this could be avoided if the conciliation body were to take a clear position on all the cases presented to it, and to make concrete suggestions on the appropriate correction (which it says the Commission should then accept, unless it can clearly demonstrate that the conciliation body is mistaken).

— Clearance decisions

  25.12  The Court notes that corrections under the reformed system have until now been considerably lower than previously, and that some, including the European Parliament, have attributed this to a decrease in the effectiveness of the Commission's clearance of accounts unit. The Court says that there is little evidence to support this theory, and that, on the contrary, the unit's reports are for the most part "comprehensive and incisive". Rather, it suggests that a major factor has been the implementation of the Integrated Administration and Control System (IACS), with the use of satellite remote sensing, aerial photography, and random sampling, coupled with physical inspections on farms, which have a strong deterrent effect.

The Government's view

  25.13  In her Explanatory Memorandum of 27 February 2001, the Minister of State (Commons) at the Ministry of Agriculture, Fisheries and Food (the Rt. Hon. Joyce Quin) concentrates as follows on the comments in the Report which relate to the clearance of accounts process in the UK:

— Accreditation

    The Court suggests that, where the paying agency consists of an entire Ministry (as in the UK), problems can arise in determining whether or not local offices should be treated as delegated bodies. However, the Minister says that the structure in the UK offers no basis for this contention, and that the Commission has confirmed that there is no conflict with the accreditation criteria — a fact which the Court recognises later in its Report.

— Work of the certifying bodies

    The Court was critical in many cases of failure properly to file documents, particularly as regards sampling. The Minister says that the UK certifying body (the National Audit Office) ensures that all audit work on certification of EAGGF accounts is subject to both a first stage and a second stage review, which are evidenced on the file, even if it is not considered necessary to evidence review of each and every document held.

    She also addresses an observation that the UK certifying body had not evidenced the population data from which samples are taken, and that the population contained non-EAGGF payments and/or the national element of co-financed measures, which may affect the conclusions drawn. The Minister says that, whilst the NAO previously sampled from Exchequer accounting data in previous years, this was subject to reconciliation with annual EAGGF data files, but that in any event the Intervention Board now provides the NAO with monthly EAGGF data for sampling purposes.

    The Court records that, whilst most certifying bodies sought to obtain all the required assurances from substantive tests on sample items, the figure in the UK was between 63 and 74%, with the balance coming from an evaluation of inherent and control risks. The Minister says that the UK is unaware of the source of these figures, and is unable to comment substantively. However, it has not been subject to criticism that its levels of assurance are not acceptable.

    The Court criticises some error evaluations as being incomplete and inconsistent, and says that the UK had systematic errors which were not quantified, were not included in the error evaluation summary, and were charged to the national budget. The Minister suggests that this refers to an error on the Farm Woodland Premium Scheme which was corrected within the year of account being certified, and thus had no effect on the account.

— Clearance decisions

    The Court's Report suggested that in 1996 the UK suffered an undue increase in reductions to advance payments, as a result of late payments to beneficiaries under the Arable Area Payments Scheme exceeding a certain proportion of claims. The Minister points out that, whilst the UK was initially subject to reductions totalling £17 million, this was reduced to £171,000 following representations to the Commission, which accepted that the delays had arisen because of major problems over upgrading the Ministry's IT systems, at the Commission's behest, to facilitate cross-checks. A similar dispensation was given for late payments in 1997.

Conclusion

  25.14  In order to understand this Report fully, it is necessary to have a clear grasp of some of the terminology in it, which is by no means easy. However, it is evident from the Court's comments that, although the reforms introduced in 1996 have yet to deliver all that was expected of them, there have been a number of important improvements. Given the scale of the expenditure under the European Agricultural Guidance and Guarantee Fund, this is to be welcomed, and we assume that a close watch will be kept on developments to ensure that this momentum is maintained.



 
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