Dear Research and Innovation (RTD),

Under the right of access to documents in the EU treaties, as developed in Regulation 1049/2001, I am requesting documents which contain the following information:

A. DEFINITIONS

For the purposes of this application, the following two terms are used:

1. ‘External auditor’ refers to any external contractor of the Research DGs that has conducted since 1/8/2008 external financial audits pursuant to articles FP6 model contract Annex II article 29 and FP7 model contract Annex II article 22.
2. ‘Contractor’ refers to a an FP6 contractor or a FP7 beneficiary. Such an entity may have participated in both FP6 and FP7 actions.

B. REQUESTS

The present application is about the documents listed below, and for which DG RTD has always been the lead service:

1. The FP6 Audit Manuals, including all annexes, as dispatched to the ‘external auditors’ for guidance and reference purposes.

2. The FP7 Audit Process Handbook, including all annexes, as dispatched to the ‘external auditors’ for guidance and reference purposes.

3. The documents DG RTD dispatched to the ‘external auditors’ with ‘Guidelines’, or equivalent’, about the content of the ‘FP6 flash reports’ and their counterpart “FP7 ‘flash’ report”.

4. The documents fully describing the ‘quality check on audit report for coherence, completeness, correctness, compliance with the Audit Handbook’ regarding FP7 audits. One or more DG RTD Units have been using such documents to verify and validate the audits of ‘external contractors’

5. The documents describing how in particular a ‘contractor’ was singled out for either a ‘risk-based audit’ or an ‘audit for continued dissuasive effect’, which are mentioned in the 2010 Annual Activity Report of DG RTD.

6. The template of the letter in use in 2011, with which DG RTD notified a ‘contractor’ about a ‘normal’ financial audit, and all annexes thereto.

7. The template of the letter in use in 2011, with which DG RTD notified a ‘contractor’ about a ‘risk-based audit’, and all annexes thereto.

8. The template of the letter in use in 2011, with which DG RTD notified a ‘contractor’ about an ‘audit for continued dissuasive effect’ and all annexes thereto.

The request concerns documents drawn up until 31/12/2012.

C. EXCEPTIONS OF REGULATION NO 1049/2001

The following observations are made regarding the exceptions of article 4 of Regulation No 1049/2001.

1. Requests 1-4:
1.1. The documents were dispatched to ‘external auditors’, so that they are not internal documents. Article 4(3) is not applicable.
1.2 Their dispatch to several contractual ‘external auditors’ precludes the application of article 4(1)(a).

2. All requests:
2.1. The exceptions of article 4(1(b) and 4(2) first and second indent are not applicable. By definition, the Union is not pursuing its own ‘commercial interests’ by paying out subsidies to ‘contractors’.

2.2. Article 4(2) third indent is not applicable (inspections, investigations and audits) because:
a. The protection applies to a single individual audit and not to how in particular audits are organised in general and abstract form.
b. The ‘contractors’ were audited pursuant to the contractual provisions FP6.II.29 and FP7.II.22 by the ‘external auditors’ (also the Commission’s contractors), and therefore it is illogical to argue that purely contractual measures fall within the ambit of that stipulation. Put differently, it will defy logic to argue that and an audit that was solely pursued according to the terms and conditions of two contracts - on the one hand, the ‘contractor’, and on the other, the ‘external auditors’, with the Commission ‘in the middle’- qualifies for the protection of that provision.
c. The prohibitions of article 57(2) of Regulation 1605/2002, as amended, place all audits of the ‘external contractors’ outside the exercise of public authority. It is illogical to argue that somehow the express approval of the audit findings by the Commission services is capable to change the substance of a ‘doubly-contractual’ audit to an exercise of public authority.

In conclusion, no exception of article 4 is applicable for all requests.

D. OVERRIDING PUBLIC INTEREST

There is a strong case of an overriding public interest for several reasons. In the interests of brevity, the initial application will only briefly argue about it.

As a preliminary point, it is noted that article 57(2) of Regulation 1605/2002, as amended, stipulates ‘The tasks which may be entrusted by contract to external private sector entities or bodies other than those which have a public-service mission are technical expertise tasks and administrative, preparatory or ancillary tasks involving neither the exercise of public authority nor the use of discretionary powers of judgment’. Consequently, the Research DGs have been obliged to take all the necessary measures to ensure compliance with that provision. However, in practice the ‘external auditors’ have indeed exercised discretionary powers of judgment, since on occasions they have declared in their final audit reports that a beneficiary’s time-recording system is unreliable, despite the complete silence of the FP7 grant agreement about time-recording or any provision of Union law.

Until 31/12/2012 ‘external auditos’ had carried out approximately 1,500 audits. This high figure underscores that ensuring fair and objective treatment of all audited ‘contractors’ is of paramount importance. However, achieving this goal has been far from trivial.

In view of the above, the public is fully entitled to scrutinise how exactly the Research DGs have ensured that ‘external auditors:
1. Have been conducting fair and objective financial audits, not stepping beyond pure technical and ancillary tasks, and more specifically not entering into the areas of ‘exercising public authority or relying on discretionary powers of judgment’.
2. Have not drawn conclusions about matters for which there has always been a total absence of contractual provisions or Union law.

Yours faithfully,

Kostas VITSOS

Dear Research and Innovation (RTD),

I refer to your email by which DG RTD informed me that it has found necessary to provide the initial reply by 30/9/2013. In the interests of procedural efficiency, the new time-limit is perfectly reasonable.

However, I find it as important to take issue with the notion that requests #1 - #3 and #6 - #9 concern a large number of documents.

The requested FP6 - FP7 Audit Manuals/Handbooks are few volumes each. Presumably, the Research family DGs have provided the external auditors and their subcontractors (e.g. Polaris Association independent auditing firms-members) with copies thereof. In the light of article 57(2) of Regulation No 1605/2002 (as amended) and the private law contract between the Commission and the auditors, adopting an initial position about their full release seems to be rather straightforward. Considering a partial release of the Manuals/Handbooks may prolong the internal procedure, but in my opinion a partial release would effectively prove that the Research family DGs have had a concealed policy of personal data processing in FP6-FP7 external financial audits. Pages 15-20 of the FP6 audit manual covering the on-the-spot auditing activities is already available in asktheeu.org, which implies that any decision to refuse full release will be in itself a manifest proof of the concealed policy.

Turning to requests #6 to #9, since DG RTD has drawn up several tens (if not hundreds) of specific audit notification letters, their full release is even more straightforward.

I trust that DG RTD will dully take into account the foregoing considerations.

Yours faithfully,

Kostas VITSOS

Dear Research and Innovation (RTD),

The present document is a confirmatory application pursuant to article 7(2) of Regulation No 1049/2001. It is kindly requested that DG RTD transfer it to the Secretariat-General which is responsible to handle it according to the Commission Decision 937/2001.

The confirmatory application concerns all requests except #3 of the initial application.

1. CONTEXT OF THE INITIAL APPLICATION

The requested FP6 Audit Manuals & FP7 Audit Process Handbook concern auditing activities for approximately 50% of all directly managed EU expenditure. The FP6 and FP7 audit campaign have aimed at clearing by way of external financial audits 50% of all claimed costs. The aggregate number of FP6 and FP7 audits by the end of 2013 will be in the order of 3,500. It is clear that the audits are an industrial scale activity.

The FP6 and FP7 audit campaigns has generated a great deal of friction and tension with the European research community. The applicant’s analysis of section 1 of the confirmatory application GestDem 2013/3351 - http://www.asktheeu.org/en/request/perso... - entitled “Context of the initial application” are incorporated herein by reference.

2. CREDIBILITY AND INTEGRITY OF DG RTD – DILIGENT SEARCH FOR DOCUMENTS

As it is self-evident from the DG RTD initial reply to GestDem 2013/3351, the article 25 prior notification of Regulation No 45/2001 DG RTD DPO-3398, as it stood until 12/6/2013, has had two false declarations. All versions of DPO-3398 essentially lack legal basis with respect to the lawfulness of personal data processing.

The applicant’s analysis of GestDem 2013/3351 in section 2 “Overall assessment of the DG RTD initial reply against the credibility and integrity of DG RTD – liability of officials” is incorporated herein by reference.

The false declarations in DG RTD DPO-3398 up to 12/6/2013 have destroyed the public’s confidence about the honesty and integrity of the entire DG RTD. Consequently, there can be no confidence whatsoever in that DG RTD has carried out a diligent search for documents. This is especially the case since several of the documents at issue will prove that DG RTD was instructing its external contractors-auditors to process personal data in contravention of the national personal data protection laws and Regulation No 45/2001.

3. REQUEST #1 – FP6 AUDIT MANUALS

As a preliminary observation, the request was purposefully worded as “The FP6 Audit Manuals, including all annexes, as dispatched to the ‘external auditors’ for guidance and reference purposes.” The specific reference to Manuals dispatched to external contractors has a fundamental impact to what extent the Commission services may lawfully rely on the exceptions of Regulation No 1049/2001 to refuse total or partial access. In so much DG RTD has not reflected in its initial reply about this specific aspect, it should be inferred that DG RTD has failed to assess how the exceptions of article 4 of Regulation 1049/2001 are impacted by the disclosure of the Manuals to its contractual counterparties.

3.1. PROBABLE FAILURE TO DISCLOSE THE EXISTENCE OF DOCUMENTS UNDER REQUEST #1

The applicant requested ‘Manuals’ in the plural. Both the cover page and the contents of the partially released Manual make it plainly obvious that it concerns on-the-spot financial audits. The on-the-spot activities are just one part of the whole FP6 financial audit cycle. There are five additional and important parts which are (i) the preparation of the audit, (ii) the assessment of the evidence of the audit file that follows the on-the-spot activities, (iii) the drawing up of the draft report, (iv) the ‘adversary’ or ‘contradictory’ procedure with the auditee about the findings of the draft audit report, and finally (v) the drafting of the final audit report.

It is wholly unreasonable to expect that there are no other documents – themselves constituent parts of a multi-volume FP6 Audit Manual- that do not provide guidance about the carrying out of the activities for those five parts of the audit.

The applicant kindly suggests that DG RTD failed to disclose to the applicant the mere existence of the other volumes of the FP6 Audit Manuals. If this is indeed the case, then the DG RTD initial reply is an implied total refusal without a statement of reasons.

3.2. NO DISTINCTION BETWEEN THE FP6 & FP7 AUDIT MANUALS IN THE STATEMENT OF REASONS

As a preliminary observation, as it is explained further below the partially released FP7 Audit Manual is immaterial to request under #2, since that request concerns the “FP7 Audit Process Handbook”.

In justifying the partial release of the FP6 & FP7 Audit Manuals DG RTD has treated the documents without drawing any distinction between them. More specifically, the statement of reasons about the partial release of the documents under requests #1 & #2 is given in pages 3 – 5, the paragraphs “As regards the withheld parts of the documents corresponding to Points 1 and 2 of your application [...] The financial policy of the Community would consequently inevitably be undermined”. The following observations are made regarding the indiscriminate treatment of the two partially released documents:

- According to the DG RTD 2010 Annual Report insofar DG RTD is concerned the FP6 campaign was competed. Whereas other DGs like DG INFSO were carrying out audits of FP6 projects in 2011, even in 2012, FP6 was launched in 2002, with the last calls for proposal about late 2006. This means that very few FP6 financial audits will be conducted in late 2013 and afterwards. Therefore, the protected interests in FP6 and FP7 audits are very substantially diminished for the former.

