1. EUROPEAN COURT OF AUDITORS 6 – 8 November 2006 EUROSAI - Prague Léon KIRSCH European Court of Auditors Audit of the Single Payment Scheme ( SPS) (Systems audit) Recent Developments in EU Agricultural Funds

2. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Content of the presentation Systems Audit of SPS Systems Audit of SPS The audit will be split into three phases (2006-2008) and each phase will be split into two stages The audit will be split into three phases (2006-2008) and each phase will be split into two stages The first phase will be limited to the establishment and management of payment entitlements (2006-2007) The first phase will be limited to the establishment and management of payment entitlements (2006-2007) The second phase will adress the activation of payment entitlements, payments and the reliability of inspecctions (2006-2008) The second phase will adress the activation of payment entitlements, payments and the reliability of inspecctions (2006-2008) The third phase will focus on IT systems and their reliability (2007-2008/2009) The third phase will focus on IT systems and their reliability (2007-2008/2009) Recent developments pending for systems audit Recent developments pending for systems audit

3. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Presentation of SPS Introduction – CAP reform Introduction – CAP reform Single Payment Scheme (SPS) Single Payment Scheme (SPS) Legal basis Legal basis Overview Overview Implementation process Implementation process Reasons for the audit, Scope of the audit Reasons for the audit, Scope of the audit Audit objectives and approach Audit objectives and approach Expected audit results Expected audit results Audit Programme Audit Programme Example Example Questions, answers Questions, answers

4. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Introduction – CAP reform June 2003 reform of the Common Agricultural Policy (CAP) aims to achieve the following: June 2003 reform of the Common Agricultural Policy (CAP) aims to achieve the following: allow farmers to produce to market demand, no link of the subsidy with the production (decoupling) allow farmers to produce to market demand, no link of the subsidy with the production (decoupling) promote environmentally and economically sustainable farming through the linking of the SPS to respect environmental, food safety, animal and plant health and animal welfare standards (‘cross-compliance’) promote environmentally and economically sustainable farming through the linking of the SPS to respect environmental, food safety, animal and plant health and animal welfare standards (‘cross-compliance’) strengthen the EU’s position in WTO agricultural trade negotiations strengthen the EU’s position in WTO agricultural trade negotiations simplify CAP application for farmers and administrators simplify CAP application for farmers and administrators keep budgetary costs stable and manageable (financial discipline) keep budgetary costs stable and manageable (financial discipline) safeguard the rural economy and environment (modulation, new measures) safeguard the rural economy and environment (modulation, new measures)

5. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Single Payment Scheme (SPS) Legal basis Legal basis basic regulations basic regulations Council Regulation (EC) No 1782/2003 of 29 th September 2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers, as amended Council Regulation (EC) No 1782/2003 of 29 th September 2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers, as amended other Council Regulations that can be found in Annex 1 of the APM other Council Regulations that can be found in Annex 1 of the APM implementing regulations issued by the Commission implementing regulations issued by the Commission Commission Regulations No 795/2004 of 21 st April 2004 laying down detailed rules for the implementation of the SPS, as amended Commission Regulations No 795/2004 of 21 st April 2004 laying down detailed rules for the implementation of the SPS, as amended Commission Regulations No 796/2004 of 21 st April 2004 laying down detailed rules for the implementation of cross-compliance, modulation and the integrated administration and control system (IACS), as amended Commission Regulations No 796/2004 of 21 st April 2004 laying down detailed rules for the implementation of cross-compliance, modulation and the integrated administration and control system (IACS), as amended Com. Reg. No 2235/2003, No 2237/2003, No. 1973/2004, No.1655/2004 Com. Reg. No 2235/2003, No 2237/2003, No. 1973/2004, No.1655/2004 national implementing regulations issued by the Member State national implementing regulations issued by the Member State

6. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Single Payment Scheme (SPS) Overview (Key elements of Single Payment Scheme ) Overview (Key elements of Single Payment Scheme ) payment is irrespective of what the farmer produces (= decoupling) payment is irrespective of what the farmer produces (= decoupling) who is entitled ? who is entitled ? entitlements only go to farmers actively farming at the date each Member State (MS) introduces the scheme entitlements only go to farmers actively farming at the date each Member State (MS) introduces the scheme farmers are allotted payment entitlements either based on: farmers are allotted payment entitlements either based on: reference amounts (generally amounts of direct payments each farmer received in the reference period 2000-2002, though different calculation options are available for specific cases) reference amounts (generally amounts of direct payments each farmer received in the reference period 2000-2002, though different calculation options are available for specific cases) flat rates (regional ceilings divided by the number of eligible hectares decelared by the farmers of the region in the year of SPS introduction) flat rates (regional ceilings divided by the number of eligible hectares decelared by the farmers of the region in the year of SPS introduction) a mixture of reference amounts and flat rates (either static or dynamic) a mixture of reference amounts and flat rates (either static or dynamic) activating entitlements activating entitlements payments are granted annualy where farmers have eligible hectares at their disposal to activate the appropriate number of entitlements (in principal permanent crops, fruit and vegetables, ware potatoes and forestry are not considered as eligible land) payments are granted annualy where farmers have eligible hectares at their disposal to activate the appropriate number of entitlements (in principal permanent crops, fruit and vegetables, ware potatoes and forestry are not considered as eligible land) conditions farmers must fulfill (‘cross-compliance’) – must respect Good agricultural and environmental condition and Statutory management requirements conditions farmers must fulfill (‘cross-compliance’) – must respect Good agricultural and environmental condition and Statutory management requirements

7. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Single Payment Scheme (SPS) Implementation (Options for SPS design and calculation) Implementation (Options for SPS design and calculation) Basic (historic) approach – entitlements granted based on payments received in reference period (reference amounts) Basic (historic) approach – entitlements granted based on payments received in reference period (reference amounts) Regional (flat rate) approach – entitlements granted based on the disvison of regional ceilings by the number of eligible hectares decelared by the farmers of the region in the year of SPS introduction(this model entails some redistribution of payments between farmers) Regional (flat rate) approach – entitlements granted based on the disvison of regional ceilings by the number of eligible hectares decelared by the farmers of the region in the year of SPS introduction(this model entails some redistribution of payments between farmers) Mixed models – mix of the above two models, further can be divided as hybrid static model (the proportion of the above two models stays the same from the first application) or as hybrid dynamic (proportion changes from the first application) Mixed models – mix of the above two models, further can be divided as hybrid static model (the proportion of the above two models stays the same from the first application) or as hybrid dynamic (proportion changes from the first application)

8. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Single Payment Scheme (SPS) Member States implementing SPS from 2005

9. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Single Payment Scheme (SPS) Member States implementing SPS in 2006 or 2007

10. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Reasons for and scope of the audit Reasons to audit SPS Entitlements are Reasons to audit SPS Entitlements are The Single Payment Scheme (SPS) is a central element of the CAP reform The Single Payment Scheme (SPS) is a central element of the CAP reform To implement properly SPS is a huge task and it will be prone to problems and errors To implement properly SPS is a huge task and it will be prone to problems and errors First payments under SPS will be done from 2006 budget (represents 13% of the general budget - € 14.653 Mio and this will increase further in the next years) First payments under SPS will be done from 2006 budget (represents 13% of the general budget - € 14.653 Mio and this will increase further in the next years) Payment entitlements will be established once and then used for later payments, if incorrectly calculated now, all future payments will be incorrect as well Payment entitlements will be established once and then used for later payments, if incorrectly calculated now, all future payments will be incorrect as well

11. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Reasons for and scope of the audit Scope of the audit Scope of the audit The first phase of the audit will be limited to the establishment and management of payment entitlements The first phase of the audit will be limited to the establishment and management of payment entitlements First stage (in 2006) – visit of 13 paying agencies in the 10 Member States that introduced SPS in 2005 and audit of the Commission First stage (in 2006) – visit of 13 paying agencies in the 10 Member States that introduced SPS in 2005 and audit of the Commission Second stage (in 2007) – visit of paying agencies in 5 Member States that introduce SPS in 2006 (appear in budget year 2007) Second stage (in 2007) – visit of paying agencies in 5 Member States that introduce SPS in 2006 (appear in budget year 2007)

12. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Audit objectives and approach The main objectives of the SPS audit are to assess whether: The main objectives of the SPS audit are to assess whether: The Commission has set up the necessary procedures to ensure uniform and correct calculation of entitlements, respecting the national ceilings and has adequately supported the Member States in their efforts to set up the initial implementation of the SPS. The Commission has set up the necessary procedures to ensure uniform and correct calculation of entitlements, respecting the national ceilings and has adequately supported the Member States in their efforts to set up the initial implementation of the SPS. The national provisions adopted by the Member States comply with EU legislation and the entitlements have been correctly calculated. The national provisions adopted by the Member States comply with EU legislation and the entitlements have been correctly calculated. The Member States have set up adequate administrative procedures and a reliable internal control for the correct, complete and accurate establishment and management of payment entitlements The Member States have set up adequate administrative procedures and a reliable internal control for the correct, complete and accurate establishment and management of payment entitlements

13. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Audit approach There will be two major areas the audit will focused on: There will be two major areas the audit will focused on: At the Commission level where it has to be assessed whether: At the Commission level where it has to be assessed whether: administrative procedures and controls have been put in place at the Commission to ensure compliance with EU legislation; administrative procedures and controls have been put in place at the Commission to ensure compliance with EU legislation; the Commission ensures uniform implementation, where necessary the Commission ensures uniform implementation, where necessary adequate supervision is exercised for the proper implementation of the SPS in the Member States adequate supervision is exercised for the proper implementation of the SPS in the Member States At the Member State level where it has to be assessed whether: At the Member State level where it has to be assessed whether: adequate procedures are in place for establishing payment entitlements; adequate procedures are in place for establishing payment entitlements; a proper system for the management of the payment entitlements is in place; a proper system for the management of the payment entitlements is in place; adequate controls function effectively. adequate controls function effectively.

14. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Audit approach Two kinds of audit test will be performed: Two kinds of audit test will be performed: a walk-through test – based on a limited sample of applications representing all the possible types of payment entitlements in a given agency in order to document the control system a walk-through test – based on a limited sample of applications representing all the possible types of payment entitlements in a given agency in order to document the control system a compliance test – based on a statistical sample of at least 30 applications from the entire population in order to determine, if the controls are effectively functioning; the sample will include as much as possible transactions selected for substantive testing by FEOGA 1 a compliance test – based on a statistical sample of at least 30 applications from the entire population in order to determine, if the controls are effectively functioning; the sample will include as much as possible transactions selected for substantive testing by FEOGA 1 The evidence collection plan contains the audit objectives, the audit criteria, the source of the audit evidence and the audit procedures to be undertaken by the auditors The evidence collection plan contains the audit objectives, the audit criteria, the source of the audit evidence and the audit procedures to be undertaken by the auditors

15. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Expected Audit results (Benchmarking)

16. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Expected Audit results (Benchmarking)

17. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Audit programme (Basics) For every paying agency a specific audit programme is needed. However every programme will have to cover the same basic items. For every paying agency a specific audit programme is needed. However every programme will have to cover the same basic items. The following five areas have been identified in order to design and understand better the steps needed for the calculation of the entitlements under SPS as per Council Reg (EC) 1782/2003: The following five areas have been identified in order to design and understand better the steps needed for the calculation of the entitlements under SPS as per Council Reg (EC) 1782/2003: 1. Eligible population 2. Definition of the reference amount 3. Establishment and Notification of the entitlements 4. Allocation of the National Reserve 5. Management of the entitlements

18. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Audit programme (Options for implementing SPS) The audit programmes will have to be adapted following the options decided for by the Member States. The audit programmes will have to be adapted following the options decided for by the Member States. The key points of the historic and the pure regional approach are presented in slides 19 to 35. The key points of the historic and the pure regional approach are presented in slides 19 to 35. For hybride models a combination of the audit programmes will have to be tailor made. For hybride models a combination of the audit programmes will have to be tailor made.

19. 6 – 8 November 2006 Léon KIRSCH European Court of AuditorsEUROSAI - Prague Recent develoments pending for systems audit In its opinion No 2/2004 on the so called «single audit model» and a proposal for a Community Internal Control Framework (CICF) the ECA stated: The type and intensity of checking within internal control systems would be set with reference to the cost and benefits (§ 50). As no systems can reasonably be expected to assure absolute correctness of all transactions, the extent and intensity of checking should make an appropriate balance between the overall costs of operating those checks and the overall benefits they bring (§ 25)

20. EUROPEAN COURT OF AUDITORS 6 – 8 November 2006 EUROSAI - Prague Léon KIRSCH European Court of Auditors Conclusion Questions & Answers