The European Court of Auditors refused to give a statement of assurance on the €100 billion (£67 billion) budget for 2004 because “the vast majority of the payment budget was again materially affected by errors of legality and regularity”.

The audit 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 report is highly embarrassing for the European Commission, which said that it was “sad” about the findings while insisting that it had made progress. The repeated failure of the EU budget to be approved leads to annual buck-passing, 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 controls.

Siim Kallas, the European Commissioner for Administrative Affairs, said: “Everybody talks about the need for simplification but when (we get) to details it is not so simple.”

The timing could not be more sensitive for Brussels, which hopes to persuade European leaders to agree on a €1,000 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.

New control measures in farm subsidies meant that most of the agricultural budget could be approved, but there were still shortcomings. Greece was singled out for criticism, with olive farmers claiming for trees that did not exist and farmers for goats they did not own, and inspectors faking inspections.

Half the project budgets approved by the Commission were inadequately monitored. “The situation, which represents no major improvement, 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 of Auditors found.

A spokesman for the British Government said that, as holder of the EU presidency, 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.”

However, Graham Brady, the Shadow Minister for Europe, said: “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.”

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