- There are essential differences in Annex II of the FP6 model contract and the FP7 grant agreement with profound consequences to the financial audits. First, article 22 §4 of Annex II of the FP7 model grant agreement expressly provides for the obligation of the FP7 beneficiary to hand over to the auditor information “including information on individual salaries of persons involved in the project”. There is no such express provision in Annex II of the FP6 model contract. Second, article 13 of the said agreement has the truly ground-breaking provision of granting personal data rights to legal persons. Third, article 3 of Regulation No 1906/2006 – FP7 Rules of Participation – expressly provides for the confidentiality obligations of the Commission and FP7 participants as a matter of Community law; no such provision is found in Regulation No 2321/2002 – FP6 Rules of Participation.

- There will be profound consequences with regards the partially released FP7 Audit Manual should it be established that the DG RTD assertions about the FP6 Audit Manual being subject to article 4(1) forth indent and article 4(2) third indent of Regulation No 1049/2001 are manifestly unfounded. As it will be argued below, this is exactly the case for the FP6 Audit Manual. Notwithstanding that the FP7 Audit Manual does not fall unde request #2, the unavoidable consequence from the DG RTD reasoning of partially releasing the FP6 Manual is that DG RTD unlawfully released the FP7 Audit Manual partially only, instead of fully releasing it.

3.3. PROTECTION OF THE UNION’S FINANCIAL POLICY – WHOLLY INCORRECT RELIANCE ON ARTICLE 4(1)(a) FORTH INDENT

In asserting that article 4(1)(a) fourth indent is applicable to the FP6 Audit Manual DG RTD is taking in a wholly inexcusable leap of logic by equating ‘financial interests’ with ‘financial policy’.

It must be stressed from the outset that, contrary to the DG RTD totally unsubstantiated assertion, the Union’s ‘financial policy’ has absolutely nothing to do the FP6 external financial audits of the Research DGs. If that is not self-evident to the Secretariat-General, it is respectfully suggested that the Secretariat-General and the Legal Services should seek the expert opinion of DG ECFIN to dispel any doubts they may be harbouring.

In a few recent applications pursuant to Regulation No 1049/2001 applicants have refuted the premise that ‘financial policy’ can be equated with ‘financial interest’ or that documents about the Union’s ‘financial interests’ are subject to the exception of article 4(1)(a) fourth indent of Regulation No 1049/2001. Two examples are:

1. GestDem No 2013/3375, http://www.asktheeu.org/en/request/dg_cn..., confirmatory application of 31/7/2013, section ‘3. Protection of the public interest as regards the Union’s financial policy’.

2. GestDem 2013/3573, http://www.asktheeu.org/en/request/dg_rt..., confirmatory application of 22/8/2013, section “1.1. Reliance on article 4(1)(a) forth indent of Regulation ‘Financial Policy’”.

The applicant subscribes to a very large extent to the arguments in the above two applications and kindly request that the Commission service duly take them into consideration.

3.4. REGULATION NO 2321/2002 AND THE PROTECTION OF THE COMMUNITY’S FINANCIAL POLICY

An analysis of Regulation No 2321/2002 (lex specialis) leads to the conclusion that in FP6 the EU legislature provided for other types of ‘controls’ to safeguard the Community’s ‘financial interests’, which are distinct from the audits pursuant to article FP6.II.29. There are seven instances of the term ‘financial interest’ in that Regulation, specifically in recital #7, twice in article 12(3), article 18(2), and three times in article 20 and the footnote.

Article 29 of Annex II of the FP6 model contract is the enactment in the FP6 contract of the provisions of article 18(3) “The Commission, or any representative authorised by it, shall have the right to carry out scientific, technological and financial audits on the participants, in order to ensure that the indirect action is being or has been performed under the conditions claimed and in accordance with the terms of the contract”.

In view of the foreseeability of the EU legislative acts and insofar the FP6 is concerned, it follows that EU legislature did not enact specific provisions according to which the FP6 contractual financial audits had been intended for the protection of the Community’s ‘financial interests’.

Admittedly, a ‘contractual scientific, technological and financial audit’ - and any legitimate audit findings arising out of such an audit may lead to a Commission’s request for the reimbursement of unduly paid amounts, thereby protecting the Community’s financial interests. However, three points are essential in this logical conclusion, which are analysed below.

First, the audit itself must be lawful. The grave infringements of Regulation No 45/2001 in each single FP6 & FP7 financial audit automatically imply that the audit findings about personnel costs are gravely illegal.

Second, the link in the logical procession from the ‘contractual audits’ through to the Community’s ‘financial interests’ finally to the ‘Community’s financial policy’ is broken between the ‘financial interests’ and the ‘public interest regarding financial policy’. The break of the link is because that, should the EU legislature had foreseen that a public interest to the Community’s financial policy was at stake in the article 18(3) of the ‘financial audits’, then it would have enacted a corresponding provision(s). The total absence of a specific legislative provision and the huge leap of logic from ‘financial interest’ to ‘financial policy’ confirms the broken link.

Third, the EU legislature grouped together ‘scientific, technological and financial’ audits. This particular grouping has profound consequences in rightfully relying on ‘financial policy’ to justify the partial access at issue, simply because it will be absurd to argue that a scientific or technological audit would affect the Community’s “public interest as regards the Community’s ‘financial policy’”.

3.5. GRAVE INFRINGEMENTS OF THE FUNDAMENTAL RIGHT OF PERSONAL DATA PROTECTION AND THE PUBLIC INTEREST

In view of the grave illegalities of every single DG RTD external financial audit as regards Regulation No 45/2001 and the false declarations of DPO-3398.1, the DG RTD reliance on article 4(1)(a) forth indent to refuse access to the FP6 Audit Manuals is hypocritical, since these illegalities are by definition the very antithesis of the ‘public interest’. An administrative department that has committed wrongful acts as DG RTD has done cannot and should evoke the ‘public interest’ in order to refuse full access to documents that will provide further evidence about its wrongful acts.

3.6. FP6 AUDIT MANUAL, GUIDELINES TO ON-THE-SPOT FINANCIAL AUDITS ON FP6 CONTRACTS

The annex herein gives the text of the expunged parts of the released FP6 Manual. The expunged text was extracted from the same document that a third part provided to the applicant. According to that third party, the document had originated from an authorised disclosure of the Commission services to another third party, with no restriction being placed by the Commission services on further disclosure. In other words, a third party provided the applicant with a full copy of the released FP6 Audit Manual (‘the full FP6 Manual’).

The applicant can neither confirm the authenticity of the ‘full FP6 Manual, nor can he trace how it came to the possession of the third party. However, the released FP6 Manual is identical with the corresponding parts of the full FP6 Manual, down to a single word.

Examples of personal data processing is found in pages 16, 17, 18, 22, 23, 25 and 26 of the Manual. An example with the specific and express instructions to the auditors to process personal data is found in the withheld text of page 17:

“Commission's approach

For the performance of financial audits under previous framework programmes, the Commission issued the following alternative audit programme (It is not required for FP6, but might be useful when justifying time devoted to the project) to be performed by the EAF in cases where no time records were prepared:

Practical advice for external audits

The absence of time sheets should not automatically result in the disallowance of the cost charged. The burden of proof rests with the Contractor. Therefore the auditors must seek from the Contractor alternative evidence to support the reasonableness of the number of hours charged. As such the auditors must:

a) Verify that the personnel charged to the contract exist and were employed during the period in question. The qualifications and experience of the personnel should also be reviewed.

b) Interview as many of the personnel as possible. Ask each employee to describe their part in the project and the work performed, to demonstrate equipment and consumables used and to estimate their time worked on the project. Cross check the evidence of one against the other.

c) Verify how workable hours have been split between different projects (to exclude that more than 100% of workable hours have been charged). Also verify that the hours claimed are within the project period.”

It is evident from even a cursory glance at the expunged parts of the released FP6 Manual reveals that the withheld parts of the document have absolutely nothing to do with the exceptions of article 4(1)(a) forth indent and 4(2) third indent, on which DG RTD based its partial release. On the very contrary, the withheld parts provide express instructions to the external auditors-contractors to process personal data of third parties to the audited FP6 projects (i.e. the researchers charged to the FP6 audited projects).

3.7. INCORRECT RELIANCE ON ARTICLE 4(2) THIRD INDENT

Article 4(2) third indent protects the purposes of a concrete audit and not audits as abstract measures. The DG RTD initial reply flies in the face of:

1. The European Court of Auditor’s practice in fully publishing its own manuals, which are more then 300 pages long.
2. OLAF’s publications of a 130-pages Operational Manual (in force until 31/1/2012), which had more than 15 annexes. OLAF’s investigations are protected by the very same provision. This did not prevent OLAF from disclosing more than 200 pages about its methods of investigations
3. The DG COMP Manual on the Anti-Trust Investigations, which is over 100 pages long.

The DG RTD logic would preclude the full release of the above manuals. Since this would run contrary to logic and also to what has indeed taken place (the manuals were published), DG RTD cannot in any event rely on article 4(2) third indent to refuse full disclosure.

3.8. DISCLOSURE OF REQUESTED DOCUMENTS TO AUDITORS-CONTRACTORS

The external auditors-contractors are legally bound to the Commission by private law contracts governed by Belgian law. Any contractual dispute is to be settled before the Courts of Brussels.

The framework contracts of DG RTD expressly allow for subcontracting. KPMG Germany has de-facto subcontracted work to its Greek sister audit firm. KPMG Greece has drawn up draft audit reports for field audits KPMG Greece carried out in 2011 and 2012 in Greece. Blomer Accountants & Reviseurs has subcontracted to members of the Polaris Group of audit firms more than 50% of all audits. Members of the Polaris Group audit firms have signed hundreds of final audit reports. In all cases of subcontractors, the Commission and the subcontractors have had no direct legal relationship whatsoever.

It is nearly certain that either DG RTD directly, or at the request of DG RTD the signatories of the framework contracts (or in any event with the DG RTD implied consent), have provided the subcontractors with ‘Audit Manuals’ and the FP7 ‘Audit Handbook’, or equivalent ‘Manuals’ or ‘Handbook(s)’. The Commission services cannot and must not claim that documents disclosed to private law entities, with no direct legally binding relationship between the Commission and the entities, are subject to article 4(1)(a) forth indent or 4(2) third indent.

Therefore, insofar DG RTD has provided -or has caused so - subcontractors of the DG RTD main contractors-auditors with ‘Audit Manuals’ or ‘Audit Handbooks’, and unless and until the Commission services state that those documents were unlawfully released to the subcontractors, the Secretariat-General and the Legal Services cannot refuse full release of the requested ‘Audit Manuals’ and ‘Audit Handbooks’.

3.9. SUMMARTY - CONCLUSIONS

In short:
- DG RTD unlawfully relied on article 4(1)(a) forth indent (public interest as regards the Union’s financial policy) and article 4(2) third indent (purposes of audits).
- The withheld parts of the released FP6 Audit Manual have nothing to do with the protected interests on which DG RTD relied upon
- The expunged parts of the released FP6 Audit Manual expressly instruct auditors to process personal data of third parties to the audited FP6 projects
- DG RTD is prepared to unlawfully refuse full access to documents handed over to tens of subcontractors (members of the Polaris Group) in order to conceal from the public is grave infringements of Regulation No 45/2001 in the framework of the DG RTD external financial audits.

