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EUROPEAN COMMISSION
RESEARCH DIRECTORATE-GENERAL
Directorate A - Inter institutional and legal matters – Framework programme
A.4 External audits A.5 Implementation of audit certification policy and outsourced audits
ANNUAL ACTIVITY REPORT ON EXTERNAL AUDITS
2009
Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone: (32-2) 299 11 11
AAR_External_Audits_2009_260210_final_expunged.doc
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ANNUAL ACTIVITY REPORT ON EXTERNAL AUDITS – 2009
TABLE OF CONTENTS
Executive Summary _________________________________________________________ 3
1.
Background ____________________________________________________________ 6
1.1. Introduction ________________________________________________________ 6
1.2. Legal background ___________________________________________________ 6
1.3. The mission of the External Audit Units __________________________________ 6
1.4. Relation with the control framework activities of DG Research _______________ 7
1.5. The audit campaigns _________________________________________________ 7
1.5.1. The FP5 audit campaign __________________________________________ 7
1.5.2. The FP6 audit campaign __________________________________________ 8
1.5.3. The FP7 audit campaign __________________________________________ 9
2.
Activities _____________________________________________________________ 10
2.1. Types and nature of the audits carried out _______________________________ 10
2.2. Cross-RDG coordination _____________________________________________ 11
2.2.1. Coordination of Audits in the Research family (CAR) __________________ 12
2.2.2. Coordination of other Committees and audit reference documents ________ 12
2.3. Extrapolation ______________________________________________________ 13
2.3.1. Extrapolation policy and coordination ______________________________ 13
2.3.2. Extrapolation management _______________________________________ 13
2.3.3. Extrapolation implementation _____________________________________ 14
2.3.4. Extrapolation follow-up activities __________________________________ 15
2.3.5. Further considerations ___________________________________________ 16
2.4. Collaboration with the ECA __________________________________________ 17
2.5. Reporting activities _________________________________________________ 17
2.6. OLAF cases _______________________________________________________ 18
2.7. Quality control tools ________________________________________________ 19
2.7.1. Keywords database _____________________________________________ 19
2.7.2. The Audit Steering Committee (ASC) ______________________________ 20
2.7.3. The quality review process _______________________________________ 20
2.8. Collaboration with the DG RTD administration and finance (UAF) network ____ 21
2.9. Sharing Audit Results (SAR) and other IT developments ___________________ 21
2.10.
FP7 Methodology Certification ____________________________________ 21
2.10.1.
General background __________________________________________ 21
2.10.2.
State of play of Certification files as of 31 December 2009 ____________ 22
2.10.3.
Supporting IT tools ___________________________________________ 24
2.10.4.
Inter-service collaboration ______________________________________ 24
2.10.5.
Communication activities ______________________________________ 24
2.11.
Coordination of outsourced audits _________________________________ 25
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2.12.
Other activities (Art.169 Initiatives/JTIs/Agencies) ____________________ 25
2.12.1.
EURAMET _________________________________________________ 26
2.12.2.
Eurostars and Bonus __________________________________________ 26
2.12.3.
Executive Agencies – REA and ERCEA __________________________ 26
2.12.4. Joint Technology Initiative (JTIs) _______________________________ 27
2.13.
Scientific/technical audits ________________________________________ 27
3.
Results and Analysis ____________________________________________________ 27
3.1. Audit numbers _____________________________________________________ 27
3.2. Audit results ______________________________________________________ 30
3.3. Analysis __________________________________________________________ 33
3.3.1.
Analysis of error rates _________________________________________ 33
3.3.2.
Analysis of adjustments at cost category level (FP6)__________________ 35
3.3.3.
Qualitative analysis of the largest adjustments in absolute terms (FP6) ___ 36
3.3.4.
Assessment of the different steps of the control chain _________________ 38
3.3.5.
Qualitative analysis of error types (FP6) ___________________________ 39
3.3.6.
Audit coverage (FP6) __________________________________________ 40
ANNEX I: Mission Statements ________________________________________________ 41
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EXECUTIVE SUMMARY
During 2009, the third year of the multi-annual FP6 Audit Strategy, the external audit Units
have continued to ensure its effective implementation while taking stock at the same time of
its results and findings for the preparation of the Audit Strategy for FP7, which was agreed in
September by all Commission services concerned. The FP7 audit campaign was consequently
launched, and it is expected to last until 2016.
The FP7 Audit Strategy (AS) is a natural progression from the strategy developed for FP6. Its
objectives are similar and it follows on the statement made in the FP6 Mid-term review that it
was delivering its expected outcomes. Certain assumptions of the FP6 Strategy have de facto
been corroborated by results and those assumptions could therefore safely be applied for FP7,
such as the fact that most errors found relate to personnel costs and overheads, or that
extrapolation has an important potential 'cleaning' effect of systematic, material errors in the
budget.
Having said that, there are also important changes in the FP7 AS. Some are the result of
technical refinements borne out of previous experience and of information about the auditable
population not available previously, such as the possibility of using actual costs submitted by
beneficiaries as the basis for sampling instead of theoretical funding estimations made when
contracts are signed. Other changes relate to the inherent differences between FP6 and FP7 in
areas such as requirements for audit certificates (compulsory in FP6 but only required when
the requested funding is over 375,000 € in FP7), or the number of Commission services
involved (6 Research DGs and 2 Executive Agencies instead of just 4 Research DGs).
Nevertheless, the most important changes from the point of view of the effectiveness of the
FP7 AS result from assumptions in the FP6 AS which have been proven erroneous by results,
in particular the assumption that most material errors in FP6 would be of a systematic nature.
In fact, systematic errors so far account for only about 40% of errors in favour of the
Commission. This important finding, combined with the subsequently reduced 'cleaning'
effect of extrapolation, has to lead in turn to a revision of the expectation that effective
auditing, extrapolation and recovery will lead to a residual error rate of less than 2%. The fact
that this assumption is to be nuanced was already highlighted in the ABM Progress report(s)
of 2009.
Another significant finding is that the FP6 representative error rate has stabilised around 3%
during the last year. This result compares with an overall 3.8% error rate for FP5, and it is
based on an auditing volume already five times bigger than for FP5, an enormous proportional
FP-on-FP increase in auditing efforts. During 2009 we have also seen a high error rate (over
8%) in relation to FP6 RISK audits which speaks for the validity of the risk assessment
methods employed to date. This is reassuring as we are currently considering risk assessment
methods to be used in FP7.
During the last year we also achieved one of the main objectives of the FP6 Audit Strategy,
namely to 'clean' from systematic material errors at least 50% of the budget. In addition, 908
FP6 audits have been closed so far by the end of 2009. This is well above the original
minimum multi-annual target of 750 set in the ABM action plan of 2007, attained more than
one year ahead of schedule.
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Other highlights of the year include: the adoption by the Commission in June 2009 of a
decision on interim implementation rules concerning acceptability criteria for the average
personnel cost methodology; the signature of six new framework contracts for the provision
of audit services by external audit firms and the successful migration to a new IT audit
management system (AMS), replacing a local tool.
Even though 2009 has been another busy and successful year for the external audit Units, and
this report provides much proof of that, it is still worth mentioning areas where additional
efforts will be needed during the year ahead.
There were examples during 2009 of the limitations inherent to the current governance
structure in the research family, with multiple AODs, multiple external audit Units and a
substantial overlap of common beneficiaries, when it comes to effective implementation of
the audit strategies.
For example, much work continued to be done in the last year trying to clarify issues resulting
from unclear or conflicting interpretations of the regulatory framework. This has led to
multiple consultations with legal Units and with other DGs, as well as the preparation of a
number of guidance notes and other instructions. Given the increased number of audits, it is
essential that coherent and consistent interpretations are taken towards beneficiaries.
Despite the development of several IT tools for planning co-ordination purposes during the
year, these limitations will have a bigger impact in FP7 considering the increase in the
number of Commission services involved and constraints created by certain technical
refinements.
These issues were transmitted as cross-cutting risks to central services of the Commission, in
view of their potential consequences.
Implementing extrapolation has remained difficult during 2009, as exemplified by the legal
proceedings initiated by two of our biggest beneficiaries. Two important actions have been
taken in this respect: a more centralised system for reception and processing of revised cost
statements in our DG, and simplification measures for beneficiaries, but their effect has still to
be felt. In addition, follow-up reviews and audits on extrapolation cases were launched in
order to formally close older extrapolation cases. At the end of 2009, DG RTD has 185
extrapolation cases on file; for all RDGs there are 429 cases. In total, 5220 DG RTD
participations are affected by extrapolation. The increase in workload generated by
extrapolation for both the Commission services and beneficiaries, together with the request in
the EP's discharge resolution for the 2008 financial year to reduce the need for beneficiaries to
re-calculate cost statements already submitted, were at the basis of the Commission
Communication of December 15th, 2009 seeking ways to facilitate the implementation of
extrapolation through, for example, flat-rate corrections. The external audit Units contributed
to the elaboration of this Communication.
The commitment to the development of a fraud detection strategy for DG RTD has led to an
increase in activity in RTD A.4, in particular in its dealings with OLAF. These very resource-
intensive files are bound to grow in importance in the years to come and may have resource
implications.
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Finally, it is worthwhile referring to the ex-ante assessment that RTD A.4 carried out for the
EMRP Art. 169 Initiative, as well as its involvement in the pilot-project for
scientific/technical audits.
In 2010, efforts will be equally concentrated on FP6 and FP7 audits with a view, on the one
hand, to bring the implementation of the FP6 AS to completeness and, on the other, to provide
a first representative indication of the amount of error present in FP7 at this point, as well as
correcting any errors encountered as early as possible so that they do not reoccur during the
lifetime of the framework programme.
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1.
BACKGROUND
1.1. Introduction
The purpose of this document is to report on the ex-post audit activities in DG RTD during
2009, using the numerical results of the verifications carried out and providing feedback on
any qualitative issues that may have come to light. As such, it also contributes to the opinion
of the Director General in DG RTD's Annual Activity Report on whether reasonable
assurance exists that the legality and regularity of the underlying transactions have been
respected.
1.2. Legal background
For FP6, which is still the major source of work for ex-post audit activities, the legal basis for
the external audit activity is Annex III point 2, paragraph 7 of the Decision n° 1513/2002/EC
of the European Parliament and of the Council, and Article 18 of Regulation (EC) n°
2321/2002 of the European Parliament and of the Council. For FP7, reference must be made
to Article 5 of the Decision n° 1982/2006/EC of the European Parliament and of the Council,
and Article 19 of Regulation (EC) n° 1906/2006 of the European Parliament and of the
Council.
The model contract for the 6th Framework Programme (Annex II, Article 29) states that: '
the
Commission may, at any time during the contract, and up to five years after the end of the
project, arrange for audits to be carried out, either by outside scientific or technological
reviewers or auditors, or by the Commission departments themselves including OLAF'.
Similar provisions are foreseen in the model grant agreement for the 7th Framework
Programme (Annex II, Article 22).
