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Audit of the Single Payment Scheme
(SPS)(Systems audit)

• Recent Developments in EU Agricultural Funds

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Content of the presentation

• Systems Audit of SPS
• 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 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)
• Recent developments pending for systems audit

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Presentation of SPS

• Introduction CAP reform
• Single Payment Scheme (SPS)
• Legal basis
• Overview
• Implementation process
• Reasons for the audit, Scope of the audit
• Audit objectives and approach
• Expected audit results
• Audit Programme
• Example
• Questions, answers

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Introduction CAP reform

• 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)
• 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 EUs position in WTO agricultural
  trade negotiations
• simplify CAP application for farmers and
  administrators
• keep budgetary costs stable and manageable
  (financial discipline)
• safeguard the rural economy and environment
  (modulation, new measures)

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Single Payment Scheme (SPS)

• Legal basis
• basic regulations
• Council Regulation (EC) No 1782/2003 of 29th
  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
• implementing regulations issued by the Commission
• Commission Regulations No 795/2004 of 21st April
  2004 laying down detailed rules for the
  implementation of the SPS, as amended
• Commission Regulations No 796/2004 of 21st 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
• national implementing regulations issued by the
  Member State

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Single Payment Scheme (SPS)

• Overview (Key elements of Single Payment Scheme )
• payment is irrespective of what the farmer
  produces ( decoupling)
• who is entitled ?
• 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
• 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)
• a mixture of reference amounts and flat rates
  (either static or dynamic)
• 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)
• conditions farmers must fulfill
  (cross-compliance) must respect Good
  agricultural and environmental condition and
  Statutory management requirements

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Single Payment Scheme (SPS)

• Implementation (Options for SPS design and
  calculation)
• 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)
• 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)

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Single Payment Scheme (SPS) Member States
implementing SPS from 2005
9
Single Payment Scheme (SPS) Member States
implementing SPS in 2006 or 2007
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Reasons for and scope of the audit

• Reasons to audit SPS Entitlements are
• 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
• 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

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Reasons for and 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
• 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)

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Audit objectives and approach

• The main objectives of this 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 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

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Audit approach

• There will be two major areas the audit will
  focused on
• 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
• the Commission ensures uniform implementation,
  where necessary
• 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
• adequate procedures are in place for establishing
  payment entitlements
• a proper system for the management of the payment
  entitlements is in place
• adequate controls function effectively.

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Audit approach

• 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 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

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Expected Audit results (Benchmarking)
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Expected Audit results (Benchmarking)
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Audit programme (Basics)

• 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
• Eligible population
• Definition of the reference amount
• Establishment and Notification of the
  entitlements
• Allocation of the National Reserve
• Management of the entitlements

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Audit programme (Options for implementing SPS)

• 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.
• For hybride models a combination of the audit
  programmes will have to be tailor made.

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Basic (Historic) Model1) Eligible population
slide 19
A) Farmers who have been granted payments in
2000-2002 under at least one of the support
schemes referred to in Annex Vi. of Reg.
1782/2003 (Art 33 1.a)
B) Farmers who have received a holding by
actual or anticipated inheritance by a farmer
referred to in A) Art. 33 1.b.
Application before 15/05/2005

• Payment entitlements can be granted to
• new farmers (after 31/12/02)
• farmers in special situation
• farmers in areas subject to
• development or restructuring
• programmes

C) Farmers who have received an entitlement
from the national reserve or by transfer (Art 33
1.c).
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Basic (Historic) Model2) Reference amount
slide 20

• Calculation for crops,livestock premiums,starch
  potatoes,
• seeds, dried fodder (Art 37 and Annex VII)
• Hardship cases modification of the reference
  period (Art 40)

• two basic calculation methodes
• for area aids three year average of the
  established numbers of hectares in the reference
  period multiplied by the aoolicable aid rate of
  annexe VII.
• for livestock premiums three year average of the
  established animals in the reference period
  multiplied by the aoolicable aid rate of annexe
  VI
• individual sanctions are not taken into account

Reduction for partially decoupled schemes (Art 64)
Linear reduction for overshooting of the
national ceiling, if applicable (Art 41)
A farmer whose production was adversely affected
during the reference period shall be entitled to
request a modification of the reference period
(the year affected will not be used for the
calculation if the whole reference period
2000-2002 is affected, the calculation shall be
based on the period 1997-1999)
Reduction for the constitution of the National
Reserve (Art. 42)
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Basic (Historic) Model3) Establishment and
Notification of the entitlements
slide 21
Normal entitlements establishment (Art 43)
Special entitlements (in case farmer has no land
Art 47 48)
Set-aside entitlements Art 53

• Number the 3 year average of the declared areas
  for crops and forage areas
• Value Division of the reference amount by the 3
  year average of the declared areas for crops and
  forage areas (see article 43 of Reg 1782/2003)

• Number When farmer was granted livestock
  premiums but had no hectares or the entitlement
  per hectare results in an amount higher than 5000
  euro reference amount divided by 5000 euro
• Value 5000 euro or fraction

• Number the 3 year average number of compulsory
  set-aside hectares
• Value the 3 year average amount for set-aside
  land divided by the 3 year average number of
  compulsory set-aside hectares