4. REQUEST #2 FP7 AUDIT PROCESS HANDBOOK

The application expressly requested “The FP7 Audit Process Handbook, including all annexes, as dispatched to the ‘external auditors’ for guidance and reference
purposes”. The following observations are made:

1. Nowhere in the partially released ‘FP7 Audit Manual’ there is an occurrence of the word ‘Handbook’; the word ‘process’ occurs once only as ‘recover process’.

2. The initial reply did not state that the requested ‘FP7 Audit Process Handbook’ and the released ‘FP7 Audit Manual’ is the same document. Impliedly, the position of DG RTD seems to be that those two documents are identical.

3. The ‘Audit Process Handbook’ is cited in page 111 of the presentation of a senior DG RTD A.4 Unit senior official in a ‘Workshop on FP7 Auditing and Financial Issues’ held in Rome on 24/11/2010, http://allegati.unina.it/ricerca/program.... Page 114 cites the ‘Audit Handbook’. From the contents of pages 109 – 114 of the presentation it must be inferred that the ‘Audit Handbook’ or the FP7 ‘Audit Process Handbook’ cover the whole audit cycle. According to slides 45 and 50, there are six (6) distinct steps in the audit cycle.

4. The presentation entitled “Cost Reporting in FP7 - Hot spots from an auditors’ perspective” of a DG RTD A.4 official in Vienna on 30/09/2010, http://rp7.ffg.at/upload/medialibrary/05... , cites in slide 50 ‘Compliance with the Audit Handbook’ as one task of Quality Control during the ‘Follow Follow-up & finalisation’ of the Audit Cycle.

5. The first sentence of page 5 of the released ‘FP7 Audit Manual’ reads: “This manual sets out guidelines on how to conduct on-the-spot financial audits on beneficiaries receiving funding under the Seventh Framework Programme for research”. In view of the considerations under (3) & (4) above and that the ‘FP7 Audit Manual’ only sets out ‘guidelines’, it must be inferred that the requested ‘FP7 Audit Process Handbook’ sets out a detailed description of all audit processes, with the ‘on-the-spot financial audit’ being only one of the audit cycle processes.

Moreover, it must be inferred from the above that:

- There is indeed a document entitled “FP7 Audit Process Handbook” or “FP7 Audit Handbook”, or similar, which is distinct form the partially released ‘FP7 Audit Manual’. The ‘Handbook’ is probably a multi-volume document.

- DG RTD released another document instead of the requested one

Since the application identified in the most precise manner the requested document (after all, the Audit Process Handbook was cited in the presentation of a senior official of the DG RTD A.4 Unit), the release of another document means that DG RTD has ‘adopted’ some kind of a ‘decision’ in answering request #2. Inasmuch one may infer from that DG RTD ‘decision’ the underlying attitude towards transparency and legality of DG RTD, there is a complete blurring of the lines distinguishing between (i) a DG RTD indifference to the transparency obligations and (ii) DG RTD deliberately misleading the applicant.

In conclusion, the DG RTD partial release of the ‘FP7 Audit Manual’ amounts to (i) a grossly inadequate search for documents of the kind “FP7 Audit Process Handbook” and (ii) the total refusal to release the requested Handbook without a statement of reasons.

5. REQUEST #4

DG RTD released a single document entitled ‘Draft Report Control Checklist’, which is most astonishing as the request concerns “quality check on audit report for coherence, completeness, correctness, compliance with the Audit Handbook”. The following observations are made:

1. As is evident from the forth line of the first page of the released document, the released checklist concerns audits of the DG RTD Unit ‘M.1.01 – Outsourced Audits and Audit Certification Policy’. There is a second DG RTD Unit that carries out external financial audits, for which the entire audit is carried out by Commission officials only. Since it is reasonable to expect that the M.1 audit checklist is more extensive than that of that second Unit, it is reasonable to expect that there is a second ‘control list’ that DG RTD did not release.

2. The released document does not refer to any kind of ‘Handbook’, even indirectly or impliedly. The lack of such references shows that the release document is immaterial to the requested ones, since the request concerns inter-alis compliance with the ‘Handbook’.

3. A ‘control checklist’ is entirely different from a ‘quality check’. The former is a mere ‘checklist’ while the latter is an entire process. The tasks and activities of a ‘quality check’ regarding ‘compliance with the Audit Handbook’ are far more than the tasks and activities of ‘filling’ a ‘control checklist’.

4. Request #4 was framed solely on the basis of the contents of slide 114 of the aforementioned presentation ‘Workshop on FP7 Auditing and Financial Issues’ (see item under (3) of the preceding chapter). It is wholly unreasonable to expect that the applicant - and the public - are to accept that the slide 114 refers to a meager ‘Draft Report Control Checklist’.

In the applicant’s view, the Research DGs must have drawn up tens of pages about a “quality check on audit report for coherence, completeness, correctness, compliance with the Audit Handbook” for audit reports drawn up by the external auditors-contractors. The provisions of article 57(2) of Regulation No 1605/2002, as amended, require that DG RTD took all necessary measures to ensure that the latter contractors did not exercise discriminatory powers of judgement. Otherwise, auditees (FP7 beneficiaries) would have been at the whim of the auditors, simply because the audit findings (as documented in the audit report) would depend on the diligence (or lack of it) of the auditor. Put differently, should it emerge that the Research DGs have only drawn up the released checklist, then the Research DGs have been recklessly negligent with compliance with the said article 57(2).

In view of the above, it must be inferred that DG RTD did not carry out a diligent search for documents. Therefore, insofar the non-released (but existing) documents are concerned the DG RTD initial reply is a total refusal without a statement of reasons.

6. REQUEST #5

6.1. DOCUMENTS REGARDING THE FP6 AUDITS

It must be observed from the outset that DG RTD manifestly failed to carry out an elementary search for documents about the FP6 audits. This is established below.

6.1.1. Released “Outcome of 2007 Risk Questionnaire - Ex-post audits”

The first two lines of the released document reads: “The questionnaire was sent to 672 people. 233 replied, which represents 34,7% of the population. The highest percentage came from Dir G (60,5%) and the lowest from Dir T (20,7%)”.

As a preliminary remark, it is illogical to claim that the questionnaire concerns FP7 audits, as in late 2007 very few, if any, FP7 grant agreements had run for more than a year, implying that the FP7 financial audits were in November 2007 entirely meaningless.

From the first two lines, it must be concluded that the released document is essentially an analysis of a questionnaire addressed and sent mainly to DG RTD staff about their ‘perception’ of risks that were to taken into consideration in selecting FP6 contractors for ex-post audits.

Such an analysis document is not about how FP6 contractors were singled out for a risk-based or a dissuasive audit. It is therefore immaterial to request #5.

6.1.2. EXISTENCE OF DOCUMENTS REGARDING FP6 AUDITS

This section argues that there are documents falling under the scope of request #5 about FP6 audits, and whose existence was not disclosed to the applicant.

According to the DG RTD 2010 Annual Report, table 3.7 of page 40, DG RTD had closed 1,082 FP6 audits; moreover, footnote (45) in page 42 is in the sole context of “Management's analysis and conclusions on the cost-effectiveness of the controls for FP6”. The very wording of request #5 was inspired from that footnote about FP6. Consequently, there can be no question whatsoever that the initial reply has disregarded documents about FP6 audits.

Furthermore, the number of the FP6 ‘risk-based’ audits has not been a tiny one. The second last paragraph of page 40 of the AAR reads:

“Under the FP6 audit strategy, DG Research has used risk criteria to sample the beneficiary population. 165 Risk-based audits carried out in 2009 have shown on average an error rate close to 8%, significantly higher than the 3% representative rate found by audits on the main beneficiaries and those randomly selected on a monetary unit basis. This is indicative of the validity of the risk assessment methods employed.”

According to table 3.6 (page 41) of the AAR, DG RTD closed 309 FP6 audits. It is evident that in 2009 more than 50% of all DG RTD FP6 audits were risk-based. It would be extremely unreasonable to claim that DG RTD singled out 169 FP6 contractors for risk-based audits in a random or arbitrary manner.

Insofar DG RTD failed to search for documents regarding the FP6 ‘risk-based audits’ and the FP6 ‘audits for continued dissuasive effect’, the initial reply is a total refusal for access without a statement of reasons. In addition, the applicant maintains that documents for this kind of FP6 audits do indeed exist and fall under the scope of request #5.

As a last remark, the exceptions of article 4(1)(a) forth indent and 4(2) third indent, on which DG RTD relied upon to refuse full release of documents regarding FP7 risk-based audits, cannot be relied upon to refuse total access to the documents about the FP6 risk-based and dissuasive audits. The reason is that at the end of 2013 the FP6 audit campaign has been terminated.

6.2. DOCUMENTS REGARDING THE FP7 AUDITS

6.2.1. IDENTIFIED AND TOTALLY WITHHELD DOCUMENT

According to DG RTD, the only document falling under the scope of request #5 for the FP7 audits is the document entitled “7th Framework Programme RTD Risk-Based Audit Approach” (henceforth ‘the refused approach’).

As a first remark and insomuch the document title correctly reflects the contents of the document, an ‘audit approach’ is a general-purpose document. In this respect, it is not evident that the refused approach provides all the details about how in concrete terms a FP7 beneficiary was to be singled out. Therefore, the applicant respectfully maintains that the DG RTD did not carry out a diligent search for documents.

6.2.2. EXCEPTIONS RELIED UPON TO TOTALLY REFUSE ACCESS

The applicant maintains that the arguments set out in sections 3.3 – 3.5 above are fully applicable to the refused approach.

In addition, the reasoning of DG RTD to totally refuse access is wholly inconsistent with documents the Research DGs have released (or approve publications) about risk-based audits and the ‘FP7 Ex-post Audit Strategy 2009-2016’ (henceforth ‘the FP7 Strategy’). The inconsistencies are outlined below:

1. The FP7 Strategy was fully released by DG MOVE in its initial reply to GestDem 2013/3488, http://www.asktheeu.org/en/request/exter.... According to DG RTD, the refused approach is a pillar of the FP7 Strategy. It cannot be accepted that on the one hand the FP7 Strategy may be fully released, while on the other hand one pillar of FP7 Strategy is to be totally withheld. Conceivably, partial release of the refused approach might be appropriate, provided that the partial release was lawful.

2. DG INFSO made a presentation about ‘Techniques for risk-based auditing’ to the European Court of Auditors in January 2011. The Court fully released that presentation, http://www.asktheeu.org/en/request/584/r.... Several slides address the selection of the auditee for a risk-based audit.

3. The publication in the International Journal of Government Auditing – July 2010 “Alleged Fraud Involving Millions of Euros: Why Didn’t We Notice?” provides information abut the selection of auditess on the basis of risks. For instance, the paper states “Entities were assessed as a whole, gathering as much information as possible before the fieldwork (ISA 315). For every entity, specific risks were identified and the audit program adapted accordingly (ISA 240). An innovative data-mining and risk-assessment approach for audit preparations was designed [...]”. It evident that the ISA 240 standard was a ‘guiding’ principle, and that ‘innovative data mining’ was a part of the selection of the auditees for a risk-based audit.