1.3. The mission of the External Audit Units
Through the execution of financial audits to the highest professional standards, the external
audit Units provide a level of reasonable assurance to senior management and, ultimately, to
the Discharge Authority (European Parliament and Council), on whether DG RTD contractors
are in compliance with the terms of the RTD contract(s). As such, the ex-post audit results
provide a representative error note and initiate the recovery procedure managed by the
operational services. By doing so, the external audit function contributes to the protection of
the European Union’s financial interests.
The responsibilities related to external auditing are attributed to two Units: RTD A.4 is
responsible for strategy and planning coordination, in-house on-the-spot audits and back-
office work1; RTD A.5 is responsible for outsourced on-the-spot audits and the
implementation of the audit certification policy. The mission statements of both Units are in
Annex I.
1 Back-office work refers to a number of tasks in support of the auditing function including information systems
and data maintenance, batch preparation, extrapolation, management reporting and a variety of administrative
tasks.
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1.4. Relation with the control framework activities of DG Research
Ex-post audit activities need to be seen as part of the overall integrated control framework put
in place by the Directorate General. Internal control activities include all ex-ante and ex-post
evaluations, controls, financial and scientific verifications and monitoring tools.
In the area of grant management for research expenditure, the focus remains very much on ex-
post controls after payment, avoiding ex-ante controls for contractors as much as possible
before payment. This is a conscious decision with the aim to reduce administrative burden ex-
ante as much as possible, facilitating in general the time-to-grant process.
Accounting transactions included in the cost statements are processed through the internal
control systems of beneficiaries, checked in FP6 by their certifying auditors, who then issue
an audit certificate. These transactions are also monitored by the Commission's Project
Officers (scientific and financial) even before the arrival of the cost statements, and thereafter
checked by means of desk reviews before payments are made. The use of certifying auditors
is very different under the 7th Framework Programme (FP7). Simulation exercises have shown
that 82% of the transactions for which an audit certificate was needed under FP6 would not
require an audit certificate in FP7. As a conclusion, the internal control system under FP7 will
rely even more on the ex-post audit activity.
The control chain described above, which operates before any ex-post financial audit is
carried out, has to be considered in the overall evaluation of risk and of the external audit
results. Close cooperation exists between auditors and Operational Units in the preparation
phase of an audit, as well as in the implementation phase of the audit findings, in the form of
contacts through the Audit Liaison Officer in order to obtain an agreement concerning audit
findings and their implementation. No audit is closed in DG RTD which has not been
expressly agreed upon by the relevant operational services.
In 2009, DG RTD continued following up the conclusions of the ad-hoc working group
charged with defining the scope, feasibility and possible synergies with scientific and
technological audits (as opposed to project reviews and ex-post impact assessments). RTD
A.4 carried out the first pilot-projects of technological and scientific audits.
1.5. The audit campaigns
Given the reliance on ex-post audit activity, a general approach was defined for FP5 and
proper audit strategies have been established for FP6 and FP7.
1.5.1. The FP5 audit campaign
For the 5th Framework Programme (FP5), DG RTD's audit policy was mainly based on
random sampling, and partially on risk assessments. The underlying assumption was that,
provided that the sample was large enough, conclusions could be drawn for the whole
population. DG RTD decided that a sample of around 10% of contractors would be audited
over the lifetime of the Framework Programme, in order to give a representative picture of the
population.
It was later recognised that, with the resources available at the time, the 10% target was
unrealistic. At present, there remain only 3 ongoing FP5 audits, which should be the last (with
the possible exception of the odd audit on request). By the end of the FP5 audit campaign, an
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audit coverage of 3.7% of the beneficiaries is expected (compared with the originally foreseen
10%). Cumulative FP5 results can be found in section 3.
1.5.2. The FP6 audit campaign
In the three years of implementation of the FP6 Audit Strategy, which covers four years in
total (2007-2010) and was established after the critical Discharge procedure in 2006, the focus
has been on increasing the number of audits, improving the consistency of approach and the
coherence of conclusions, more homogeneous audit policies (including reporting and
documenting), calculating reliable and representative error rates, and introducing the
extrapolation procedure.
The Mid-term review of the FP6 Audit Strategy, finalised in the beginning of 2009, concluded
that all the RDGs believed that the corporate FP6 Audit Strategy is delivering its expected
auditing output satisfactorily. However, a number of issues had to be either addressed or taken
as a given:
1. Despite constant coordination efforts, the 'corporate' character of the Audit Strategy
reaches its limits in the independence of the four AODs.
2. The reinforcement of the process of extrapolation has turned out to be very time-
consuming and labour-intensive (see section 2.3.3)
3. The increased number of audits and the effectiveness of the audit approaches are
generating a higher number of contested cases, some of which are leading to legal
cases. These will require more attention of the Commission services in order to defend
its financial interests.
2009 has been the third year of implementation of the multi-annual FP6 Audit Strategy. The
strategy is now well advanced, as exemplified by the fact that the DG RTD overall minimum
target of 750 audits over its four-year lifespan has already been comfortably surpassed (see
section 3.1 Table 3.6).
Audit results have shown, for example, that systematic errors do not appear to be as prevalent
as originally thought. Reviewing this important premise of the FP6 Audit Strategy has
resulted in changes to the formula used to calculate the FP6 residual error rate for the
Declaration of Assurance of the Director General.
This is an important finding, because it was the assumption that the very large majority of
errors was systematic. This, combined with the coverage 'cleaning' effect of extrapolation,
made decision-makers conclude that effective auditing, extrapolation and recovery would lead
to a residual error rate of less than 2%. The fact that this assumption is to be nuanced was
equally highlighted in the ABM Progress report(s) of 2009.
The RDGs also investigated how to best address this issue from an ex-post view, although this
may require the revision of the internal control framework as a whole, as well as taking into
account the costs and the benefits of any possible additional controls, ex-post or ex-ante, since
it is clear now that the Audit Strategy and recovery procedures by themselves might not
suffice to bring the residual error rate to 2% or lower.
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From an ex-post control point of view, additional efforts could consist of:
1. Randomly seeking non-systematic errors in order to reduce the error rate. As there is
no systematic way of doing this, this was thought not to be sufficiently cost-effective.
2. Extending the list of top-beneficiaries beyond what is covered today, seeking further
errors of systematic nature, with extrapolation as a potential consequence. In this latter
scenario, the corrective effect on the budget would become of course increasingly
marginal since the biggest beneficiaries have already been covered.
Given the ongoing debate on the 'tolerable rate of error' and doubts on the cost-effectiveness
of additional controls, no clear decision has been taken. Indeed, the presence of a material
level of non-systematic errors on contracts with audited beneficiaries, which cannot be
corrected by means of extrapolation, is relevant for the ongoing work for the determination of
the 'tolerable error rate' in the research area. This technical work is due to be concluded in the
course of 2010 so as to adopt a Commission communication to the Budgetary Authority and
the European Court of Auditors (ECA) during the first half of the year.
Audit results have also shown that most errors in FP6 relate to personnel costs and overheads,
and that the effect of ex-ante controls between the receipt of the cost statements and their
payment has been limited.
Although these and other insights result from a body of over 900 closed audits, there are still
250 ongoing FP6 audits at this point. It is therefore too early to draw final conclusions for
FP6, but the experience so far of implementing the FP6 Audit Strategy has been invaluable in
designing the strategy for FP7.
1.5.3. The FP7 audit campaign
2009 has seen the start of the FP7 audit campaign. Several months of cross-RDG discussions
resulted in a common Strategy document for all RDGs and Executive Agencies being adopted
at the end of September 2009 but, even though 160 FP7 audits have already been launched,
the number of them closed so far is too small and not representative enough to say anything
substantial at this stage.
The start of the campaign was also delayed by the natural time lag between the start of a
framework programme and the point in time at which it begins to become 'auditable'. During
2008 and 2009, RTD A.4 run four checks at different points in time to assess the 'maturity' of
the FP7 auditable population, and after the last one of these, carried out in May 2009, it was
considered that a first set of FP7 audits would be cost-effective and material
Compared with the FP6 Strategy, the most important differences of the FP7 Audit Strategy
are that, with the creation of the executive agencies, the FP7 Strategy now concerns six
Commission services instead of four, and that ex-ante certification controls will have to be
taken into account when carrying out ex-post audits.
On a more technical level, as well as already taking advantage of the refinements introduced
to the formulae for the calculation of error rates in FP6, the FP7 Strategy introduces
qualitative improvements in several areas. It removes the stratification of the population used
in FP6 and aims to provide a more accurate representative error rate by 1) taking
representative sample(s) from the whole population, not just one stratum, 2) using a
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population of individual cost statements, rather than participations in projects, and 3)
considering the actual amounts claimed by beneficiaries in each reporting period rather than
expected EC contributions during the lifetime of the project.
Improvements have also been introduced to the way in which representative samples are
selected and audited. The selection parameters have been brought more in line with those used
by the ECA, and the sample units are individual cost statements. The possibility of taking
multiple samples over the expected implementation of the Strategy (2009-2016) is foreseen,
as well as a mathematical method for combining their respective error rates without
introducing a bias.
Increased efforts in cross-RDG co-ordination will be needed for an appropriate
implementation of the FP7 Strategy. This issue has been brought to the attention of the central
Commission services as a cross-cutting risk shared by the RDGs.
2.
ACTIVITIES
2.1. Types and nature of the audits carried out
The external audit Units select the ex-post audits in accordance with the methods described in
the Audit Strategies.
For FP6, this means according to three strategic strands:
TOP: this is a selection of the beneficiaries which receive the most money from the
Commission. The DG RTD list of top beneficiaries consists of 243 contractors which
receive 50% of the FP6 budget managed by DG RTD. All beneficiaries in this sample
have been audited at least once (on at least three participations) and, where necessary,
further audits are carried out in order to confirm the presence or not of systematic
material errors for each beneficiary.
MUS: using the monetary unit sampling technique to ensure statistical
representativity, a selection of 161² beneficiaries was made from the non-TOP DG
RTD population. One audit is carried out for each of them.
RISK: a number of different criteria have been used to select the beneficiaries in this
strand. The audits of this strand are intended to have a corrective effect on the amount
of errors present in the DG RTD population. The results of these audits are not taken
into account for the calculation of the representative error rate.
For FP7, the strategic strands are:
REPRESENTATIVE: using statistically representative sampling methods, a number
of audits will be undertaken for the purpose of accurately identifying the amount of
error present in the population (i.e. representative error rate).
CORRECTIVE: audits will be selected using a variety of criteria trying to maximise
their potential corrective effect.
In addition, there are additional auditing commitments in the following areas:
FUSION: the current arrangement with RTD J is to audit all FUSION associations on
a cyclical basis. The intention is to conduct one audit per association at least every
three years.
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COAL AND STEEL (C&S): in 2009 a small number of audits were again launched on
beneficiaries who receive funds from the Research Fund for Coal and Steel (RFCS),
which is managed by RTD K. Following an agreement to make the selection of
beneficiaries more representative in the future, a wider sample will be taken in 2010.
