Audit of agricultural expenditure - Challenges and developments -

1. Audit of agricultural expenditure- Challenges and developments - Wolfgang Burtscher Directorate General for Agriculture and Rural Development Jornadas de Directores de Organismos Pagadores, Segovia, 22. Julio 2008

2. Political context of audit of agricultural expenditure • Shared management of agricultural expenditure between Member States and European Commission. • Commission, however, responsible for correct implementation of EU budget. • Repeated qualified Declaration of Assurance from the Court of Auditors regarding regularity and legality of expenditure. • Negative repercussions on European public opinion, if EU-Funds are badly managed and controlled. • Strategic objective to obtain a positive DAS by 2009.

3. Appreciation of agricultural control framework through Court of Auditors (AR 2006) • Agriculture and Rural Development expenditure under the Guarantee Fund is affected with errors which, also decreasing, remain material (between 2% -5%). • The Court’s substantive testing reveals that the error rate calculated on the basis of a sub-sample, covering only the non-rural development part of agriculture expenditure is below materiality (2%). • Rural development expenditure, in particular agri-environmental measures, is prone to a higher incidence of errors. • Control of agricultural expenditure as a whole is considered to be partially satisfactory, whereas control in strucural funds is conceived as unsatisfactory.

4. General structure of the control framework for agricultural expenditure • Compulsory administrative structure at the level of Member States, centred around accredited paying agencies (Regulations 1290/2005 and 885/2006). • Detailed rules on controls and sanctions in the sectoral regulations (notably Regulation 796/2004 for direct payments and Regulation 1975/2006 for rural development). • Ex-post controls of the work of the paying agencies through certification bodies and of expenditure under Regulation 4045/89. • Annual financial clearance and multi-annual conformity clearance procedures.

5. Improvements at the level of Paying Agencies (PA) • Head of Paying Agency’s Statement of Assurance (DAS) constitutes a positive step towards further improved accountability. • No qualified statement of assurance has been received from Spanish paying agencies nor related remarks of CB. • Value of DAS will be further enhanced through disclosure of lists of documents and work performed which forms the basis of the statement of assurance. • Improvement of annual summaries of coordinating bodies in particular as regards information concerning controls statistics and the recovery of undue amounts.

6. Detailed rules on controls and sanctions in the sectoral regulations • Integrated Administrative Control System (IACS) is the most comprehensive control system that covers area and animal based payments under the first and second pillar. • ECA considers: « IACS, where properly applied, is an efffective control system for limiting the risk of error for irregular expenditure ». • IACS presently covers some 84,5% of the EAGF expenditure (91% by 2013) and about 40% of the total rural development expenditure programmed for the period 2007-2013 (area and animal relatated measures under Axis 2). • Consequently deficiencies in the IACS lead to important financial corrections in the conformity clearance procedure.

7. Importance of keeping IACS fully operational, in particular as regards LPIS Most current deficiencies regarding Land Parcel Identification System (LPIS): • Outdated ortho-photos; • Physical blocks in LPIS are not defined correctly; • Information regarding eligible area is not always correct (exclusion of trees, scrub, other ineligible land).

8. Importance of appropriate on-the spot controls and reporting thereof • Results of on-the spot controls are an important source to determine weaknesses in the control system and to establish the error rate at the level of farmers. • More emphasis on quality of on-the spot controls through monitoring work of certifying bodies as part of their work on the internal control system. • Detailed reporting of control results to the Commission, in particular as regards Single Payment Scheme, rural development expenditure, fruit and vegetables and wine.

9. Certifying Body to review standard of on-the-spot checks and reporting – EAGF and EFRD • Assessment of the control environment (e.g. plans for on-the-spot checks, agreement with delegated bodies, adequacy of inspections reports, application of reductions and exclusions). • Compliance testing to assess the standard of on-the-spot checks, a sample of field inspections (normally 10 for each Fund) should be reperformed or by accompanying inspectors in the field. • Validate and verify the control statistics established by PA (reconciliation of data and audit trail).

10. Financial clearance • Commisson decision by 30 April N+1. • Concerns the completeness, accuracy and veracity of the paying agency’s accounts. • Based on DAS of Head of Paying Agencies and on a certificate from an independent certification body, covers also the proper functioning of the paying agency’s internal control system. • Is without prejudice to subsequent conformity clearance.

11. Conformity clearance -substance • Designed to exclude expenditure from EU financing which has not been paid in conformity with EU-rules. • Expenditure to be excluded depends on - nature and gravity of infringement - financial damage for the Funds • Amount is calculated on the basis of the loss actually caused, extrapolation or where this is not possible flat rates are used. • In case of flat rates, guidelines provide for standard correction rates of 2%, 5%, 10% or 25% of expenditure at risk, depending whether deficiencies concern key or ancillary control requirements.

12. Conformity clearance – procedure • Annual work programme based on risk analysis (e.g. materiality, last audit date, control system risk, paying agency risk) • Mission planning and execution • Mission report and Article 11 letter • Member State’s reply • Bilateral meeting and minutes (MS also to argue why risk is more limited) • Conciliation letter to Member State • Conciliation procedure to reconcile the divergent positions of MS and Commission) • Final letter • Ad hoc Commission decision

13. Thank you for your attention !