4. The DG INFSO 2011 Annual Activity Report states that DG RTD followed the DG INFSO innovative with respect to risk-based audits. Since DG INFSO & OLAF disclosed (or presumably authorised publications about them) information about risk-based audits, it follows that DG RTD cannot totally refused access, insofar the lawfully disclosed information/documents is relevant to the refused audit approach.

In view of the above, the total refusal to release the “7th Framework Programme RTD Risk-Based Audit Approach” flies in the face of the information lawfully in the public domain about how a FP7 beneficiary was singled out. The arguments of sections 3.3 – 3.5 and 3.7 are fully applicable to the refused audit approach.

6.3 CONCLUSIONS

The applicant maintains that DG RTD did not carry out a diligent search for documents. Furthermore, the DG RTD reasons justifying the total refusal are not in compliance with Regulation No 1049/2001

7. REQUESTS #6 - #8

Prior to analysing the initial reply, the following remarks are made about the released documents.

R1. The released document with filename “Points 6 to 8 Template_FP7_LoA_EAF.pdf”, which a template letter for an audit by an external contractor-auditor (apparently used in 2012), does not list as an enclosure or an annex a Privacy Statement, even though such a statement was expressly referred to in DPO-3398.1 and it was posted in the Europa website. Instead, the template makes an express reference to a Privacy Statement found in Cordis.

R2. The released document with filename “Points 6 to 8 Template_FP7_LoA_EAF.pdf”, which a template letter for an audit by DG RTD staff (apparently used in 2011), does not list as an enclosure or an annex a Privacy Statement, even though such a statement was expressly referred to in DPO-3398.1 and was posted in the Europa website. Instead, the template makes an express reference to a Privacy Statement found in Cordis.

R3. The released document with file name “Points 6 to 8 FP7 07 List of possible information to be asked from beneficiary.pdf” is the ‘enclosure’ of the main letter.

The released document referred to under R1 above (and the forth document with filename “Points 6 to 8 Template_FP7_LoA_EAF_Annex_1.pdf” bears an ‘Ares(2012)’ reference. It is therefore self-evident that it is not a template used in 2011, and therefore immaterial to the requests #6 - #8.

The DG INFSO letter announcing an audit Ares(2011) 258273 - 9/3/2011 released in GestDem 2013/3956, http://www.asktheeu.org/en/request/fp6_f..., has several fundamental differences with respect to the template under R2 and the R3 enclosure. One notable one is total absence from the DG INFSO letter of the paragraph concerning Regulation No 45/2001 and the Privacy Statement in CORDIS.

The Annex I (enclosure) of the DG INFSO letter requests from the auditee under ‘IV. General financial documents’ - in advance of the field audit !!!!!!!- the provision of “3. Accounts receivable ledger; 4, Accounts payable ledger; 5. Sales ledger; 6. Purchase ledger”. Such extremely detailed information, which has every single transaction of the auditee (most of it is wholly immaterial to the FP6 & FP7 audit !!!!!!!!), is not requested in the document under R3. Even though that particular DG INFSO audit might be on the very extreme limits of a risk-based audit, nevertheless its existence indicates that there were additional templates used in 2011, which DG RTD either failed to identify or impliedly refused to release.

For the sake of brevity, the applicant will refrain from further elaborating on concrete risk-based audits of the Research DGs announced in 2011, for which the audit notification letter differs very considerably from the released template under R2. The applicant is at the disposal of the Secretariat-General to bring to its attention several Ares reference numbers of those notification letters. In all those letters, the paragraph concerning Regulation No 45/2001 and the Privacy Statement in CORDIS are missing. The concrete-audit letters have no reference whatsoever to Regulation No 45/2001, and instead have provided as an annex-enclosure the Privacy Statement found in Cordis.

Turning to the DG RTD statements about “evolution of templates, indicative nature of the released templates, auditors having at their disposal the latest drives”, it must be observed that such arguments indicate both a fundamental misconception of Regulation No 1049/2001 and a self-destructive logic. Some reasons are:

1. According to DG RTD, in 2011 auditors used indeed the latest templates to draw up concrete letters. Therefore the templates were indeed held by the Research DGs. Presumably, they are currently kept in the document management systems of the Research DGs and in their backups. The Commission services are obliged to diligently search for them and fully release them afterwards.

2. The evolution of the templates does not take place spontaneously or randomly. There are one or more underlying, substantial reasons justifying their evolution. Contrary to the implied DG RTD logic, the very evolution of the templates dictates that each successive version is kept.

3. In general, the template is needed for checking compliance of the whole audit against the internal ‘norms’ and guidelines. A permanent ‘loss’ of a template(s) indicates a chaotic internal organisation, which cannot be tolerated for an administrative department directly managing alone FP7 research projects funded by 22 billion of taxpayers’ money.

In conclusion, the above facts and considerations prove that there were several templates of letters notifying the conduct of an audits (and annexes thereto) which DG RTD has failed to identify and release. The DG RTD release of just four documents, two of which are not for audits of 2011 and hence immaterial, amounts to a total refusal with no statement of reasons.

8. THE COMMISSION SERVICES’ HYPOCRISY

This section discusses the hypocrisy of the Commission services with regards their stance on the fundamental right of personal data protection.

There is hypocrisy when, on the one hand the Union conducts delicate and sensitive negotiations with the US and Canadian Governments about the transfer of passenger name records, while on the other hand the administrative departments of the Commission have had adopted for the last six years the aforementioned concealed policies seriously infringing the fundamental right of personal data protection, culminating in the inclusion of blatantly false statements in the Europa website, i.e. DPO-3398.1.

The applicant respectfully puts to the Commission services that the hypocrisy is far worse in the light of the Commission’s proposal on the General Data Protection Regulation, document COM(2012) 11. According to recital (14) of the proposal, the Institutions are to be exempted from the new Regulation. This begs the question why the Institutions are to be exempted, and most importantly the Commission.

Article 28(5) of the proposed Regulation empowers the Commission to adopt delegated acts that will lay down the obligations of data controllers. Put differently, the Commission services (NOT the Commission itself), the very services of which several administrative departments have adopted concealed policies of massively infringing Regulation No 45/2001 (most probably keeping the Commission in the dark), will ‘advise’ the College in adopting delegated acts for matters for which the services have demonstrably disregarded legality and the fundamental right of personal data protection.

Since the conduct of the Research DGs cannot have taken place without the Legal Services and the Secretariat-General not noticing it, this in turn begs the following two questions: fist, which particular administrative departments will ‘advise’ the College about personal data protection as regards the delegated acts; second, what will be the true ‘value’, ‘quality’ and ‘objectivity’ of such ‘advice’ in the face of what has been going on in FP6 and FP7 with respect to compliance with Regulation No 45/2001, not only regarding audits but also regarding proposal submission and so on.

9. OVERRIDING PUBLIC INTEREST – ILLEGALITIES OF THE RESEARCH DGS

Both the initial application and sections 3.3 – 3.5, 3.7 & 3.8 above are advancing arguments for the full release on the grounds of an overriding public interest.

The total loss of the DG RTR credibility, as set out in section 2 above, means that the Secretariat-General will either have to undertake a fresh search for documents and objectively assess whether any exception is applicable, or opt to be ‘associated’ with the DG RTD standing and attribute towards legality and transparency.

The annex herein provides the expunged text of the partially released FP6 Audit Manual - Guidelines to on-the-spot financial audits on FP6 Contracts. It is self-evident that not only the expunged parts have nothing to do with ‘the public interest as regards the Union’s financial policy’ and the ‘protection of the purposes of the audits’, but also that the expunged parts expressly set out the concealed policy of the Research DGs to illegally process personal data of third parties to the audited FP6 contracts. In other words, it is a concealed policy of contravening article 16 TFEU, Regulation No 45/2001 and the national personal data protection laws.

Moreover, DG RTD has been caught red-handed in flagrantly infringing Regulation No 1049/2001 for the sake of protecting the private interests of the Research DGs (i.e. prevent a disclosure of a policy of illegal personal data processing in a colossal scale). There is no other interpretation of the DG RTD partial release of the FP6 manual and the justification about the partial release.

In the wake of the two false statements of DG RTD DPO-3398.1 and its bogus and deceitful nature that has been exposed in a full public view, if there were any tiny pieces of DG RTD’s credibility and integrity still remaining, the particular circumstances and its conduct regarding the partial release of the FP6 Manual has totally destroy them.

The applicant believes that the conduct of the Research DGs cannot and must not be tolerated in a Union governing by a rule of law. This applies a fortiori in view of the Members of the Commission ‘lecturing’ the world about respect of fundamental rights.

The overriding public interest has manifested itself by the need to scrutinise in depth the conceal policies of the Research DGs, which have culminated in two false statements in Europa (i.e. DPO-3398.1).

10. CONFIRMATORY APPLICATION

It is reiterated that the confirmatory application concerns all request except #3. The applicant, and presumably the public, expects that the Secretariat-General will dully take into full account the foregoing considerations and analysis.

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ANNEX: EXPUNGED PARTS OF FP6 AUDIT MANUAL

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Annex 3: Required supporting documents during the audit
Annex 4: Typology of errors

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. The particular financial provisions contained in the set-up of the Framework Programme, however, require that a substantial degree of professional judgement be applied when assessing the compliance of the participants with the contractual provisions.

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Audit procedure
Initiation of the audit

The audit procedure is initiated with the preparation and dispatch of the notification letter. The actual date of the audit shall be confirmed with the audited entity. Advance documents The European Commission compiles and provides the complete audit background documentation consisting of the RTD contract between the Commission and the entity to be audited, all adherent texts like amendments, periodic activity and management reports, report on the distribution of financial contribution, authorizations, correspondence, as well as financial documents like the financial statements, the relevant ‘analyse statements’ (i.e. the documents which indicate what costs have been accepted by the European Commission Financial Officer) and the payment orders. New financial statements, which may have been established since the compilation of the background documents, are considered to be part of the audit work.

Preparation of the visit
Contractors will be requested to make available all relevant supporting documentation in line with their contractual obligations. In some cases, they will be requested to have copies prepared for the audit team. Bearing in mind the particular reporting obligations described below (in particular the absence of standard cost categories in the financial statements sent to the Commission) some documents may be required electronically some time before the on-the-spot audit. A model enclosure to an information note stating the documentation to be requested to the contractor has been attached to these guidelines (Annex 3).

It is important to verify whether the contractor has been subject of a previous audit by either the Court, the Commission or the external audit firms (EAF) nominated by the Commission. The results of these audits shall be taken into account regardless the Framework Programme concerned.

Performing the on-the-spot visit

The audit will be performed on a confidential basis.
The audit will be carried out at the premises of the contractor. It is important to confirm that the information concerning the premises where the research work is performed, as stated in the contract preparation forms, is correct. The audit team should also enquire where the supporting financial documentation is kept.

The audit must assure that the research work and its management is carried out by the entity with which the contract is concluded. Any deviation (an organisation other than the one contracted to carry out the research work) must be reported to the Commission at an early stage (Flash Report).

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It is considered essential to promote an adequate communication with the auditee. Factors that contribute to this are:
- Personal contact with the contractor (via e-mail, phone), especially at the time of the audit preparation (in this sense, Article 3.2.a to Annex II to the contract establishes that the contractor shall communicate to the Commission the name of the person/s in charge of the management and monitoring of the contractor's work)
- Clear communication of the audit scope and objectives of the audit, normally during an introductory meeting with technical and financial staff of the contractor.
- Obtaining a sufficient understanding of both the audit organisation and the project, covering both technical and financial aspects.
- 'No surprise' approach as regards eventual audit findings. Raise potential adjustments as soon as they are identified to allow relevant staff to comment on them before assessing materiality, confirming also the adequate interpretation of the situation.
- Explain potential adjustments with contractor, ensuring that they fully understand the cause and the eventual impact. Conduct also a winding-up meeting summarising the preliminary results of the audit.