RFCS contracts do not follow the provisions of the Framework Programmes, and
therefore these audits are considered as not FP-related.
AUDITS ON REQUEST: audits in this category are performed at the request of the
operational services, and they are normally quite specific in their scope. These
requests are discussed in regular meetings, and not all are accepted. Usually, they are
counted as risk-related audits under FP6 or corrective audits under FP7.
In 2009, comparable with previous years, four meetings were held to deliberate audit
requests. These meetings are attended by members of RTD A.4 and the Audit Liaison
Officers of those Directorates who requested audits.
26 audit requests were put forward to RTD A.4. In 13 (out of 26) cases, the audit
request was accepted and the related audit mission integrated into the usual audit
planning of RTD A.4. Priority is given to these audits and, hence, more than half of
the accepted audits have been carried out and ended in 2009.
In 4 (out of 26) cases, the need to carry out a financial or scientific audit was not
recognized or, in one case, the audit request was withdrawn. In 9 further cases, the
audit request was considered either incomplete or premature, so that these audit
requests are considered 'on hold' and can be renewed at any time.
The figures are in line with previous years. It is to be noted that for the first time, 2
Scientific Audits have been carried with participation of Unit A.4 in 2009 (these are
included in the 13 accepted audit requests).
Joint audits with the ECA (see section 2.4).
TECHNICAL AUDITS: a new DG RTD-wide procedure for the undertaking of audits
of a scientific nature, with or without the involvement of the financial audit Units, has
been developed by RTD A.6. The first pilot-projects have been launched during 2009.
Some beneficiaries can be in non-EU countries ('third country audits'), although there
is no specific commitment to do a certain number of these and they are done when
they are part of wider selections.
Audits can be either done by the European Commission auditors (in-house) or outsourced to
an external audit firm (batch), under a framework contract. The aim is to have 25% of the
audits carried out in-house. For FP7, there has been a change of main supplier for the external
audits.
2.2. Cross-RDG coordination
The adoption of common corporate Audit Strategies means closer coordination between the
RDGs in a significant number of areas. DG RTD is the chair of a number of committees, and
also provides the secretariat. This requires a significant investment of resources, given the
present RDG governance. Indeed, DG RTD felt that the Commission is running a serious
cross-cutting risk in relation to the co-ordination of audit planning and a coherent and
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consistent presentation of audit results. This cross-cutting risk has been brought to the
attention of the central services during the recent risk assessment exercise.
2.2.1. Coordination of Audits in the Research family (CAR)
The RDGs have established a 'Coordination group for External Audit in the Research family'
(CAR) in order to coordinate strategic and policy matters and to ensure a coherent approach to
contractors and to the external audit firms. Chaired by RTD A.4, the CAR convenes on
average once every three weeks.
The scope of the group is to realise:
Common positions and communication towards internal and external parties.
Common guidelines to auditors on specific audit issues requiring an interpretation.
Update of the audit related common documents such as: Audit Strategy, Audit
Manual, Audit Certificate Handbook and Guidance Notes.
Agreement on professional issues such as selection methodologies and
tender/procurement procedures, technical audit procedures, issues related to the
extrapolation policy, IT modules facilitating co-ordination.
Common training for staff/external auditors.
In 2009, the CAR met 18 times. The focus throughout 2009 was on the finalisation of the
FP6 Audit Strategy and the preparation of the FP7 Audit Strategy.
The CAR further adopted five Guidance Notes on audit issues and several updates of the
common audit documents.
2.2.2.
Coordination of other Committees and audit reference documents
In addition to the CAR, DG RTD chairs and coordinates a number of other Committees, all
with a view to ensure cross-RDG coordination. These committees are the Extrapolation
Steering Committee (ESC, see section 2.3), the Frauds and Irregularities Committee (FAIR,
see section 2.6), the coordination of relations with the external audit firms, including the
Monthly Audit Status Meeting (MASR, see section 2.11), the Joint Assessment Committee
(JAC, see section 2.10.1.) and the Working Group on Certification of Methodology (WGCM,
see section 2.10).
DG RTD is also in the lead for coordinating the information and documents on audit-related
matters to be provided by all RDGs to the ABM.
Since 2008, all RDGs are using the common 'Audit Process Handbook' for FP6 audits. This
handbook contains all the procedural steps and the templates relating to the performance of an
external audit with own resources. The objective is to ensure a common approach for all audit
tasks and the application of generally accepted auditing standards.
In 2009, the handbook has been updated regularly. After the summer break a working group
involving all Research DGs and the two executive agencies was created to update the
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handbook for FP7 audits. Several documents are already available but work continues.
Updates are posted on the SAR Wiki2 as and when they occur.
Furthermore, for FP6, the Audit Certificate Handbook (for internal use) and the Audit
Certificate Guidance Notes (a guidance tool for external certifiers of audit certificates) are
available. For FP7 'Guidance notes for beneficiaries and auditors on certificates issued by
external auditors' have been posted on the Cordis website.
2.3. Extrapolation
Extrapolation is a key component of the common audit strategies because , its essential role in
'cleaning' the budget from systematic material errors must have its maximum effect in order to
see a significant reduction from the representative error rate to the residual error rate.
2.3.1.
Extrapolation policy and coordination
In the very beginning, the implementation of extrapolation was carried out separately by each
RDG. This resulted in different practices in the four RDGs towards common contractors.
Therefore, in February 2008, the Extrapolation Steering Committee (ESC) was set up in order
to ensure a common approach. The ESC, in which all RDGs are represented, discusses and
evaluates potential extrapolation cases put forward by an individual RDG or as a result of an
audit of the ECA. ESC meetings are organised and chaired by RTD.A.4. They take place on a
regular basis. If a case receives the approval of the ESC, a number of procedures are launched
to implement the extrapolation for all contracts of all research family DGs for a specific
contractor.
As of September 2009, representatives from the agencies (ERCEA and REA) are participating
in the ESC. They play a full role in the extrapolation process under FP7.
2.3.2.
Extrapolation management
During 2009, the ESC met 10 times. A total of
217 extrapolation cases were discussed of
which 183 were approved. Since the start of the ESC in 2008, in total 429 cases have been
discussed, of which 323 have been agreed. This highlights the in-depth analysis undertaken
prior to launching the procedure for any extrapolation case. The following table provides an
overview of the ESC cases per RDG:
Table 2.1 - ESC results in 2009 (as of 31/12/2009)
Cumulated
Agreed
19
43
75
46
183
323
No Extrapolation
8
7
6
10
31
49
On Hold
1
1
2
2
Other*
1
1
55
Total 2009
28
52
81
56
217
Total cumulated
72
96
185
76
429
429
* Before ESC cases or under preparation cases
2 Web-based collaborative tool for the exchange of information amongst the external audit services of the
Research DGs.
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So far, DG RTD has put
185 extrapolation cases on file, of which
107 are currently ongoing,
12 are under preparation,
17 have been suspended and are centrally managed by RTD A.4 and
RTD A.5,
7 have been closed, and for
42 extrapolation appeared during the process not to be
due (no other cost periods to extrapolate to, update of audit results, etc.).
Table 2.2 - Current status of the DG RTD extrapolation cases 2009 (as of 31/12/09)
Cancelled
11
20
11
42
Closed
4
2
1
7
On Hold (centrally managed)
1
9
7
17
Ongoing
6
49
52
107
Submitted
2
10
12
Grand Total
22
82
81
185
This overview shows that extrapolation frequency has remained stable over 2008 and 2009.
2.3.3.
Extrapolation implementation
As each individual extrapolation case can potentially affect many projects across a number of
RTD Directorates, ongoing extrapolation cases require a significant amount of effort,
attention and supervision by the operational services responsible for the follow-up actions, as
well as by the external audit Units. The experience acquired so far has underlined the
challenges in this area, especially with regard to following up the reception of revised cost
statements.
To address this issue, a new Unit (RTD R.7 'Management of debts and guarantee funds') was
created to act as a central reception point and deals with all extrapolation cases launched as of
13/03/2009. In addition, to improve the coordination of the implementation process, this new
service is in charge of monitoring those beneficiaries that do not react promptly to
Commission requests through reminder letters, or those who request an extension of
deadlines.
Experience shows that cases where systematic errors can be extrapolated without any further
information from the contractor are a minority. In some cases, the contractor wishes to
establish a dialogue and to provide additional documentation and evidence. Currently,
17 of
such cases, usually for larger beneficiaries, are centrally managed by the audit Units.
For all DG RTD-led extrapolation cases, (i.e. initiated by DG RTD), so far
4567 participations have been identified as potentially affected by the application of extrapolation.
Among these, 194 have been implemented (i.e. amount due adjusted), 1963 are currently
under implementation, 1959 relate to the extrapolation cases currently 'on hold' (i.e. the
centrally managed cases) and 451 have been cancelled (since according to the contractor no
extrapolation is required).
In addition,
54 cases initiated by other RDGs have an impact on DG RTD because the
beneficiaries participate in 653 RTD projects, of which 14 have been implemented, 615 are
currently under implementation and 24 relate to cases for which the audit results are under
discussion ('on hold' cases).
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Table 2.3 – DG RTD contracts affected by extrapolation
On Hold
1959
24
24
1983
Closed
194
4
7
3
14
208
Ongoing
1963
104
474
37
615
2578
Cancelled
451
451
Total
4567
108
505
40
653
5220
Moreover for
70 RTD-led cases,
1056 participations managed by other RDGs are equally to
be revised in the extrapolation process.
A clear step forward to better coordinating the extrapolation process across the four RDGs has
been made through the introduction of the first release of SAR-EAR (cross-RDG
extrapolation IT tool launched in September 2009) (see section 2.9).
2.3.4.
Extrapolation follow-up activities
During 2008, and on the initiative of RTD A.4, 6 extrapolation follow-up meetings were
organised in order to ensure better coordination within DG RTD. Given the decentralised
structure in DG RTD financial management, this has been an essential initiative. During
another 2 meetings in 2009, representatives of operational RTD Directorates responsible for
the implementation of extrapolation have discussed the status of ongoing cases and any
further actions to be taken, based on the latest information collected by all stakeholders. The
meetings also allow for useful discussions of practical issues (i.e. registering and analysing
revised cost statements, development of software tools to monitor follow-up, issues relating to
the recovery procedure, possibility of global recovery orders, legal issues, etc.). The last
meeting chaired by RTD A.4 took place in July 2009. From September 2009 onwards, these
coordination tasks have been handed over to RTD R.7 which initiated a number of working
groups involving UAFs .
Monitoring the actual implementation of the extrapolation is carried out by RTD R via the
ASUR-EXTRA tool where the services encode the actual implementation information for
each participation involved. The audit Units base themselves on this information to further
decide on any appropriate follow-up action to be undertaken.
