Europe’s official financial watchdog has refused to approve the European Union's accounts for the EU for the eleventh consecutive year, because they are riddled with fraud and errors.

The European Court of Auditors refused to give a "statement of assurance" on the 100 billion euro budget for 2004 because the "the vast majority of the payment budget was again materially affected by errors of legality and regularity".

The auditors found particular shortcomings in the EU’s two biggest areas of spending: farm subsidies and regional development. It also failed to approve the budget for the EU’s foreign policy, aid programme, and internal policies, particularly its research programme.

However, financial assistance to countries applying to join the EU was certified, as was the administration budget.

The Court’s report is highly embarrassing for the European Commission, which said it was"sad" about the findings, but insisted that it had made progress. National governments called for a reform of the accounting system, with Britain branding it "ridiculous".

The repeated failure of the EU budget to get approval by auditors leads to annual buckpassing, with the Commission blaming national governments for not taking responsibility for EU expenditure in their countries, and national governments blaming the commission for not improving financial controls.

Siim Kallas, of the European Commission for Administrative Affairs, said:"Everybody talks about the need for simplification but when (we get) to details it is not so simple any more."

The timing could not be more sensitive for Brussels, which hopes to persuade European leaders to agree a 1 trillion (thousand billion) seven-year budget in a summit next month. The poor financial controls are also likely to harden Tony Blair’s resolve not to surrender the British budget rebate unless agricultural subsidies are scaled back.

Hubert Weber, president of the European court of auditors, told the European Parliament: "The Court is again no in a position to provide an unqualified opinion: the supervisory and control systems are not yet implemented and operating effectively and payments are still materially affected by errors."

New control measures in farm subsidies meant that most of the agricultural budget could now be approved, but the rest of it still had significant shortcomings.

Greece was singled out for criticism, where olive farmers claimed for trees that don’t exist, goat farmers claim for goats that don’t exist, and official inspectors fabricate inspections.

One Greek farmer claimed subsidies for 239 sheep lost to wolves and disease, but was unable to explain how he managed to keep his flock the same size without restocking it.

Half of the project budgets approved by the European Commission were found to be inadequately monitored.

"The situation, which represents no major improvement on previous years - was largely due to over-declaration of costs, declarations of ineligible costs or absence of supporting documentation, such as proofs of delivery of services paid for" the Court found.

A British government spokesman said that as the current EU president, Britain was trying to improve financial controls: "We have taken steps to bring about future change to this ridiculous situation where the court of auditors qualifies the accounts every year. It serves no one to have a failure of the system which means it is impossible to sign off on the budget."

However, shadow Europe Minister, Graham Brady, said: "For the EU budget to go unapproved by the auditors for the eleventh year running is absurd. The failure to address the crisis of confidence in the use of EU funds is yet another illustration of the drift and incompetence at the heart of Tony Blair’s EU presidency.

"But it is still more shocking that, when British taxpayers’ contributions are open to fraud and abuse, he is prepared to compromise on our rebate and sign away yet more British money to Brussels

Jan Mulder, a Dutch liberal MEP on the European Parliament’s budget control committee said:"It’s a big issue. How can we face the public with a budgetary situation like this?"

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