Agreement with the contractor is not always possible. Even in cases of disagreement, efforts should be made to clearly explain to the beneficiary the audit team's positions and interpretations concerning any potential adjustment and its impact.

Reporting on the audit results
Findings to be included in the audit reports shall be based on the contract or the legal basis applicable to the FP6. Taking into account the particularities of the contractual provisions, a substantial degree of professional judgement may be required. In these cases it is even more important to assure the sound justification of the findings.

Reporting procedures and time limits concerning audits made by external audit firms are determined in Annex A-I (Working Practice) of the Model Framework Service Contract for FP6.

Documentation of audit findings
It is the audit team's responsibility to ensure that the work carried out is documented in such a way as to allow tracing the conclusions included in the audit report to the supporting audit evidence. In this sense, audit findings should be:
- referenced to the article of the contract or of any other legal text that has not been complied with (when reference to National legislation, specific policies of the contractor or generally accepted procedures are involved, these should be referenced as well).
- clearly documented in working papers describing as well the audit work carried out.
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An audit file will be prepared for each on-the-spot financial audit. This file should include working papers specifically related to the audit on-the-spot, for example:
- documents concerning the audit planning (notification letters, exchange of e-mails), execution (minutes of the meetings held, list of documents requested and not provided, etc.) and reporting - general documents concerning the contractor (legal registration, financial statements, relevant internal policies) including related work papers
- general documents concerning the management of the project by the contractor (descriptions of the project and project reports provided during the visit, etc), including related work papers
- supporting documents concerning the specific costs declared to the Commission, classified by cost category to the required detail (from direct and indirect costs to a section for each of the specific categories sued by the beneficiary)
- documents concerning the work performed by the external auditor certifying the financial statement submitted to the Commission.

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Interpretation
Cost categories
Under FP6, eligible cost categories are not specifically defined. As a result, any category can be considered eligible provided that it complies with the general eligibility requirements mentioned earlier.

Audits shall be planned taking into account any specific cost categories used by the contractor for the preparation of the Financial statement. Experience shows however that indirect RTD actions are usually implemented around a set of generally accepted cost categories, and the contract includes in some cases specific requirements for some of these categories. In order to better support audit teams in the performance of on-the-spot financial audits, specific sections have been included in these guidelines for the following cost categories:
• personnel costs; [special requirements only for AC model and in-house consultants]
• durable equipment; [no special requirements]
• travel and subsistence; [no special requirements]
• consumable costs; [no special requirements]
• subcontracting costs; [special requirements]
• protection of knowledge [no special requirements]
• management of consortium activities [special requirements]
• indirect costs; [special requirements]

Funding rates for activities
The auditors need to ensure that the allocation of costs to the types of activities in the financial statement complies with the definitions in place for each activity (as described under section 2.3 type of activities of the FP6 guide to financial issues). Types of activities are generally linked to different funding rates (between 35% and 100%). It is therefore important that auditors reconcile the nature of costs allocated with the definition of the activity.

Problems encountered
As under previous framework programmes, most problems relate to calculation methodologies and internal transfers for:
• Overhead charges
• Personnel rates and productive hours
• Asset/ laboratory use
• Other internal charging for specific cost categories

With respect to the contractually defined restrictions for the eligibility of

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costs, it is also important to verify during the audit whenever charges of an unusual nature have been made to a contract such as:
• Costs which have not been accounted for or paid at some stage
• Expenses paid in cash
• Expensive travel arrangements that are not part of normal company policy
• Employees or consultants paid above market rates without a clear project motivation or selected for unclear reasons.
For contractors participating both in national and EC-funded RTD programmes, a common problem is that the beneficiary applies the national rules also to the EC contracts.
If any contradictions between national audit practices or policies and international accounting practices and principles are detected, these contradictions and possible effects should be disclosed in the audit report (and where necessary be discussed with the Commission audit services).
FP6 does not allow for the use of budgeted or estimated costs. Note however that the rules for participation stipulate that the contract may lay down 'average rates of Community financial participation by type of expenditure', 'pre-set lump sums' and 'value by activity', which shall approximate to the expenses envisaged. These mechanisms would be mentioned explicitly in the contract. They are not established except for user fees.
With regard to budget transfers, FP6 confers the responsibility for the allocation of the funds to the consortia. Coordinators must be able to justify at any time how the Community contribution has been distributed to the individual participants, reporting to the Commission at least once a year (except for the last tranche paid).
Budget transfers are the sole responsibility of the consortium to be discussed amongst themselves. This becomes only a concern of the auditor once the project is closed and the budgets have been allocated definitely. If the budget transfer is liked to be a transfer of tasks, this has to be reflected in an amendment to the contract. Otherwise, they can do budget transfers between themselves.

Documentation
The following general information on the contractor should be requested prior to the audit and kept on file (see Annex 3):
• Management accounts/reports of cost/profit centre (where the indirect RTD action is carried out)
• Management accounts/reports of RTD action audited
• General accounting policies of the contractor.

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Interpretation
Time sheets and alternative evidence Contractors must be in a position to justify the allocation of personnel costs to the audited project, and as a result the existence of time sheets or any other time recording system is necessary. In fact, the different versions of the financial guidelines published in CORDIS have advised contractors to keep some sort of time recording in the absence of any other reliable system to justify the allocation of personnel costs to the project.

Contractors shall be requested in advance to produce a detailed justification concerning the personnel costs taken into account in the Financial Statement (Form C) sent to the Commission. This justification should mention the individual employees involved in the project and corresponding personnel costs.

Actual time spent in the project and hourly rate applied should also be specified (although this can be calculated on-the-spot). Audit teams shall assess whether the evidence provided by the contractor is sufficient and reliable to comply with the contractual provisions, on the basis of their professional judgement.

Time recording arrangements may be (paper-bound or electronic) time sheets, but the use of other means of recording the actual hours spent on the project shall not be excluded.
Time records (when they exist) should be checked for compliance with the following general requirements:
• Identification (time records shall refer specifically to the individual employee and to the indirect RTD action audited, as well as to the period covered).
• Certification (hours charged to the project should be subject to verification by the person responsible for the project or supervisor).
• Credibility when compared to standard productive hours (e.g. if many employees seem to work longer, one may question the productive hours calculation) or to individual records (project records as compared to all records concerning the employee).

Problems encountered
The most common problems are:
• the absence of reliable time records and

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• the lack of certified by the person in charge of the work (recommendation)

Where there are no time sheets, contractors shall provide alternative justification on the allocation of personnel costs to the project. Based on the evidence the auditors must conclude whether all or only part of the costs claimed are allowable.

So called "attestations d'honneur" are not considered to be an appropriate alternative justification and are therefore not acceptable.

Time recording should be assessed for all contractors, regardless the cost reporting model (AC, FC, FCF) or the instrument concerned by the financial audit.

Note that unpaid overtime does not constitute a cost for the beneficiary and can never be reimbursed under the contract.
Documentation
It is important to keep on file /consult (see Annex 3):
• List of all personnel involved in the RTD action indicating period(s) they worked for the project as well as position classification / category
• As many copies of certified time sheets or timesheet summaries as practicable, in order to provide a clear audit trail for the hours charged on the cost statements.
• A full record of the results of the alternative audit programme, stating clearly what information was available and reasons why any information could not be obtained.

Commission's approach
For the performance of financial audits under previous framework programmes, the Commission issued the following alternative audit programme (It is not required for FP6, but might be useful when justifying time devoted to the project) to be performed by the EAF in cases where no time records were prepared:

“Practical advice for external audits
The absence of time sheets should not automatically result in the disallowance of the cost charged. The burden of proof rests with the Contractor. Therefore the auditors must seek from the Contractor alternative evidence to support the reasonableness of the number of hours charged. As such the auditors must:
a) Verify that the personnel charged to the contract exist and were employed during the period in question. The qualifications and experience of the personnel should also be reviewed.
b) Interview as many of the personnel as possible. Ask each employee to describe their part in the project and the work performed, to demonstrate equipment and consumables used and to estimate their time worked on the project. Cross check the evidence of one against the other.
c) Verify how workable hours have been split between different projects (to exclude that more than 100% of workable hours have been charged). Also verify that the hours claimed are within the project period.

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d) Match the time charged with the periodic reports produced on the progress of the work. e) Verify if the personnel charged have been present in meetings concerning the project.
f) Verify if the personnel charged are named in scientific reports and publications relating to the project.
g) Examine working papers to establish a link between the work performed and the project.”

Whereas it is common practice to seek alternative evidence in the absence of time records, please note that oral evidence alone is insufficient for allowing personnel cost.

Please note that it often happens that the time recording at a contractor is not perfect and accordingly, the auditors should clearly describe what the situation is (e.g. all or some time records are missing, all or some certification is missing etc.). It is evident that the less the contractor has complied with the provisions of time recording, the deeper the “Alternative Audit programme” should go.

Interpretation
All personnel costs related to the audited project may be considered eligible under FP6, provided that they comply with the general eligibility requirements. This concerns both temporary and permanent staff, and could even concern in-house consultants [- usually on premises of contractor; -under instructions of contractor; -results belong to contractor; -costs similar to those of employees in similar circumstances; travel paid by contractor] if these are considered as 'personnel' in line with the usual policies and practices of the contractors (in principle this would only have an impact in the indirect costs calculation - see considerations made on this issue under the corresponding section of these guidelines).

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The status of the individuals for which personnel costs have been declared can be easily established and proved by checking the employment contracts and the related payroll/salary slips.

Problems encountered
The first difficulty is to determine whether consultants shall be considered personnel or subcontracted staff. In the first case, the contractors will be able to charge indirect costs associated to them (either in the form of an accurate overhead rate for FC contractors or applying the percentages foreseen for AC and FCF contractors). The general policies applied by the contractor on this area shall be taken into account. The audit team could verify in particular the way in which the costs are accounted for and finally represented in the financial statements.

Another problem concerns the policy to charge average or estimated personnel rates instead of actual costs. Article II.19.1.a of Annex II of the FP6 model contract states that costs must be actual.

Use of average costs:

If at the time of the establishment of the financial statement and the audit certificate - including the final reporting period - , actual costs are not available, averages could be accepted proviso:
(i) the organisation in its normal accounting practice uses averages, i.e. the averages are not purpose made for the Commission.
(ii) the averages provide the closest possible approximation of the actual costs and are based on the most accurate information/data available at the moment the financial statement is made.

In case an audit certificate is required the auditor must report on the use of averages and confirm that costs claimed using averages reflect the requirements of the contract and they provide the closest possible approximation of the actual costs. Nevertheless, in case of a financial audit carried out by (or on behalf of) the EC the Commission reserves the right to adjust the averages to real costs.

Use of estimated costs:
If at the time of the establishment of the financial statement and the audit certificate, actual costs are not available, estimates could be accepted proviso:
(i) the organisation in its normal accounting practice uses estimates/averages, i.e. the estimates are not purpose made for the Commission.
(ii) the estimates provide the closest possible approximation of the actual

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costs and are based on the most accurate information/data available at the moment the financial statement is made.