RTD R.7 did not take over the management of the extrapolation cases of before 13 March
2009,so a follow-up campaign was initiated in September 2009 on all RTD extrapolation
cases launched before 13/03/2009 in order to ensure that extrapolation adjustments have been
properly applied by beneficiaries. Each case has been analysed through either a detailed or a
global desk review with a focus on the contractor's cooperation level, number of corrected
cost statements received, amount of the adjustments etc.
Currently,
63 cases have been selected for further analysis, excluding the 'on hold' cases. Of
these,
9 follow-up audits on the spot have been decided and scheduled. For
24 audits, no
follow-up was required at this stage but rather an action at Operational Units' and/or RDG-
level before allowing the external audits to take an appropriate cost-effective decision. For
this part of the process the audit Units rely on the other services. For the remainder, the
analysis is ongoing.
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In the course of 2010, this closing follow-up per individual extrapolation case will continue.
2.3.5.
Further considerations
Overall, as already highlighted in previous year's reports, it can be concluded that the
extrapolation process and its follow-up remain complex and time-consuming, still requiring
substantial resources. Moreover, disputes related to interpretations of the regulatory
framework have resulted in two beneficiaries initiating legal proceedings during 2009.
In the case of CEA, the dispute concerns the eligibility of a social tax that the Legal Service
considers explicitly as not eligible, and the consequences of this on all their FP6 projects, due
to extrapolation, as well as on the certificate on the methodology submitted under FP7. The
CNRS case concerns a number of personnel cost items considered ineligible by the EC which,
because of their systematic nature, when adjusted in non-audited projects have a very
substantial effect. The legal challenge on their part is on the administrative procedures used
by the EC for the subsequent recoveries.
Indeed, extrapolation is an important management tool which requires an active and extensive
co-operation of beneficiaries and, in the case of projects for which the financial statements
have already been finalised and reimbursed, it is very resource intensive for both the
Commission services and the beneficiaries. These circumstances, in combination with the
increased number and extent of audits, have led in 2009 to criticism from Members of the
European Parliament, stakeholders and Member States. Following these criticisms, a lot of
effort has been put into analysing the ongoing extrapolation cases and the underlying
systematic audit findings.
In this respect and in the framework of an overall simplification process for the contractors,
the possibility of flat rate calculations to establish the outstanding debt has been introduced3
as of 15/12/2009. Furthermore, eligibility criteria of certain expenditure (direct taxes and
social charges), having led to numerous discussions, have been more explicitly defined. This
should make it simpler to decide on the eligibility (or not) of these types of expenditure. In
collaboration with RTD R, the actual implementation of these simplification measures for the
extrapolation process is currently under way. It is expected that these simplification measures
will lead to a more cost efficient use of human resources
both for Commission services and
for beneficiaries, while safeguarding the principle of sound financial management.
The overall financial result of actual recoveries/adjustments related to extrapolation is
potentially very important. However, given the fact that most of the extrapolation cases are
still ongoing, the financial impact to date of extrapolation remains modest. It is important to
note that the time needed to actually implement the financial adjustments and to initiate the
related recoveries can be up to two years or more in difficult cases as the end of subsequent
cost reporting periods is awaited. This is likely to be even longer in FP7 as the cost reporting
periods are longer.
Table 2.4 - Overall adjusted amounts due to extrapolation
Euros
(-) Adjustments in favour of the Commission
-2.707.061,00
3 Commission Communication SEC(2009)1720, 15 December 2009.
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(+) Adjustments in favour of the beneficiaries
140.983,00
It will be necessary to improve further the working procedures, and – as already mentioned
before - commit appropriate resources to the follow-up of extrapolation cases, as well as
improve the IT systems used to register, manage and monitor extrapolation cases.
Furthermore, it is necessary to further centralise and improve the coordinated approach of the
follow-up activities, within DG RTD and with the other RDGs.
2.4. Collaboration with the ECA
During 2009, our collaboration with ECA continued on the strengthened basis developed
during the previous years. Better planning co-ordination has allowed a much earlier awareness
of audits carried out by both sides on beneficiaries audited previously by either. In turn, the
subsequent exchange of previous audit findings and results in these cases has proven
extremely useful, and it has been made much easier for the ECA by RTD A4 arranging access
for them to the central repository of audits of the RDGs, the SAR Wiki (see section 2.2.3).
For a number of reasons, including scheduling and resource constraints, not many joint audits
with ECA were carried out in 2009. On the other hand, RTD A.4 carried out some audits
which were directly triggered by previous audits by ECA, mostly in cases where extrapolation
was proposed by the ECA for which DG RTD sought to confirm and reinforce its assessment
on the basis of a bigger sample. This approach will be continued in the future as a way of
increasing the corrective effect of the auditing efforts.
More generally, referring to the observations in the ECA’s Report on 2008, the ECA
confirmed that the FP6 Audit Strategy is a sound one because it addresses the risks of cost
overstatement, but underlined that significant challenges remain such as recoveries and
simplification.
The new FP7 Audit Strategy was presented to ECA representatives at the end of October
2009.
2.5. Reporting activities
The external audit Units are asked to report throughout the year in quite a different number of
formats and to a variety of audiences: monthly reports to the Director General, quarterly
reports to the Commissioner, progress reports for the ABM and the ECA, plus a substantial
number of ad-hoc requests for information derived from the auditing activities, both
quantitative and qualitative.
As well as fulfilling these reporting requirements, and as stated in the external audit Units'
Annual Activity Report (AAR), a more in-depth analysis of results was to be a priority during
2009. This has required a series of improvements in the tailor made layout of information
allowing a better understanding of aggregated audit results and, in turn, for better decision-
making. For example, it has been extremely important in the preparation of the FP7 Audit
Strategy, and also in initiatives to identify FP6 instruments with a higher risk profile or to
measure the extent to which systematic errors are present in our population.
These improvements could not have been achieved without changes to various IT systems and
tools which are used for data collection, together with laborious one-off exercises collecting
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historical data retrospectively. Recent improvements in the quality of FP6 data at DG level
contribute to the fact that FP6 audit findings can be measured more and more accurately.
2.6. OLAF cases
RTD A.4, in charge of relations with OLAF on external enquiries4 since February 2008,
transmitted eleven new cases of suspected irregularities to OLAF in 2009. In four cases,
suspicion of irregularities was reported by the operational services in charge of the projects
and contracts; in three cases, the decision to transfer the case to OLAF was taken following
on-the-spot audits performed by RTD A.4 auditors. In four cases, the allegations of potential
irregularities were made by external informants (one anonymous). Another case in the area of
research was directly opened by OLAF on the basis of information received from an
individual. One of the above cases concerns aspects of intellectual property rights, one case is
related to scientific fraud whilst the other nine cases refer to financial irregularities.
In 2009, OLAF classified ten DG RTD cases as 'non-cases'5. OLAF closed six cases for which
the allegations of irregularities were confirmed in their investigations. These cases are
currently followed up at administrative, financial and/or judicial levels.
With regard to the total number of OLAF cases relevant to DG RTD, including those from
previous years, as of 31 December 2009, RTD A.4 manages 23 open cases as well as 13
closed cases which are still in administrative, financial and/or judicial follow-up.
RTD A.4 further intensified the cooperation with OLAF services. RTD A.4 colleagues
participated in more than 20 meetings with OLAF investigators and DG RTD operational
services to discuss specific cases.
At the beginning of 2009, DG RTD and OLAF launched the CHARON cooperation project,
an initiative to support a risk-based audit efforts in DG RTD. CHARON will introduce
possibilities for advanced data mining on RDG data available in different information
systems. A number of technical meetings between DG RTD and OLAF were held and
progress was made towards the implementation of CHARON, which is expected to be
operational in spring 2010.
As a result of the experience gathered in 2008, two further initiatives were implemented in
2009. First, the setting up of the FAIR Committee, whose main objective is the exchange
between the RDGs and Executive agencies of information, experiences and best practices on
ongoing and potential irregularities and fraud cases with beneficiaries of the Framework
Programme. Two FAIR Committee meetings were held in 2009. Second, RTD A.4 introduced
an additional step in the quality review procedure to considered, for every draft audit report,
whether there are potential irregularities which deserve to be studied in more detail.
Last but not least, it is worth mentioning that OLAF finalised its 'Intelligence analysis of
irregularities and suspected fraud in the Research sector' and presented the report to the
Director-General of DG RTD on 30 September 2009. As a consequence, DG RTD identified
the issues where support from OLAF would be helpful in view of the development of a fully
4 Internal enquiries relating to individuals are dealt with by RTD.01.
5 A matter is classified as a non-case where there is no need identified by OLAF to go further with the
investigation. Non-cases result from assessments that conclude that EU interests appear not to be at risk from
irregular activity.
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fletched 'Fraud prevention and detection strategy' in DG RTD, in which RTD R.5 is
responsible for prevention measures and RTD A.4 for detection measures.
2.7. Quality control tools
2.7.1. Keywords database
RTD A.4 and RTD A.5 established a Keywords Working Group (KWG) at the end of 2007 to
address the need for harmonisation in the treatment of the increasing number and complexity
of audit findings. The KWG consists of 6 members and is chaired by RTD A.4.It is involved
in the replies to questions raised by auditors of the RDGs, the external audit firms, the
research helpdesk, operational services and framework programme beneficiaries.
The most important KWG activities are:
1.
Guidance notes: Guidance notes are formally adopted by the CAR and provide
specific instructions for auditors on issues of contention KWG is responsible for their
drafting, legal consultation, formal adoption and disclosure in the Wiki database,
accessible to the research DG services and ECA.
2.
Development and maintenance of the keywords database The 'keywords database'
is a compilation of all previous positions taken in the past on various interpretative6
issues, providing guidance to auditors and helping to maintain a coherent approach
towards external parties.
3.
Consultancy services:
a) External helpdesk: KWG works in close cooperation with the research helpdesk
administered by RTD A.2, providing advice particularly on accounting issues.
b) External auditors: guidance is given on everyday auditing issues raised by auditors
and questions asked by beneficiaries.
The need to 'speak with one voice' towards beneficiaries is essential. This 'one
voice' is to be agreed first among the RTD audit Units, and then across all RDGs.
Knowing that beneficiaries will consider replies as a formal position of the
European Commission services, all formal replies are approved by the KWG prior
to sending them, ensuring legal compliance and a coherent approach.
Guidance notes adopted in 2009:
Owners-managers
In-house consultants and teleworking
Academic fees
Internally invoiced costs
Tax on salaries
The possibility of publishing the principles adopted in these guidance notes for a wider public
is being analysed in cooperation with RTD A.2.
6 An 'interpretative issue' is any issue which requires harmonisation given the risk of different assessments
amongst auditors about the (non-)eligibility of the costs. The legal unit of DG RTD is often consulted on these
issues.
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2.7.2.
The Audit Steering Committee (ASC)
The ASC exists to assess the substance of proposals for large audit adjustments and
interpretative issues. It provides the opportunity of a peer review by fellow auditors on these
issues. Adjustments are considered to be large when they are above 100,000 € and represent
5% or more of the costs claimed, or when they are above 30,000 € and represent 30% or more
of the costs claimed.