Notification to farmers before 31/12/2005
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Basic (Historic) Model4) Allocation of the
National Reserve
slide 22
Payment entitlements form the National Reserve
can be granted to (Art 42)
New farmers (commenced their agricultura
activity after 31/12/2002) (Option)
Farmers in special situations
Farmers in areas subject to development or
restructuring programmes (Option)
23
Basic (Historic) Model5) Management of the
entitlements
slide 23
Integrated Administration and Control System
(IACS)
Elements of the integrated system - Art 18
Computerised data base Art 19
Identification system for agricultural
parcels (Art 20)
System for identification and registration of
payment entitlements (Art 21)

• to allow verification of entitlements and
  cross-checks with the aid applications and the
  identification system for agricultural parcels
• to allow direct and immediate consultation, of
  the data relating to at least the previous three
  consecutive calendar and/or marketing years

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Basic (Historic) Model Activation of Entitlements
slide 24

• Yearly claim
• Parcels declared may be used for any agricultural
  activity except (Art 51)
• permanent crops
• fruit and vegetables
• ware potatoes
• Cross-compliance

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Regional (Flat Rate) Model1) Eligible population
slide 25
All the farmers whose holdings are located in
the region concerned of Reg. 1782/2003 (Art 59
1.)
Application before 15/05/2005

• Payment entitlements can be granted to
• new farmers (after first year of application)
• farmers in special situation
• farmers in areas subject to
• development or restructuring
• programmes

Farmers who have received an entitlement from
the national reserve or by transfer (Art 33 1.c).
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Regional (Flat Rate) Model 2) Establishment and
Notification of the entitlements
slide 26

• Reduction of the regional ceiling by the national
  reserve

Normal entitlements (Art 59.2 )
Set-aside entitlements (Art 63)

• Number the number of eligible hectares declared
  for the establishment of the payment entitlements
  in the first year of application of the SPS
  (taking into account hardship cases art 49.4)
• Value Division of the reduced regional ceiling
  by the number of eligible hectares declared for
  the establishment of the payment entitlements in
  the first year of application of the SPS

• Number the number of eligible hectares declared
  for the establishment of the payment entitlements
  in the first year of application of the SPS
  multiplied with a set-aside rate. The 10
  compulsory set-aside multiplied by the proportion
  in the region between the arable crop area in the
  reference period and the total eligible land.
• Value value of the normal entitlements.

Normal entitlements with authorisation for use
for the production of fruit and vegetables and
ware potatoes (Art 60)

• Within a maximum number of hectares based on the
  reference period, farmers may ask for identifying
  entitlements authorising the use of parcels for
  fruit, vegetables and ware potatoes production.

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Regional (Flat Rate) Model 3) Allocation of the
National Reserve
slide 27
Payment entitlements form the National Reserve
can be granted to (Art 42)
New farmers (commenced their agricultural
activity after the first year of application of
the SPS (Option)
Farmers in special situations
Farmers in areas subject to development or
restructuring programmes (Option)
28
Regional (Flat Rate) Model 4) Management of the
entitlements
slide 28
Integrated Administration and Control System
(IACS)
Elements of the integrated system - Art 18
Computerised data base Art 19
Identification system for agricultural
parcels (Art 20)
System for identification and registration of
payment entitlements (Art 21)

• to allow verification of entitlements and
  cross-checks with the aid applications and the
  identification system for agricultural parcels
• to allow direct and immediate concultation, of
  the data relating to at least the previous three
  consecutive calendar and/or marketing years

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Key Questions Paying Agencies Audit
slide 29

• Introduction of SPS by the Paying Agencies
• What?
• Which Approach?
• Which measures remain partially coupled?
• When?
• Key dates  first wave  ,  second wave , ...
• Key dates partially decoupling (Art 64)
• Implementation schedule
• How?
• National implementation rules
• Was it already audited? (Commission, certifying
  body, internal audit, ...)

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Key Questions Paying Agencies Audit
slide 30

• Eligible population
• Definition of the reference amount
• Establishment and Notification of the
  entitlements
• Allocation of the National Reserve
• Management of the entitlements

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Eligible Population
slide 31

• Main audit risk Non farmer gets entitlements
• Historical approach
• Member States can invite eligible farmers to
  confirm their interest for obtaining
  entitlements (Art. 12)
• Two possible questions
• Reliability of data used for addressing farmers
• Evidence for the changes in the eligible
  population between the reference period and the
  first year of application.
• Regional approach
• Criteria to determine if an applicant is farmer.

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Definition of the Reference Amount
slide 32

• Main Audit Risk Wrong calculation
• Historical Approach
• Non reliable historical data (area and/or
  animals)
• Errors in the calculation scheme as defined by
  annex VII
• (See questions 5 in audit programme for each
  applicable payment scheme)
• is a direct or a indirect calculation model used
• are the correct rates applied?
• are the correct regional references and or
  ceilings taken into account?
• are the reductions for overshooting considered?
• are the sanctions excluded?
• Regional Approach
• Respect of regional ceiling.

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Establishment and Notification of the
entitlements
slide 33

• Main Audit Risk Wrong calculation
• Historical Approach
• Non reliable historical data (area)
• Set aside entitlements
• Non reliable data on set aside area and payments
• Regional Approach
• Non eligible area claimed areas during the
  first year of application

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The National Reserve
slide 34

• Main Audit Risk
• Wrong constitution
• Wrong allocation
• Constitution
• Difference between national ceiling and sum of
  reference amounts (historical approach)
• Correct capping
• Allocation
• Non eligible population
• Wrong calculation of amount

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Management of the entitlements
slide 35

• Wrong identification (origin, type, owner, value,
  use, ... )
• Compatibility with other IACS database components
• Historical data are not timely available

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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)

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Conclusion

• Questions Answers