In case an audit certificate is required the auditor must report on the use of estimates and confirm that costs claimed using estimates reflect the requirements of the contract and they provide the closest possible approximation of the actual costs.

Whenever possible, contractors that have used estimates should adjust these costs and provide actual costs when these become available. If the final financial statement is submitted a long time after the end of the project and it can be reasonably expected that actual costs are available, financial statements with actual costs will be needed.

At final payment, estimates can only be claimed if at that moment it is (still) not possible or very difficult to know the real costs. For these cases, the auditors should also mention that the costs are based on estimates which are the closest possible to real costs at the moment of charging these costs. Nevertheless, in case of a financial audit carried out by (or on behalf of) the EC the Commission reserves the right to adjust the estimates to real costs.
Documentation
It is important to keep on file / consult:

• Copies of employment contracts
• Evidence for gross salary (payroll/salary slip)
• Evidence of checks of proper recording of eligible costs in the organisations accounting records.
• Evidence of payment of salary (bank statement)
• Contractor's personnel policy or work conventions.

Interpretation
As a general rule, personnel costs linked to permanent staff cannot be

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considered eligible for contractors operating under the AC model, unless their salary is dependent upon external funding. The contract establishes however two exceptions to this general principle:
a) eligible personnel costs may relate to temporary contracts signed with staff to allow permanent personnel to carry out additional work required for the project, which is dependant upon external funding.
b) personnel costs linked to permanent staff may be considered eligible when they concern Management activities (as defined in the contract - Article 2 of Annex II) provided that they can be identified with precision by the contractor and that they are in line within the limits established in Article 28 of Annex II (this reference concerns the limit of 7% of EC contribution applicable to Management costs).

For temporary employees, status can be easily established and proved by checking the employment contracts.

Dependency on external funding has to be proved by the contractor, evidence of this can include:
• Clauses in employment contracts making part or all of pay contingent on the institution/ university receiving external grants.
• Breakdown of funding for the entire institution showing recurring and internal funding compared to specific external grants (usually prepared as part of background information to the audit report).

The key question to ask is: “Would this person continue to be employed if the contractor lost their external funding?”
Documentation
It is important to keep on file / consult:
• Copies of employment contracts clearly highlighting their temporary nature (and preferably naming the specific EC contract in some way).
• Evidence of grants and scholarships, as well as any tuition costs charged to the contract.
• Justification for “dependence on external funding”, together with the reasoning for acceptance/rejection of costs
• Evidence for gross salary (payroll/salary slip)
• Evidence of checks of proper recording of eligible costs in the organisations accounting records
• Evidence of payment of salary (bank statement)
• Contractor's personnel policy or work conventions

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Interpretation
For some contractors, researchers participating in the project are at the same time owners of the company and do not receive a salary but a share of the profits (an “owner-manager” in this context is a sole trader or partner in a business whose earnings are taxed on the basis that they are equivalent to the relevant share of the profits of the business). In other cases, the remuneration of the owner is based on consultancy hours invoiced to the beneficiary and declared to the Commission.

On the basis of the legal opinion for FP6 provided by the Commission (see below), “owner-manager” remuneration, which is not in the form of a salary, cannot be accepted as personnel costs.

Exemptions to non-eligibility of personnel costs of the owner-manager will be discussed based on a note sent to the Legal Service of the Commission.

Commission interpretation
The legal opinion of the Commission for the 6th FP is as follows:
Under FP6 (unlike FP5 contract that foresaw the possibility to use average cost for personnel under certain circumstances), only the real eligible costs can be charged to the project. One of the essential eligibility criteria of costs under FP6 projects is criterion of actuality. Costs have to be actually incurred (real costs) and they have to be recorded in the contractor’s accounts and be identifiable.

As a general rule, a single person running the company (or several persons that are co-owners of the company), does not receive a salary or other form of remuneration, as it is not the company’s employee. That is why the value of work performed by the entrepreneur(s) is not considered as a cost, neither in economic nor fiscal sense. Fiscal regulations do not allow charging into the cost of company the labour costs of its owner. As a value of labour costs cannot be identified and registered in books of the company, it cannot be charged to the FP6 project either.

The dividends in their classic form are part of a company’s profit after taxation. Thus dividends are not a cost in the sense of accountancy, as they do not figure in company books as an element of costs. Dividends cannot be considered as a form of salary as they are not remuneration for performed work, but they are attributable to being a company (co)owner/shareholder. If the researches are simultaneously owners of the company, dividends paid out would normally relate to return of capital which is ineligible, as stipulated in Article II.19 of the contract.

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Interpretation
Productive hours calculations attempt to give an actual average of the eligible chargeable time of the contractor’s staff.
For example:
Total days in a year 365
Weekends -104
Annual holidays -21
Statutory holidays -15
Illness/Others -15
Workable days in a year 210

The above will vary depending on the personnel category, industry sector, unions, contracts and national legislation which should all be taken into account.

Productive hours have to be clearly verified and where possible agreed to the underlying time records. If hours actually spent in productive tasks (as supported by time records) exceed the standard productive hours, the first shall be used for the calculation of the personnel costs, unless overtime is paid.

Problems encountered
Time in support of the continued expertise of the organisation can be deducted to arrive at standard productive hours, such as
• Training • Internal meetings
• Studying general information

The contractor, however, must credibly substantiate the amount of this time.

Activities that can not be deducted (i.e. they are considered to be “productive” and will have to bear overhead costs) are:
• Sales and marketing
• Preparation of proposals
• Administrative time (often means “unsold” time)

Furthermore it is important to take into account that employees may be shared by several cost/profit centres having an impact on the calculation of their productive time in the department carrying out the project.
Documentation
It is important to keep on file / consult:

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• Any summaries of time spent by activity which can substantiate the productive hours calculation.
• “Credibility checks” with the time declared to ensure actual chargeable hours do not exceed standard productive hours, and that no overtime hours are charged (unless these are compensated as part of normal policy and practice of the contractor).
Commission interpretation
For the performance of financial audits under previous framework programmes, the Commission issued the following guidance notes to the EAF on this area:

“Productive time
The productive time for an employee is the time that is actually spent on direct work. The productive time can not exceed the workable time. To arrive at the productive time it is necessary to deduct from the workable time all indirect activities that can not be allocated to direct activities such as training, seminars, conferences, internal meetings and studying genera information.

It is impossible to define a general correct figure for productive time as the indirect activities vary not only from organisation to organisation but also between different categories of personnel within an organisation. The auditor must use his professional judgement to decide if the productive time used for calculation is reasonable.

The time charged out by the participant should not exceed the productive time. Otherwise a participant would recover more than his actual personne costs.

An inclusion of a productive hour calculation is not necessary if:
• the person(s) charged to the contract is recruited exclusively for the EC project,
• is working full-time for the project, an
• there is no indication that work has been performed on other tasks than the EC project.

In all other cases a proper calculation of productive hours should be presented. It is in the interest of the Commission to know the Contractor's level of productivity and to be able to compare this figure with othe Contractors, further the knowledge of the productivity level is necessary to be able to judge the reasonableness of the labour rate charged.

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Interpretation
Only in those cases where staff works 100% on a given project can the personnel costs be calculated using the salary slips and employment contracts only. In most cases, however, personnel costs are charged using hourly rates.
Actual hourly costs, should be :
Total actual personnel costs for the employee
Total Actual productive hours for the employee
Hourly personnel rate = Total actual personnel costs for the employee
Total Actual productive hours for the employeeHourly personnel rate =

Some contractors cannot achieve this level of accuracy, so they employ two forms of standardisation:
• Standard productive hours calculation used for all employees (see section on Productive Hours Calculations)
• Calculating hourly rates based on the average for a given staff category rather than on an individual basis.

Problems encountered
Common problems are:
• Budget or proposal rates being used instead of actual rates
• Average rates that do not reflect company accounting policies and practices and that deviate from the actual.
• Standard productive hours are below productive hours actually worked as per time records, increasing the hourly rate.
• Charged/sold hours being used instead of total productive hours (i.e. when charged/sold hours are less than total productive hours, increasing the hourly rate).
• Productive hours calculations which inflate the hourly rate to include ineligible activities of employees which should not be charged to the EC.

A rule of thumb is to simulate the calculation of personnel costs using the hourly rate in the theoretical case that 100% of the hours recorded had been spent working for the audited project.

On AC contracts, the contractor often charges the entire amount of the grant or fee paid to the temporary researcher.

In addition problems can arise when:
• Because of the “flat-fee” being paid to the researcher, no time records are kept (Note that this is not always necessary in FP6, especially if working full-time on EU project)
• Hours worked and hourly rates are “invented” to fill the cost statement (part “Details per category”)

In these circumstances, the primary audit documentation should be the total contract/ grant documents, and the available payroll records.

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Documentation
It is important to keep on file:

• A clear description of the methods used to calculate the hourly rates for all personnel categories/project personnel
• Documentary evidence of the audit tests performed to ensure that the amounts charged have been calculated according to the contractor’s approved method.

Interpretation
In line with the general eligibility requirements, contractors shall calculate eligible durable equipment costs by applying their usual accounting principles regarding depreciation, rental or leasing to the items purchased, hired or leased for the implementation of the project.

Determining the usual accounting principles of the contractor regarding durable equipment is usually simple. These are often specified in the financial statements published by the contractor. In this sense, note the following:
• The calculation of months used start with the delivery or date of first use, not the invoice date
• Depreciation must be allocated to the different cost statement periods (normally using the pro-rata temporis rule)
• Allocation to the project must take into account whether the equipment is used exclusively or partially for the funded project
• there is no restriction regarding purchased or leased under a previous contract (but only the depreciation period not yet expired may be charged to this contract), However, the necessity of the use of the equipment shall be carefully analysed

In general, the following formula shall be applied:
= Cost of the item x xLifetime during periodTotal Item lifetime% of use in the
projectEligible durable equipment costs= Cost of the item x xLifetime during
periodTotal Item lifetime% of use in the projectEligible durable equipment costs

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This linear depreciation method was applied to FP5, but also other depreciation methods may be applied. It must be noted that in FP6 the contractor have to apply his usual depreciation system for durable equipment.

Cases can be found where all items purchased below a pre-set ceiling are directly charged against the profit & loss account. This may be considered acceptable if it is in line with the accounting policy of the contractor (e.g. when this is specifically mentioned in the financial statements)

Problems encountered
• 100% equipment costs charged to the project on a systematic basis.
• Depreciation policy incorrectly applied
• Depreciation calculated from invoice date, not delivery date.
• VAT included in the asset cost
• Rebates or discounts not disclosed (i.e. amount stated on purchase order rather than amount paid charged)
• Equipment not used on the project but charged to the project (in particular if equipment purchased towards the end of the project)

Documentation
It is important to keep on file / consult:
• Contractor's guidelines for procurement of durable equipment (if available)
• Purchase order for durable equipment
• Invoices for purchase of equipment
• Voucher/Expense account of accounting entries
• Bank statements showing amount and date of payments
• Calculation of depreciation rates, leasing or rental charges
• Inventory register or fixed asset register/ledger for the equipment (related to the project)
• Equipment's usage diary/register (for equipment used by different projects)

The existence of Durable Equipment should be substantiated where possible e.g. by physical verification (this is usually rather simple, except in those cases where equipment has been purchased for their integration in more complex systems or facilities, as may be the case for demonstration activities).