The ASC considers both in-house and outsourced DG RTD audits and helps to ensure equal
treatment and the coherence of audit work.
The number of cases dealt with in the ASC has grown from 2008 due to the increased audit
activity:
Table 2.5 - ASC cases
2005
3
3
2006
4
8
2007
3
5
2008
12
26
2009
14
20
2.7.3.
The quality review process
The quality review process for the audit reports done by the European Commission auditors
was strengthened in 2009.
According to the Audit Process Handbook, RTD A4 adopts an 'Audit Closing Memorandum',
which involves two quality control checks. The first check is on the substance of the draft
audit report before it is sent to the Operational Directorate(s) and the auditee for their
comments. This substance check concentrates on three main questions:
Are the adjustments sound and well explained in the audit report?
Has the audit revealed systematic errors and will an extrapolation case be proposed?
Has the case given rise to a potential irregularity?
The second check takes place before the audit is closed. It looks at completeness, correctness
and coherence, and it is both on format and on substance:
Are all relevant documents attached, ensuring that appropriate procedures have been
respected?
Have the templates in the Audit Handbook been used or, if not, is such deviation
justified?
Have the audit results been presented in all documents in a coherent way?
Did the auditee express remarks of substance and have those been duly considered?
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Are the deviations between amounts stated by the certifying auditor and those stated in
the Audit Report so important that the certifying auditor should be informed?
Outsourced audits procured as batch assignments are monitored by a dedicated team
regarding milestones and deliverables in accordance with A5's batch audit procedures
handbook.
2.8. Collaboration with the DG RTD administration and finance (UAF) network
Throughout 2009, the external audit Units have strengthened close working relationships with
the administration and finance Units during planning and preparing new audit campaigns,
during the audits (in order to obtain feedback on draft audit conclusions), and after the audits
(for the implementation of the final audit conclusions).
Moreover, ad-hoc bilateral meetings have been held whenever appropriate to discuss specific
files. The external audit Units also participate in the monthly UAF meetings to present and
clarify matters linked to audit and financial issues.
2.9. Sharing Audit Results (SAR) and other IT developments
Where IT developments are concerned, throughout 2009 the external audit Units were
focused, on the one hand on a more optimal sharing of audit results (SAR) with the rest of the
RDG family and, on the other, on the migration and centralization of local applications. The
highlights were:
Audit Management System (AMS) in DG RTD – AMS was put in production in
August 2009 (Phase 1) and it has replaced Aubase (the former audit management
system that was developed locally by the external audits unit).
Extrapolation of Audit Results (SAR EAR) – SAR EAR was put in production in
September 2009 in order to coordinate extrapolation cases among different RDGs.
Planning of Audit Activities (SAR PAA) – SAR PAA was put in production in
December 2009, and full deployment will be completed by February 2010.
Extrapolation (EXITs) - To address the acute need for the administration and
management of the work created by extrapolation, a new application called EXITs was
developed by Unit A.4. It is currently using AMS data tables. The plan is to include its
functionality in AMS Phase 2.
Pluto/CHARON Project – The CHARON project consists in tailoring an IT market
product called i2 iBase in view of identifying potential candidates for fraud and
irregularities investigations (see section 2.6).
2.10. FP7 Methodology Certification
2.10.1. General background
The Certification policy for the FP7 Grant Agreements was designed with the aim to correct
the most common errors identified in the past, and in particular those related to personnel
costs and indirect costs. In this context, FP7 introduced, in addition to
the Certificates on the
Financial Statements (known under FP6 as 'audit certificates'), two new types of ex-ante
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certificates on the methodology which may be submitted prior to the costs being claimed:
the
Certificate on Average Personnel Costs (CoMAv) and
the Certificate on the Methodology
for Personnel and Indirect costs (COM). The acceptability of the methodology certificates is decided by an inter-service Joint
Assessment Committee (JAC), which involves DG RTD's external audit Units and DG
INFSO. In 2009, 6 JAC meetings were held.
In June 2009, the Commission adopted a decision on interim implementation rules concerning
acceptability criteria for the average personnel cost methodology7. These criteria enable the
JAC to approve or reject the accounting methodologies of beneficiaries who declare average
personnel costs.
2.10.2. State of play of Certification files as of 31 December 2009
At the end of December 2009, the state of play of submitted requests for eligibility and
certificates is as follows:
Eligibility Requests
Certificates
Type of Certificate
Submitted
Accepted
Submitted
Accepted
Rejected
Withdrawn
Pending
CoM Average Personnel Costs
and Indirect Costs
15
0
6
2
7
88
54
CoM Real Personnel Cost and
Indirect Costs
9
2
1
1
5
Certificate Average Personnel
Costs (CoMAv)
N/A
37
3
4
7
23
TOTALS
61
5
11
10
35
The figures indicate that the certification activity started slowly yet an increasing trend is
noted. The graph below indicates the evolution over time of the methodology certification
activity between July 2007 and December 2009. There is an uninterrupted increase, both in
eligibility requests and submissions. Where initially they were mainly CoM, the CoMAv has
surpassed the CoM. This indicates that beneficiaries are finding out that this is a mandatory
requirement to claim average personnel costs. In the last months of 2009 an increased
submission activity can be noted which may predict a likely uptake of submissions for 2010.
7 Commission Decision C(2009)4705
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When judging the limited number of methodology certificates approved so far it should be
borne in mind that FP7 introduced the requirement for 'full cost' accounting for all
beneficiaries. This means that all beneficiaries previously participating under the 'additional
cost' regime – mostly universities and public research organizations without analytical
accounting, or even cash-based accounting – now must account for the full-costs of their
research. Feedback obtained from many stakeholders indicates that most are in a preparatory
or, at best, transition phase due to which their cost accounting methodology is not in 'steady
state' and accordingly no methodology is yet presented for certification. RTD A.5 services are
however in contact with a number of European universities (currently from UK, DE, NL, FR,
IT and BE) who are getting prepared and are strongly motivated to seek approval of their
methodology.
As regards the certification of average personnel cost methodologies, the delayed adoption of
acceptability criteria has certainly impacted negatively the take-up of the FP7 cost
methodology certification. Since the criteria have been settled, experience shows that they
rather create entry barriers for many FP7 participants who apply personnel cost accounting
practices with higher deviation tolerances. At the level of the Commission services this is not
at all satisfactory yet not entirely unexpected. While the average cost accounting requirements
thus settled for FP7 allow by their design to contain the risk of deviations from actual cost,
they in reality prove to be overly demanding for many, thereby effectively neutralizing the
simplification and error-reducing potential initially aimed for. The time-recording constraint
is another example of this.
The upcoming Communication to the Council and the European Parliament on simplification
will explore options for further simplification in research funding. This communication
should launch a broad inter-institutional discussion and will permit the Commission to
consider new concepts for research funding, including a broader approach towards actual
costs and recognition of usual accounting practices. Also, in this context, the parallel work on
the concept of tolerable risk of error to ensure the right balance between control costs and
error rates, sound financial management and simplification could be referred to.
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2.10.3. Supporting IT tools
The development of the central IT tool in OMM to support the management of the FP7
certification activities was started in the third quarter of 2007 under the responsibility of RTD
R.4. Due to resource constraints, this project was no longer considered by RTD R.4 as an IT
priority and was finally abandoned due to the implementation of PDM/URF in replacement of
OMM.
From June 2008 onwards a new web-based project was launched, promoted by ITPO. This
project aims to provide a central web-based IT tool, solely dedicated to supporting the FP7
methodology certification. In 2009 Unit R.4 initiated a contract with an external service
provider for the development of the web-based system. Design and analysis phases were
carried out in the last quarter of 2009. Until the finalisation and deployment in production
environment of the new tool, the local MS Access database initially developed in 2007 still
supports the certification activities.
2.10.4. Inter-service collaboration
An inter-service Working Group on FP7 Certificates on the Financial Statements (WGCFS)
has been established involving representatives from the research DGs and REA and ERC
Executive Agencies. The aim of the Working Group was to develop guidance and support for
the Operational Units and, in particular, for the Financial Officers who handle the FP7
Certificates on the Financial Statements (CFS). Its purpose was to ensure a coherent,
harmonised and consistent approach on CFS-related matters throughout the Research and
Executive Agencies. The prepared Internal Guidance Notes on FP7 Certificates on the
Financial Statements and a detailed Check list aims at supporting the Operational Units and in
particular the financial officers of the Administrative and Finance Units in the evaluation of
Certificates on the Financial Statements (CFS) under the European Community's DG RTD
FP7.
2.10.5. Communication activities
These matters of ex-ante certification have also required intensive communication:
Handling questions submitted through the Research Enquiry Service on
Europe
Direct. Approximately 100 questions concerning average personnel costs were
answered in 2009.
An internal awareness-raising campaign on FP7 Certification issues leading to
meetings with Operational and UAF Units.
Participation in seminars, conferences, bilateral meetings and pilot reviews (around 50
events in total).
Posting of certification-related documents on
www.cordis.europa.eu (FAQ document,
specific certification-dedicated pages, 'Guidance notes for Beneficiaries and
Auditors').
Regular meetings with NCPs for legal and financial issues.
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2.11. Coordination of outsourced audits
Six new framework contracts for the provision of audit services were signed during the year
dealing with audit services on FP6 and FP7 grants respectively. The new framework contracts
covering FP6 audits were signed in February 2009 and the ones for FP7 audits in June 2009.
These framework contracts cover the outsourcing of audits on FP6 and FP7 grants for the
period 2009-2012 with a potential market value amounting to 16,5m € and 42m €
respectively.
Each of these framework contracts is signed with three different audit firms to be used under a
'cascade' principle, i.e. when the first on the list cannot execute the audit, the second, possibly
the third company on the list is taken.
The new framework contracts brought new firms to the scene and extensive efforts were made
by RTD A.5 to prepare these firms for the EC's audit requirements and expectations.
Due to the audit targets of the FP6 and FP7 audit strategies there is a strong dependence on
the external audit firms, as approx. 75% of the target is achieved through outsourced audits.
The external audit firms operate according to established professional audit practice and
standards and provide a necessary complement to DG RTD's in-house audit expertise and
capacity.
RTD A.5 closely monitors the performance of the audit firms ensuring that, as far as possible,
all audits are completed and closed within the contracted time frame. In addition to the daily
follow-up of individual audit assignments, this monitoring involves the following processes:
Monthly Audit Status Reporting (MASR) meetings chaired by the RTD A5 HoU,
covering the progress of all on-going batches, technical issues, invoicing and future
audit planning.
Occasional accompanying of external audit firms on on-the-spot audits.
Providing guidance and clarification on specific problems.
Maintenance of the Audit Review Assessment (ARA) to follow-up the quality of the
services provided.
A batch audit processing manual including checklists for the different deliverables.
Normal contract management issues, such as setting up contracts, amendments,
payments, penalties etc.
RTD A.5 manages the public procurement procedures for the new framework contracts for
audit services on FP6 and FP7 research grants on behalf of all RDGs and related agencies.
2.12. Other activities (Art.169 Initiatives/JTIs/Agencies)
With regard to the Art. 169 Initiatives for which dedicated implementation structures are set
up, RTD A.4 carries out the ex-ante assessments. RTD A.4 is therefore involved in the three
Art. 169 Initiatives currently ongoing.
CONFIDENTIAL
2.12.1. EURAMET
EURAMET e.V. (EURAMET) was established in 2007 under German law as a non-profit
association. EURAMET is the European regional metrology organisation and is responsible
for the co-ordination and cooperation of National Metrology Institutes (NMI) in Europe. A
grant to EURAMET was proposed in the Cooperation work programme 2007 as an ERA-NET
Plus bridging measure to prepare and test the dedicated implementation structure for the Art.
169 Initiative 'European Metrology Research Programme' (EMRP).
Pursuant to the Financial Regulation (FR) applicable to the General Budget of the European
Communities (Art. 54), and following the opinion of DG BUDG8, the EMRP Initiative
corresponds to what is called 'indirect centralised management'. According to Art. 56(1) of the
FR, where the Commission uses a system of 'indirect centralised management', it must first
obtain evidence of the existence and proper operation within the entity to which it entrusts the
implementation, including an effective and efficient internal control system, as well as of a
number of requirements to ensure that the structure is mature enough for the financial
management of EU funds. This was the objective of the ex-ante assessment of RTD A.4,
which led to the adoption of an action plan by EURAMET, its implementation being followed
up by RTD A.4.
In addition, RTD A.4 was asked to participate in the drafting of the delegation agreement
between the European Commission and EURAMET, which specifies the tasks entrusted to
EURAMET, the rules for their implementation and the relations between EURAMET and the
Commission. The delegation agreement also determines EURAMET's rights and
responsibilities.
2.12.2. Eurostars and Bonus
In 2008, RTD A.4 also participated in the setting up and the ex-ante assessment of the
Eurostars Art. 169 Initiative. During 2009 some exchanges with the operational Directorate
took place on the implementation of the Action Plan proposed by the dedicated
implementation structure, EUREKA, in response to the conclusions of the ex-ante assessment.
RTD A.4 has also participated in the drafting of a proposal for a co-decision on the
participation by the Community in a Joint Baltic Sea Research and Development Programme
(BONUS-169), undertaken by several Member States. Following the same procedure as
applied for EMRP (see point 2.13.1), an ex-ante assessment will be performed in the future.
2.12.3. Executive Agencies – REA and ERCEA
The external audit Units were also involved in the process of setting up of the two 'DG RTD'
Executive Agencies, in particular where the Audit Strategy is concerned.
The relationship between the Agencies and DG RTD has been laid down in Memoranda of
Understanding.
8 Note from M Romero Requena to MM Silva Rodriguez and Colasanti, n° 2267 dated 19.3.2007.
CONFIDENTIAL
2.12.4. Joint Technology Initiative (JTIs)
RTD A.4 has also been involved in the process of defining parts of the internal control system
of the JTIs, in particular concerning ex-post audit issues. Working groups exist under the
chairmanship of RTD R. RTD A.4 participated mostly in the definition of the ex-post
auditing features, the reporting requirements and the procedures to assess 'in-kind'
contributions.
2.13. Scientific/technical audits
The focus in financial audits on compliance with the legal and regulatory framework has led
auditors (cf. Recommendation No. 8 of the IAS audit on 'ex post control' of 2006) to
recommend to undertake, where applicable, on-site technological and scientific audits as
foreseen by Art. 11.23, Annex II of the FP7 Grant Agreement and Art. 1129, Annex II of the
FP6 Contract. The aim is to look at the projects from an independent scientific view and
independently from the project reviews that take place during the lifetime of a project.
As no formal guidance existed in this area, a working group composed of representatives from
RTD A, RTD R and four thematic Directorates was set up in February 2009 to elaborate a
methodology, which was completed by the end of 2009. This document served as a basis for
launching pilot projects9 in two thematic Directorates in order to test the methodology prior to a
possible wider use of such technological audits. These cases may be either generated from
specific requests from the operational Units when doubts occur with regard to the
scientific/technical deliverables (3 cases) or as a follow-up to previous financial audit findings
(1 case). In some cases, underperformance of a beneficiary can also be reported by the project
coordinators.
Despite the difficulty of this type of scientific audits, they may gain importance in the course
of the following years.
3.
RESULTS AND ANALYSIS
The quantitative results of the activities of the external audit Units are presented in this part,
together with analysis and commentary where appropriate.
3.1. Audit numbers
This section presents results related to the number of audits and participations audited in 2009
and cumulatively, with breakdowns by a number of categories. The most interesting points are
summarised below each table.
9 The two pilot projects have been launched within RTD E.3 and RTD G.3 and were concluded in September and
October 2009 respectively. Both technical audits have been performed with the support of the external financial audits unit
(RTD A.4).
CONFIDENTIAL
Table 3.1 - Audits closed and participations audited (2009 and cumulative, ALL audits)
FP6
TOP
131
385
349
965
MUS
5
9
154
341
RISK
165
388
376
769
FUSION
7
11
27
38
OTHER
1
0
2
0
Total FP6
309
793
908
2113
FP7
CORRECTIVE
3
9
3
9
FP5
N/A
1
1
703
875
Coal & Steel
N/A
6
17
8
22
Grand totals
319
820
1622
3019
319 audits in total were closed during 2009, including the first 3 FP7 audits.
908 FP6 audits have been closed so far by the end of 2009. This is above the original
minimum multi-annual target of 750 set in the ABM action plan drawn up in 2007.
The main reasons for this are extrapolation follow-up audits and additional risk-related
audits aimed at further reducing the residual error rate for FP6. At the beginning of
2010 there are still 248 FP6 ongoing audits.
The ratio of participations covered per audit is 1,24 for FP5 and 2,32 for FP6 at this
point. This indicates a substantial increase in the cost-effectiveness of audits in FP6,
and it is the result of improvements in planning and audit preparation.
Table 3.2 - Audits of specific types (2009 and cumulative, FP6 and Coal & Steel audits)
FUSION
6
7
27
Coal & Steel
N/A
6
8
Joint audits with ECA
6
4
6
Third country audits
6
5
12
Audits on request
6
21
46
For more details on these audits, please see sections 2.1 and 2.4.
Table 3.3- Audits closed, outsourced and in-house (2009 and cumulative, FP6 only)
Total Outsourced
211
68.3%
658
72.5%
In-house
98
31.7%
250
27.5%
Grand totals
309
100.0%
908
100.0%
CONFIDENTIAL
Batches 75, 76, 78 (FP6), 82, 83 and 88 (FP7) were launched during 2009, while
batches 46, 51, 53, 57 and 60 were completed in 2009.
The percentages of in-house and externalised audits were 31.7% and 68.3%
respectively in 2009. This shows an increase in the percentage of in-house audits of
6.2% from last year.
Table 3.4 - Audits launched and closed (2007-2008-2009, ALL audits)
FP5
FP6
280
192
423
372
284
309
987
873
FP7
160
3
160
3
C&S10
5
2
6
6
11
8
Totals
291
305
433
383
451
319
1175
1007
451 audits were launched in 2009, as opposed to 433 in 2008, an increase of 4.2%. In
the last two years, having launched more audits than have been closed means that
2010 starts with a substantial body of ongoing audits, many of which are well
advanced.
For closed audits, the figures are 319 (2009) and 383 (2008), a decrease of 16.7%.
This can be explained by problematic files needing unforeseen additional work before
and/or after their closure, and by the introduction of new external audit firms. It is
worth noting that, despite the decrease in the overall number of audits closed, audit
coverage year on year has increased (see section 3.2).
Table 3.5 - Audits closed by country (2009, FP6)
DE
Germany
48
15.5%
13,4%
UK
United Kingdom
48
15.5%
12,7%
FR
France
37
12.0%
10,2%
IT
Italy
23
7.4%
8,3%
NL
Netherlands
23
7.4%
5,9%
ES
Spain
23
7.4%
6.6%
BE
Belgium
10
3.2%
3.8%
AT
Austria
10
3.2%
2.5%
CH
Switzerland
8
2.6%
2,6%
EL
Greece
8
2.6%
2.5%
SE
Sweden
8
2.6%
3.6%
Others (EU & non-EU)
63
20.4%
27.9%
Total
309
100,0%
100,0%
10 Coal and Steel audits were not yet done by DG RTD's external audit units before 2008.
CONFIDENTIAL
The 11 countries listed above received almost 80% of all the FP6 audits carried out in
2009. This can be partially explained by the emphasis of the FP6 Audit Strategy on the
biggest beneficiaries (217 of our top 243 beneficiaries are in these 11 countries).
Table 3.6 - Participations audited by DG RTD Directorate (2009, FP6)
B
ERA: Research programmes and capacity
35
4.4%
C
ERA: Knowledge-based economy
1
0.1%
D
International cooperation
15
1.9%
E
Biotechnologies, agriculture, food
79
10.0%
F
Health
156
19.7%
G
Industrial technologies
103
13.0%
H
Transport
113
14.2%
I
Environment
86
10.8%
J
Energy (EURATOM)
34
4.3%
K
Energy
32
4.0%
L
Science, economy and society
23
2.9%
S
'Ideas' programme
14
1.8%
T
Implementation of activities to outsource
102
12.9%
Total
793
100.0%
It is important to note that the sampling methods used by the external audit Units do
not presently provide statistical representativity per Directorate. Samples are taken per
RDG for the FP as whole.
Additional information shows that the percentage of participations audited which
belong to each of the Directorates is roughly in line with the percentage of all FP6
participations they manage.
3.2. Audit results
This section presents audit results in monetary terms, including an attempt to compare the
effect of ex-ante and ex-post controls. The most interesting points are summarised below each
table.
Please note that all figures representing adjustments (to the costs claimed) in this part
are estimates that might or might not correspond with the eventual financial recovery or
offset amount applied by operational services. Proposed adjustments are calculated on the
basis of cost model and instrument type but there might be variations of the actual percentage
of EC contribution for specific contracts. This information is not available in central RTD
information systems for FP6, although it will be for FP7.
In any case, in 2008, the method for calculating proposed adjustments was refined to take into
consideration instrument types as well as cost models. In addition, we now seek more detailed
percentages of EC contribution from the operational services for audited participations where
the proposed adjustment is over 100000€ in favour of the Commission. This has resulted in
more accurate error rate calculations.