As far as possible, the relevance of the asset to the project under audit should be substantiated. The inspection should also include a verification of the serial number of the equipment with the number on the invoice.

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Interpretation
When assessing the compliance of travel & subsistence costs declared by the contractor with the contractual provisions, the following elements shall be addressed:

• Who - eligible travel costs will normally cover exclusively staff working in the project (including permanent personnel working on the project whose salary costs are not claimed)

• Where – trips will be associated to events related to the implementation of the funded action, normally excluding countries where none of the participants is established

• What – unnecessary or reckless expenditure is not eligible. In this line, hospitality or entertainment costs in the form of evening meals are not normally considered necessary for the project. Costs should be declared individually by each contractor (e.g. AC contractors may not claim subsistence costs concerning FC contractors). First class travel or accommodation can be accepted if it is part of the contractor’s normal policy.

• Why – it must be demonstrated that the journey is relevant to the project (rather than being loosely related to the area of research).

• When – the travel dates should clearly coincide with the dates and duration of the meeting/ conference (i.e. no extra hotel bills, preferably no combination with holiday trip). In particular, the audit work should include a cross-check of time records with travel dates.

Problems encountered
Common problems are:
• VAT being claimed, or VAT not disclosed separately
• Rebates or discounts not disclosed (i.e. amount stated on purchase order rather than amount paid charged)
• “Entertainment” expenses included
• Costs claimed jointly for the whole consortium (normally by AC

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contractors).
• extra days claimed

Documentation
It is important to keep on file / consult:

• Contractor's internal guidelines for reimbursement of travel expenses (where applicable)

• List and dates of trips by project personnel

• Travel request forms authorised by the person responsible for the project

• Commission approval for any destination outside the territory of the Member States, the Associated states or a third country where a contractor is established, unless such a destination is provided for in Annex I

• Invoices for travel and accommodation expenses (incl. copies of flight/train tickets, etc.) • Voucher/Expense account of accounting entries

• Bank statements showing amount and date of payment

Interpretation
The main differences implied by the model contract as regards resources made available by third parties and subcontracting are the requirements for the selection of the third party and the possibility to reimburse profit made by that third party.

Third party resources
Third party resources made available to a contractor on the basis of an agreement prior to making resources available covering the funded action may constitute eligible project costs, provided that:
- the involvement of the third party in the project or the execution of a specific project task by a third party is clearly identified in Annex I to the contract,
- the costs associated to these third party resources are calculated in line with the general eligibility provisions provided for by the

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contract (i.e. non profit, etc.),
-specifically reported in the corresponding section of the Form C,
- the cost of the third party resources are covered by an audit certificate (which may be the same as the one provided for the corresponding contractor).

Note however that Article 23 of Annex II to the contract states that resources made available by third parties specifically for their use in the funded action constitute a 'project receipt' (unless they are reimbursed to the third party by the contractor) and therefore shall be deducted from the eligible costs for the calculation of the Community contribution corresponding to the audited contractor.

Contractors do not need to conduct a selection procedure in order to involve this third party, but the calculation of the value of the resources made available by a third party must comply with the eligibility requirements stated in Article 19 of Annex II to the contract and they must therefore exclude any profit (also at the level of the third party). Note also that when a third party makes resources available to a contractor free of charge, and these were attributed specifically to the EC project, this constitutes a project receipt that must be declared to the Commission and the reimbursement of the related costs would be zero (see section on project receipts).

The third party is contractually obliged to provide an audit certificate to the actual contractor. If the contribution for the third party is over 30% of the budget foreseen (e.g. Craft projects) then this should be notified to the respective Commission audit service, which will review the case and decide if a separate audit/ replacement of the original/ should be carried out on the respective third party.

Third parties making resources available to the project may be subject to audit by the Commission and the Court (Article 3.2.b of Annex II to the contract). Examples of resources made available by third parties may constitute for instance services provided under arrangements with affiliates concluded by the contractor in the course of its normal business (covering co-operation between employees of a number of affiliated companies).

Special clause 23 for JRC and Associations composed of members: The members working on the project and identified as such in the contract are allowed to charge their cost under its own cost reporting model and shall submit their own form C and audit certificate. These costs are not considered as receipts of the project.

Subcontracting
Sub-contracting is an exception to the principle that Community contribution does not give rise to profit. Four main elements shall be taken into account when verifying the conformity of the sub-contracting in on-the-spot audits relating to FP6 contracts:
i) the nature and significance of the tasks subcontracted: the elements of the work to be clearly identified in the technical annex, minor

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services, which do not represent core elements of the project, can be subcontracted directly by the contractor and they should prove necessary for the implementation of the funded action.

ii) the selection of the sub-contractor: subcontracting must be awarded to the bidder offering the "best value for money" offer. The contract does not specify the tender procedures to apply, but public bodies apply national public procurement rules.

iii) the conformity of the sub-contracting arrangements with the contractual provisions: while retaining the sole responsibility for carrying out the action and for compliance with the provisions of the contract, the participants must undertake to make the necessary arrangements to ensure that the subcontractor waives all rights in respect of the Commission under the contract. In addition, provisions regarding confidentiality, obligation to supply information to the Commission and the Member States, publicity of Community financial support, the obligation to provide adequate financial statements and the Commission audit rights shall be extended to the sub-contractor.

iv) the regularity of the evidence supporting the payment of the services subcontracted: key checks to perform concern the verification of the existence of invoices concerning the sub-contracted tasks (including VAT), the review if the adequate entry of the transaction in the participant's account and the confirmation of the actual payment of the subcontractor's services.

Subcontractors may be subject to audit by the Commission and the Court (Article 3.2.b of Annex II to the contract).

Problems encountered
Common problems are:
• Inclusion of profit in intercompany transactions and in-house consultants (see Commission guidance below). Inclusion of profit per se is NOT a problem if subcontracting is involved.
• Failure to recharge/ internally invoice costs between affiliates, resulting in no costs being actually incurred by the contracting legal entity.
• VAT being claimed, or VAT not disclosed separately
• Rebates or discounts not disclosed (i.e. amount stated on purchase order rather than amount paid charged)
• Inclusion of subcontracting (and in some cases resources provided by third parties) from the base used to calculate flat rate indirect costs in AC or FCF contracts.
• Subcontractors (or consultants) chosen in absence of any selection criteria.

Documentation
It is important to keep on file / consult:
• Contractor's internal guidelines for procurement of services (where

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applicable)
• An explanation of the selection process used to choose the subcontractor, if not in line with the guidelines.
• Copies of the signed original subcontracts and agreements with third parties (including technical annexes)
• Copies of the original invoices
• Evidence of delivery or services provided
• Voucher/Expense account of accounting entries
• Bank statements showing amount and date of payment
• A clear description/ diagram of the ownership structure which clearly shows how the legal entities are affiliated. (If they are).
Commission interpretation
For the performance of financial audits under previous framework programmes, the Commission issued the following guidance notes to the EAF on this area:
“In cases where “related parties” are charged as personnel costs o subcontracting, the auditor should evaluate the costs by reference to prevailing market rates, and also satisfy themselves that the recruitment is directly justifiable (i.e. necessary for the contract).

Individual consultants who charge their costs to the contractor by means of invoices can be considered as personnel costs rather than subcontracting as long as all of the following conditions are met:
• The consultant’s rate is reasonable and is remunerated in accordance with the normal practices of the contractor provided these are acceptable to the Commission.
• The output of the consultant is under the supervision of the contracto
• The contractor works on the contractor’s premises and can be considered a member of the project team.”
(See FP6 Guide to financial issues 6.1.1.)

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Interpretation
Typical costs classified under this heading are laboratory supplies or costs of small items for prototypes of a sufficient entity and specification as to justify that they are not covered by eligible indirect costs. In this line, where specific cost items are declared as direct costs by FC contractors, they shall not be included in the calculation of indirect costs.

Problems encountered
Common problems are:
• Costs are included which are not relevant to the project under audit
• Rebates or discounts not disclosed (i.e. amount stated on purchase order rather than amount paid charged)
• Valuation of consumable items purchased at different prices and not differentiated in the contractor's inventories
• VAT being claimed (or VAT not disclosed separately)
Documentation
It is important to keep on file / consult:
• Contractor's guidelines for procurement of consumables (if available)
• Purchase order
• Copies of original invoices for consumables entry
• Voucher/Expense account of accounting entries
• Bank statements showing amount and date of payment
• Inventory register/ledger (where applicable)

Interpretation
Protection of knowledge is not specifically mentioned as an eligible cost. However, it follows from the provisions indicated above that costs relating to the protection of the knowledge generated by the project are considered eligible for reimbursement if they meet the other conditions for eligibility. Typical costs classified under this heading are costs for patent applications.

Problems encountered
Common problems are:
• Costs are included which are not relevant to the project under audit or

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incurred after project duration
• VAT being claimed, or VAT not disclosed separately
• Rebates or discounts not disclosed (i.e. amount stated on purchase order rather than amount paid charged)

Documentation
It is important to keep on file / consult:
• Calculation of the actual costs necessary for the protection of knowledge (such as documentary research preliminary to the filing of an application for the granting of an industrial property right)
• Invoices for fees to the competent authorities and/or advisers
• Voucher/Expense account of accounting entries
• Bank statements showing amount and date of payment

Interpretation
Article 2 of Annex II to the model contract defines the activities covered by the management of the consortium: - obtaining audit certificates by each of the contractors
- implementation of competitive calls by the consortium for the participation of new contractors, in accordance with the provisions of the contract
- maintenance of the consortium agreement if it is obligatory
- obtaining any financial security such as bank guarantees when requested by the Commission
- any other management activities at the consortium level not covered by any other activity, such as:
• coordination of the technical activities of the project
• the overall legal, contractual, ethical, financial and administrative management
• coordination of knowledge management and other innovation-related activities
• overseeing the promotion of gender equality in the project
• overseeing science and society issues related to the research activities
conducted within the project
• any other management activities foreseen by the annexes.

In principle, all contractors participating in an indirect RTD action may declare costs related to the management of consortium activities, provided

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that this is in line with the consortium agreement and that the 7% ceiling is respected for the consortium as a whole.

Note also that where the costs incurred for management activities exceed the limit of 7% of the Community financial contribution, such costs may be charged to the other relevant activity to which they correspond if they meet the general eligibility conditions mentioned under point 5 of these guidelines, applicable to those activities. Generally speaking, audit certificates can only be charged to management cost activity.

Problems encountered
The problems encountered will be similar to those identified for each of the cost categories. The fact that management costs are reimbursed up to 100% by the Commission entails the risk that beneficiaries include under this category activities corresponding to research or demonstration activities. (limit of 7% should cap such problems)

Documentation
It is important to keep on file / consult:
• A description of the activities carried out by the contractor in the context of the management of the consortium.
• A separate breakdown of the management costs declared, classified by activity.
• Supporting documentation concerning the costs declared, in line with previous sections of this guidelines

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Interpretation
For AC and FCF contractors, indirect costs are calculated as a percentage of 20% of the direct eligible costs excluding subcontracting, so the verification work is limited to the compliance of direct costs with the specific provisions applicable for these reporting models. Particular attention shall be paid to the concept of additionality, as far as AC contractors are concerned, and to the consideration of consultants under personnel.

If there is an in house consultant, overhead costs for this person can also be charged, irrespective if the in house consultant provides his services full time from the premises or not.