CONFIDENTIAL
Table 3.7 - Audit results in monetary amounts (2009, ALL audits)
FP5
1
47,305
43,410
39,190
-4,220
0
FP6
793
519,807,096
519,069,183
505,030,211
-23,430,703
9,392,730
FP7
9
2,029,713
2,029,713
1,917,907
-111,806
0
C&S
17
8,380,466
8,361,060
8,126,961
-235,975
1,876
Totals
820
530,264,580
529,503,366
515,114,269
-23,782,704
9,394,606
FP5
1
47,305
43,410
39,190
-4,220
0
FP6
793
381,237,722
380,554,588
370,087,126
-16,269,066
5,801,604
FP7
9
1,144,051
1,144,051
1,061,696
-82,355
0
C&S
17
5,392,957
5,382,855
5,211,871
-172,110
1,126
Totals
820
388,707,697
388,010,566
377,256,094
-16,557,202
5,802,730
In 2009, a total of over 530m€ in costs were audited by the external audit Units. Of
this amount, the EC contribution was almost 389m€ (370m€ in 2008). Almost all costs
audited corresponded to FP6, and they represented 2.9% of the whole FP6 budget (see
table 3.17).
The total amount of adjustments in favour of the Commission at funding level
proposed by the auditors was roughly 16.6m€ (11.4m€ in 2008).
Table 3.8 - Audit results in monetary amounts (cumulative, ALL audits)
FP5
876
358,247,777
352,137,653
349,524,169
-12,835,453
10,390,030
FP6
2,113
1,796,133,771
1,794,237,709
1,763,235,855
-47,567,046
16,565,192
FP7
9
2,029,713
2,029,713
1,917,907
-111,806
0
C&S
22
20,267,182
20,243,841
20,029,873
-236,916
22,948
Totals
3,020
2,176,678,443
2,168,648,916
2,134,707,804
-60,751,221
26,978,170
FP5
876
214,782,328
211,084,886
208,928,662
-8,025,512
5,950,712
FP6
2,113
954,583,034
953,437,033
934,002,258
-30,231,609
10,796,834
FP7
9
1,144,051
1,144,051
1,061,696
-82,355
0
C&S
22
11,336,315
11,324,246
11,163,327
-172,581
11,662
Totals
3,020
1,182,731,390
1,177,875,878
1,156,012,154
-38,541,508
16,759,208
CONFIDENTIAL
Concerning cumulative results, the auditors have so far checked nearly 2.2bn€ in costs
claimed over the FP5, FP6, FP7 and C&S audit campaigns.
Of that amount, 1.80bn€ is FP6 costs, compared to 358m€ for FP5. This represents an
increase of over 500%, at a point in time when the FP5 audit campaign is almost
complete while the FP6 campaign has at least another year to go. This highlights the
enormous proportional FP-on-FP increase in auditing efforts.
In relation with the previous point, the cumulative amount of proposed adjustments at
funding level for FP6 is already over 30m€.
Table 3.9 - Results by instrument type (cumulative, FP6). All amounts are EC share
IP
Integrated Project
871
41.2%
-13,788,277
45.6%
STREP
Specific Targeted Research Project
427
20.2%
-4,471,606
14.8%
NOE
Network of Excellence
351
16.6%
-6,236,687
20.6%
IA-I3
Integrating activities implemented as Integrated
84
4.0%
-1,508,531
5.0%
Infrastructure Initiatives
CA
Coordination action
67
3.2%
-640,723
2.1%
SSA
Specific Support Action
57
2.7%
-993,765
3.3%
EST
Early-stage Training
50
2.4%
-394,042
1.3%
FUSION
FUSION programme
45
2.1%
-147,048
0.5%
CRAFT
Co-operative research projects
40
1.9%
-554,774
1.8%
RTN
Research Training Networks
38
1.8%
-323,778
1.1%
EXT
Grants for Excellent Teams
17
0.8%
-70,097
0.2%
CLR
Collective research projects
12
0.6%
-57,037
0.2%
EIF
Intra-European Fellowships
12
0.6%
-23,284
0.1%
CNI-SSA
Construction of new infrastructures
8
0.4%
-914,241
3.0%
implemented as Specific Support Actions
Other
34
1.6%
-107,718
0.4%
Grand Total
2113
100.0%
-30,231,609
100.0%
Even though we do not select representative samples per FP6 instrument, the volume of
results to date gives insights as to whether the incidence of errors is higher for some
instruments than it is for others. The results, however, are not sufficiently conclusive.
Table 3.10 - Results by cost model (cumulative, FP6). All amounts are EC share.
AC
1078
51.0%
-13,154,006
43.5%
FC
695
32.9%
-12,104,489
40.0%
FCF
276
13.1%
-4,660,523
15.4%
N/A
64
3.0%
-312,591
1.0%
CONFIDENTIAL
Grand Total
2113
100.0%
-30,231,609
100.0%
The same analysis can be performed on cost models. Here, the FC model receives a share of
adjustments which is noticeably higher than the proportion of participations audited using that
cost model.
3.3. Analysis
This section attempts to provide a more in-depth and qualitative analysis of certain aspects
and results of the work of the external audit Units, particularly in relation to error rates, error
types, most prevalent errors at cost category level and a more detailed look at the highest
adjustments proposed so far in FP6.
3.3.1.
Analysis of error rates
Table 3.11 - Error rates (2009, FP6 audits). All amounts are EC share
FP6
TOP
275,648,663
-7,785,642
-2.82%
-2.90%
MUS
738,762
-239,778
-32.46%11
RISK
100,565,933
-8,159,748
-8.11%
FUSION
3,601,230
-83,897
-2.33%
Total FP6
380,554,588
-16,269,066
-4.28%
Table 3.12 - Error rates (cumulative, FP5 and FP6 audits). All amounts are EC share
MUS
69,702,383
-2,791,622
-4.01%
RISK
189,454,580
-11,329,833
-5.98%
FUSION
144,528,587
-323,778
-0.22%
Total FP6
953,437,033
-30,231,609
-3.17%
FP5
N/A
211,084,887
-8,025,512
-3.80%
The FP6 TOP cumulative rate has gone down during last year, from -2.99% to -2.87%.
This has also resulted in a reduction of the overall representative rate12, which has
gone down from -3.13% at the end of 2008 to -3.00% at the end of 2009. This will
have a direct impact on the residual error rate.
More than half of the FP6 audits closed in 2009 belonged to the RISK strand. This
volume, together with an increase of the error rate in this strand, has resulted in an
increase also of the cumulative overall FP6 error rate, which has gone up from -2.47%
in 2008 to -3.17% in 2009.
11 Only five MUS audits were closed in 2009.
12 The representative error rate is a combination of results in the TOP and MUS strands, and it is so called
because the samples of these strands are statistically representative (MUS) or cover 100% of the budget (TOP).
CONFIDENTIAL
The fact that the overall FP6 RISK error rate stands at almost -6%, while the
representative rate is exactly -3%, is an indication of the validity of the risk assessment
methods employed to date. This is reassuring and useful as we are currently
considering risk assessment methods to be used in FP7.
The following charts illustrate the evolution of cumulative overall error rates in FP5 and FP6
up to the end of 2009.
FP5 annual error rates have reached a plateau in the last three years. Considering that
only two FP5 audits remain open and there are no plans to launch any more, the -3.8%
cumulative rate may be considered as almost final. It is interesting to note that it
remains very close to what it was in 2002.
The picture is different for FP6, with a clear year-on-year regular increase. However,
this increase can now be linked to the success of RISK audits and is no longer a
reflection of the amount of error detected in the population as measured by the
representative error rate, which has now also stabilised around -3%.
Again of particular interest here is the difference in the RISK strand, which suggests
that enhanced criteria for the selection of beneficiaries with a high-risk profile are
bearing fruit.
CONFIDENTIAL
A series of analyses during 2009 on the share of overall errors represented by those of
a systematic nature led to a realisation that they were not as prevalent as assumed
when the FP6 Audit Strategy was prepared. This has resulted in changes to the
formula for the calculation of the residual error rate in order to make it more accurate,
and it has also been an important consideration in preparing the FP7 Strategy (see
section 1.7). As one can derive from the pie chart, less than half of the errors found in
monetary value are considered as systematic.
3.3.2.
Analysis of adjustments at cost category level (FP6)
This section provides analysis of the incidence of errors at cost category level. Costs claimed
by beneficiaries are ascribed to one of a number of defined cost categories. When audit results
are compiled, they are presented and implemented for an audited participation as a whole,
with results in different cost categories being netted off. However, it can be of value to
consider errors at cost category level, particularly in order to identify in which areas of
expenditure errors are found most often, in terms of number and value.
Table 3.13 - Proportion of adjustments by cost category (cumulative, FP6)
Adjustments to costs previously reported
189
4.8%
3.3%
160
9.0%
4.1%
Consumables
252
6.4%
2.7%
61
3.4%
1.5%
Durable equipment
115
2.9%
2.5%
42
2.4%
0.4%
Personnel
787
19.9%
49.5%
393
22.0%
19.0%
Subcontracting
163
4.1%
9.5%
331
18.6%
6.2%
Travel & subsistence
490
12.4%
1.0%
89
5.0%
0.4%
Other direct costs
813
20.6%
14.1%
195
10.9%
10.6%
Indirect costs (overheads)
1132
28.7%
17.2%
506
28.4%
57.8%
Various others
7
0.2%
0.1%
6
0.4%
0.1%
Grand Total
3948
100.0%
100.00%
1783
100.0%
100.00%
CONFIDENTIAL
For adjustments in favour of the Commission:
As in previous years, the highest number of errors in terms of recurrence can be found
in the Indirect costs/Overheads, Other direct costs, Personnel and Travel and
subsistence cost categories. The percentages have not varied significantly from the
situation at the end of 2008.
In terms of monetary impact, the same cost categories have the highest share of errors.
The proportions, however, are quite different and significant. Adjustments to
personnel costs, for example, represent almost half of all the adjustments proposed, in
terms of amounts, but only about 20% in terms of numbers. On the other hand,
although we identify many errors in Travel and subsistence, they only represent 1% of
the overall amount. Although this is not a finding made this year, it remains significant
and it could inform future audit efforts by, for example, concentrating on auditing
personnel costs across a higher number of projects and ignoring other cost categories
as they are not cost effective to audit.
For adjustments in favour of the beneficiaries:
Like for negative adjustments, the situation at the end of 2009 fairly mimics previous
cumulative results.
However, the category with the highest cumulative adjustments is Indirect
costs/Overheads (57.8% in value, 28.4% in number), followed by Personnel (only
19% in value but 22% in number).
3.3.3.
Qualitative analysis of the largest adjustments in absolute terms (FP6)
The 10 biggest negative adjustments proposed in audits closed in 2009 are listed below, and
there is also a brief explanation of the nature of the errors found in each case. These 10
adjustments plus the 10 top adjustments in 2008 represent about 26% in monetary value of all
adjustments in favour of the Commission proposed so far in FP6 audits, although they are
only 20 out of 1310 adjustments in favour of the Commission proposed to date.