As FC contractors are concerned, overheads should include only costs which are not directly attributable to a project (e.g. administration, management, depreciation of buildings and equipment, supplies as water, electricity, telecommunications and postal charges, office supplies, general office software and personnel costs related to administrative personnel, as long as not already charged under the contract as direct costs), and a fair share of those overheads being attributed to the EC-funded project.

Sales, marketing, hospitality and entertainment cost are non-eligible costs within the category of indirect costs as there is no direct relationship with the eligible direct costs attributable to the project. The same applies for "owned funded research", although exceptions may occur where own funded research may directly relate to EC funded research activities. In these cases there must be clear documentation of costs, which substantiates own funded research expenses. In situations of doubt the auditor should check with the EC. In any case the usual accounting principles do not overrule the general principles of cost eligibility (actual, necessary etc.).

The audit work to be carried out in the context of the verification of the indirect costs declared to the Commission will cover the following two aspects:
- verification of the eligibility of the overheads taken into account for the calculation (confirming that they do not include any of the costs specifically considered non-eligible by the contractual provisions)

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- assessment of the allocation methodology applied by the contractor to allocate the indirect costs to the individual projects (and in particular to the audited action).

Experience shows that FC contractors usually charge indirect costs using an hourly overhead rate to be applied to the hours worked in the project (e.g. 20 euro for every personnel hour recorded) or as a percentage on personnel costs allocated to the project (e.g. 75% of personnel costs). The only difference is that in the latter case the indirect costs charged are progressive to the salary of the staff category. Any other methodology would be acceptable as long as it is in line with the general accounting policy of the contractor (the same approach should also be used for non-EC contracts) and respects the general principles defined by the contract (in particular that it does not produce profit).

Problems encountered
Although the contract in theory allows contractors to use their standard overhead practices, in the majority of cases these standards will have to be adjusted to exclude the following costs not allowed per the contract:
• Interest, management charges and other Return on Capital Employed included
• Charges not related to research (e.g. Marketing, sales and distribution costs, overhead costs of purchase department for industrial contractors, depreciation of factory assets)
• Charges and losses that should be borne by other projects as direct costs

Check on the exact list of ineligible costs.
Whenever the contractor is organised around different cost or profit centres (and especially if it is established in different locations) only the overheads of the department(s) or cost/profit centre(s) carrying out the project should be taken into account.

A rule of thumb for the assessment of the allocation methodology is to simulate the apportionnement of the overheads in the hypothesis that 100% of the productive personnel of the company would be working for the project.

Documentation
It is important to keep on file / consult:
• A complete and detailed breakdown of all the overhead costs which have been taken into account for the calculation of the eligible indirect costs.
• Audit trail of the overheads costs considered to the financial statements and underlying accounting records.
• A clear explanation of the allocation methodology applied.
• An explanation of all unusual items or items whose description imply they may not be allowable costs.

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Interpretation
According to the Financial Guide, the exchange rates to be applied by the beneficiary are those published by the European Central Bank (ECB's conversation rates may be obtained at the following internet address: ) or in the relevant Official Journal of the European Union.

As indicated above, two possibilities are given to FP6 contractors: the possibility to apply the rate of the date when costs are incurred will be normally used by contractors keeping accounting in euro that incur costs expressed in other currencies, or contractors keeping accounts in currencies outside the euro zone incurring costs in a different currency and for contractors in the EURO zone who incur costs in currencies other than the euro. The option to apply the exchange rate of the first date following the end of the reporting period will normally be used by contractors keeping accounts in a currency other than the euro (although they may have used the first option to convert specific expenditure items into their local currency).

Note that the provisions concerning exchange rates shall also be applied for project receipts.

Problems encountered
The contract does not distinguish between calendar and working days. The ECB, however, does not publish rates on legal holidays or weekends. According to the financial guidelines (version February 2005), the next rate published shall be applied. Nevertheless, holidays and weekends differ from one to another country (e.g. Sundays are working days in Israel). Only ECB rate or DG BUDG rate should be used. Note also that a significant portion of contracts end the reporting period on 31 of December.

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Interpretation
Many of the contractors participating in indirect RTD actions funded under the FP6 are constituted as non-profit organisations or foundations. In many cases, this implies that they cannot recover VAT (since they do not charge it to the services they provide), and therefore it constitutes a cost for them. The contractual provisions, however, do not establish an exception to the rule that identifiable VAT is not eligible in any case, and therefore audit teams must consider it as a non-eligible cost.

Interpretation
Distribution of Community funds

The allocation of the Community contribution among the participants depends on the consortium. Although the contract establishes that the distribution of the EC contribution shall be transferred by the coordinator without unjustified delay, it does not establish a specific time limit.

With the exception of the initial pre-financing, payments shall be executed by the Commission on the condition that the technical and financial reports corresponding to the period covered by the payment, as defined by Article 7 of Annex II to the contract, are approved or deemed approved. In this respect the contract establishes that the Commission shall evaluate them (or have them reviewed) within 45 days following receipt, but also that the non-financial reports shall only be deemed approved 90 days after receipt

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in the absence of any reaction from the Commission. The technical and financial reports specified by Article 7 of Annex II to the contract shall be submitted within 45 days following the end of the corresponding reporting period (with the exception of the final report on the distribution of the Community financial contribution that shall be sent within 60 days following the receipt of the final payment by the coordinator)

Selection of additional participants
As indicated earlier, the consortium may vary its composition on its own initiative.

The selection of additional participants may require the publication of a competitive call if this is foreseen in Annex I of the contract and if the contract is for an integrated project or network of excellence. In such cases the evaluation of offers received uses similar procedures in the light of the criteria that governed the selection of the indirect RTD action concerned. The consortia's compliance with these requirements can only be assessed at the level of the coordinator, who shall normally lead the procedures for the selection of additional partners. During on-the-spot audit carried out at the level of the coordinator, the audit team should assess whether the requirements have been complied with. In particular, the audit team should confirm that:
- the selection procedure has been published by the consortium;
- that the selection has respected the principles of quality, transparency, equality of treatment and impartially (including the absence of conflicts of interest).
- that ethical considerations have been adequately considered.

Fair treatment
The principle of flexibility governing the internal management of the consortia may imply that some contractors may be treated in an unfair manner by the strongest participants. This can affect small and medium sized contractors in a particular manner. When conducting audits at the level of the final beneficiary, audit teams should be aware of this risk and pay special attention to indicators that might suggest that coordinator is abusing of its position. This is an issue to be recognized by the auditor when it occurs and to be mentioned in the audit report. One of the indicators may be very long delays in making payments to certain contractors by the co-ordinator.
Documentation of audit findings
The following information should be received and kept on file (see Annex 3):

For the transfer of Community contribution
• Bank statement showing amount and date of advance and/or interim and final payments received (from Commission or administrative co-ordinator)

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• Only for co-ordinator: contractor’s bank statement showing amount and date of advance and/or interim and final payments forwarded to other members of the consortium
• Consortium agreement and any amendments

For the selection of additional contractors
• Documentation concerning the selection of additional contractors by means of a competitive call where required by the contract (publication, evaluation forms, evaluation reports, CV of evaluators, Form Bs, etc.)

*****************

Yours faithfully,

Kostas VITSOS

Dear Research and Innovation (RTD),

Dear Member of the Transparency Unit,

I refer to the response to the confirmatory application Ares(2014)6510 - 06/01/2014.

This is to respectfully request the FULL RELEASE of the 'FP6 Audit Manual, including its annex, 15 September 2006'. The request springs from the 4th last paragraph of page 3 of the response, which reads:

'However, you specify that a full copy of the FP6 Audit Manual is already in your possession, following the transmission to you by a third party which received the document in a lawful manner from the Commission. From the text quoted in your application, I deduce that the document is authentic. I therefore consider that document falls outside the scope of your confirmatory application.'

The rationale as regards the obligation to grant full access to the FP6 Audit Manual is given below:

1. By confirming that the expunged parts of the FP6 Audit Manual quoted in the annex of the confirmatory application are verbatim copies of the parts of the manual for which DG RTD refused to grant access in the initial response, it necessarily follows that the full content - albeit in a different format - of the FP6 Audit Manual of 15/6/2006 is lawfully in the public domain.

2. The public is able to reconstruct the complete manual by putting together the partially released copy with the annex of the confirmatory application http://www.asktheeu.org/en/request/finan....

3. I was unable to find a provision of EU law, or case-law of the EU Courts, according to which under Regulation 1049/2001 an Institution is lawfully entitled to refuse FULL access to a document under this particular circumstances, that is to say, the document in question is partially released in the initial response and in the confirmatory application the applicant quotes the withheld parts of the document - with the withheld parts provided to the applicant by a third party (claiming that he/she has been in a lawful possession of the document at issue), and the Commission services not having stated that the withheld parts ended up in the public domain by an unauthorised disclosure.

4. An analysis of the Judgement of the General Court in the case T-93/11, Stichting v Commission, suggests (e.g., paragraph 45) that the disclosure by an Institution of a document to a dozen, or more, entities without some kind of a restriction regarding the further disclosure of the document to other third parties indicates that the Institution has not regarded the document as sensitive.

5. A position of an unauthorised disclosure of the withheld parts of the manual may justify not granting full access. The response did not state that, irrespective of who that third party might have been who disclosed the content of the manual, the Commission services had expressly instructed recipients of the manual not to further disclose it to third parties without a prior permission. This is to be contrasted with audit reports of the Research DGs, which expressly state in their headers restrictions on further disclosure. In such particular circumstances, by not suggesting unauthorised disclosure of the manual, it necessarily follows that the Secretariat-General has impliedly admitted that the Research DGs have not expressly notified audit firms and their subcontractors that the manual was a sensitive document.

6. It is virtually certain that the subcontractors of the audit firms - signatories of the framework contracts have been provided with copies of the manual, either directly or indirectly. It is very probable that DG RTD did not classify the manual as confidential.

7. A careful examination of the withheld parts of the manual reveals that the document has absolutely nothing to do with the 'financial and economic policy of the Union' (article 4.1.a fourth indent) or 'the purposes of inspections, investigations of audits' (article 4.2 third indent).

8. On the very contrary, the withheld parts of the manual show the policy of the Research DGs to disregard to an extreme degree Regulation 45/2001 and Directive 95/46/EC in the external financial audits.

9. Other applicants may lodge fresh applications under Regulation 1049/2001 requesting the FP6 Audit Manual of 16/9/2004, expressly referring to the annex of the confirmatory application GestDem 2013/3349 and the letter Ares(2014)6510 - 06/01/2014. Under such particular circumstances it is extremely difficult to see how DG RTD will be able to advance the argument that the other applicant will effectively be in a possession of the content of the manual by reconstructing the manual, and consequently DG RTD is not obliged to grant full access to the manual in a fresh application.

In view of the above and under the specific circumstances of the instant application, the omission to grant FULL access to a document held by the Commission - i.e., the FP6 Audit Manual of 16/6/2006 – has to be seen as a mere administrative error, and NOT a refusal to grant full access on account of substantial reasons. In other words, granting full access to the manual does not amount to a re-examination of the substance of the response to the confirmatory application.

In conclusion, I respectfully reiterate my submission that the Secretariat-General is obliged to provide me with a copy of the FP6 Audit Manual of 16/9/2006 HELD by the Commission services.

Yours faithfully,

Kostas VITSOS