CONFIDENTIAL
Table 3.14 - Details of the 10 largest adjustments per audited participation in absolute
terms in 2009 (all figures are EC share)
1
INSTITUTE OF
RU
515703
RISK
G
1,401,573.36
1,401,573.36
606,846.20
-794,727.16
SPECTROSCOPY OF RUSSIAN
ACADEMY OF SCIENCE
2
GABO GMBH & CO. KG
DE
LSHM-CT-
RISK
F
678,170.85
678,170.85
146,642.45
-531,528.40
2004-503039
3
UNIVERSITAET ZU LUEBECK
DE
37593
RISK
F
1,760,317.36
1,749,026.16
1,284,225.60
-464,800.56
4
SNECMA MOTEURS SA
FR
506154
TOP
H
962,887.18
962,887.18
536,980.81
-425,906.37
5
PEPSCAN SYSTEMS B.V.
NL
LSHG-CT-
RISK
F
529,821.70
529,821.70
136,875.90
-392,945.80
2005-018683
6
GOETEBORG UNIVERSITY
SE
512013
RISK
F
1,279,186.25
1,279,186.25
898,405.69
-380,780.56
7
HET NEDERLANDS KANKER
NL
LSHC-CT-
TOP
F
372,402.28
372,402.28
892.28
-371,510.00
INSTITUUT / ANTONI VAN
2004-503426
LEEUWENHOEK HOSPITAL
8
CENTRE NATIONAL DE LA
FR
505390
TOP
I
979,308.39
979,308.39
645,729.97
-333,578.42
RECHERCHE SCIENTIFIQUE
9
AIRBUS UK LIMITED
UK
AIP4-CT-
TOP
H
4,929,718.50
4,929,718.50
4,599,141.30
-330,577.20
2005-516092
10
CONSEJO SUPERIOR DE
ES
NMP3-CT-
TOP
G
1,528,562.65
1,528,562.65
1,266,278.42
-262,284.23
INVESTIGACIONES
2005-515784
CIENTIFICAS
Details about each case (numbers as in table above):
1. The 'Institute of Spectroscopy of the Russian Academy of Sciences' sign contracts
under the AC cost model. Nevertheless, costs for permanent employees have been
charged, which were rejected by the auditors (-172000€). Further to this, the
contractor charged the full cost for the purchase of equipment in one go, instead of
depreciating it (which is foreseen in their own accounting rules). Subsequently, the
auditors have disallowed a further 483000€. The remainder concerns small sums of
VAT. The total adjustment is - 794727,16€.
2. The contractor which signed this contract was a company called 'GABO Gesellschaft
für Ablauforgansation, Informationsverarbeitung und Kommunikationsorganisation
GmbH & Co. KG' ('GABO'). On January 1st, 2005 GABO:mi Gesellschaft für
Ablauforganisation: millarium GmbH & Co. KG ('GABO:mi') was founded and the
assets and liabilities related to the management of process and projects were
transferred from GABO to GABO:mi including on the above mentioned contract.
Under German legislation this form of transfer needs the agreement of the contracting
third parties. There was no amendment to the research contracts with the Commission.
Costs were henceforth incurred by GABO:mi but claimed as being costs of GABO.
The auditors disallowed the costs.
3. With regard to Lübeck University, eight invoices totalling some EUR 390K incurred
at the end of period 1 were 'double claimed'. This adjustment was increased by the
20% claimed for indirect costs.
4. The major part of the adjustments for SMECMA is due to (1) the absence of an audit
trail allowing the auditors to reconcile the indirect costs charged to the contracts with
the contractor's accounts and (2) the disallowance of the subcontracting not foreseen in
Annex 1 of the contracts.
CONFIDENTIAL
5. The contractor which signed this contract was a company called Pepscan Systems.
There was a reorganisation within the group in 2006 and part of the research activities
were transferred to other companies within the group called Pepscan Therapeutics and
Pepscan Presto, which incurred the costs of the project. Costs were however claimed
by Pepscan Sysytems. There has been no amendment to the contract and these
associated companies are not mentioned as third parties in the contract. The auditors
disallowed the costs.
6. The main adjustment for Gothenburg University relates to personnel costs. In one case
no reasonable assurance could be given on the claimed salary costs, and in other cases
costs were related to another project or lack of a contract was noticed.
Regarding the other direct costs, an adjustment was proposed as the contractor was
unable to substantiate the different cost elements taken into consideration for internal
invoicing. The adjustments in the direct costs resulted in an adjustment of the indirect
costs.
7. The main cause of the adjustment at this Dutch hospital is the ineligibility of certain
other direct costs that could not be substantiated by invoices or subsequent payment
but only by a purchase order. Additional findings refer to the fact that the supplier for
the related goods or services is at the same time partner of the very same project.
8. The CNRS adjustments on this single participation are mainly due to (1) the lack of
reliability of the time recording system and (2) the fact that the provision for
unemployment is not an eligible cost, the latter being subject to legal scruting in the
light of the recent Commission Communication.
9. AIRBUS claimed costs on the basis of cost-centre averages. The applied averages
included indirect costs. The audit proposed adjustments for the difference between the
cost centre based average costs and the actual personnel actual costs. In addition,
indirect costs claimed as direct personnel costs were reclassified to indirect costs.
There were also disallowances for travel expenditure that could not be substantiated.
10. The main reason for the CSIC adjustment is the lack of accounting records for
depreciation, affecting both direct costs for durable equipment, and the indirect costs
calculation.
3.3.4.
Assessment of the different steps of the control chain
Table 3.15 - Net effect of ex-ante and ex-post controls (cumulative, FP5 and FP6 audits).
All amounts are EC share
Costs claimed and audited
(A)
214,782,328
954,583,034
1,169,365,362
Costs accepted by Financial Officers
(B)
211,084,886
953,437,033
1,164,521,919
Net effect of ex-ante controls (B-A)
-3,697,442
-1,146,001
-4,843,443
Costs accepted by Auditor
(C)
208,928,662
934,002,258
1,142,930,920
Net effect of ex-post controls (C-B)
-2,156,224
-19,434,775
-21,590,999
The net effect of ex-ante and ex-post controls is shown above. By ex-ante, one refers to the
corrections made by financial officers to costs claimed when they are received, and by ex-
post, reference is made to the adjustments proposed by the auditors.
CONFIDENTIAL
Interestingly, ex-ante controls have had a bigger cumulative effect for FP5 than ex-
post controls. However, for FP6, the opposite is true, and the difference is quite
significant. The most likely explanation for this is the introduction of audit certificates
in FP6. This introduction might have led to the fact that most part of the errors are
detected and corrected before sending the cost statement to the Commission, an effect
also suggested by the comparison between the FP5 and FP6 cumulative error rates (see
table 3.12).
3.3.5.
Qualitative analysis of error types (FP6)
Each time an audit is closed, it is given two ratings related to 'Seriousness' and 'Nature' of the
errors found by the auditors, if any. By using a combination of these two ratings, a better
understanding of the incidence of errors and their importance can be obtained, as shown in the
table below13.
Table 3.16 - Types and incidence of errors found at participation level (cumulative, FP6)
Small
0.5%
1.1%
53.4%
0.2%
55.2%
Medium
0.1%
0.9%
21.2%
0.3%
22.5%
High
0.0%
0.2%
5.3%
1.1%
6.6%
Totals
12.6%
2.5%
83.3%
1.6%
100.0%
Most of the adjustments proposed by the external audit Units are due to
straightforward errors of small or medium seriousness. Discoveries of fraud are rare.
This situation is reflected by this table in the 53.4% of participations showing SMALL
ERROR. This is in line with the ECA findings in their DAS reports.
The percentage of participations where potential irregularities and highly serious
problems are found remains fairly low, at 1.1%, although it is worth mentioning that it
was just 0.5% at the end of 2008.
In 12% of the cases, there were no findings. This figure was 17.3% at the end of 2008.
13 'Seriousness' refers to the severity of problems found (NONE, SMALL, MEDIUM or HIGH), while 'Nature'
reflects the character of those errors (NONE, QUALITATIVE, ERROR or IRREGULARITIES).
CONFIDENTIAL
3.3.6.
Audit coverage (FP6)
Table 3.17 - Audit coverage (cumulative, FP6)
Total number of
participations
(eCORDA,
01/12/09)
56,085
Audit coverage by
Audited
number of audited
participations
3.8% (2.4% by
participations
2,113
end of 2008)
Audit coverage by amounts audited ('direct'
9.1% (6.2% by
coverage)
953,437,033
end of 2008)
Audit coverage of non-audited amounts
received by audited beneficiaries ('indirect'
coverage')14
5,176,173,928
43.5%
Total audit coverage ('direct' and 'indirect')
6,129,610,961
52.6%
Total FP6 RTD payments as of end 2009
10,443,540,000
100.0%
During 2009, one of the main objectives of the FP6 Audit Strategy, namely to 'clean'
from systematic material errors at least 50% of the budget was achieved. The current
figure is 52.6% and, considering there are still about 250 ongoing FP6 audits, the final
result will be significantly higher than the original target.
Almost 10% of our budget and almost 4% of the participations have been directly
audited to date.
14 The non-audited budget received by audited beneficiaries is considered 'clean' from systematic material errors
either because none were detected or through extrapolation.
CONFIDENTIAL
ANNEX I: MISSION STATEMENTS
MISSION STATEMENT RTD A.4: EXTERNAL AUDITS
The Unit contributes to the assessment of the legality and regularity of the DG RTD payment
transactions by means of ex post financial audits, thereby providing a basis of reasonable
assurance to senior management and other stakeholders (including the budget discharge
authorities) that RTD contract participants are in compliance with the financial terms of the
RTD contract. The corrective actions and follow-up measures which result from the ex post
audit activity contribute to the protection and safeguarding of the European Union’s financial
interests in the research area.
RTD A.4 performs, mainly with own audit staff and occasionally through independent
professional audit firms, a number of audits ('on-the-spot-controls') each year, which are
selected from the 'auditable population' of RTD contractors, and ensures that these audits
are professionally managed and supervised.
RTD A.4 evaluates, reports, and monitors on a regular basis the requests for financial
audits made by the DG RTD Directorates or other relevant parties. RTD A.4 evaluates
these requests and carries out financial audits as necessary with the required priority and
urgency.
RTD A.4 uses and maintains specific tools and methodologies for the selection of RTD
contractors to be audited. The selection is based on the multi-annual Audit Strategy as
endorsed by the DG, and focuses on achieving sufficient and representative audit coverage
to support the DGs annual assurance declaration.
RTD A.4 provides on regular basis management information as a result of the 'on-the-
spot-controls'. For those RTD contractors who fail to comply with the contract the RTD
A.4 recommends financial adjustments and in case of systematic errors, extrapolation of
such adjustments towards non-audited transactions.
RTD A.4, after analysis and synthesis of audit results, gives feedback on corrective
actions, and centralises the regular reporting of actions taken or to be taken by the RTD
Directorates on the basis of the information available in the Audit Back-Office.
RTD A.4, through close co-operation and harmonisation with the other DGR’s and
Executive Agencies, takes the lead in establishing relevant audit policies and strategies. It
therefore organizes, chairs and ensures the secretariat for the monthly CAR group
meetings.
RTD A.4 contributes to the understanding and application of the legal RTD framework
through interpretation and guidelines on FP RTD financial and accounting matters. The
Unit also contributes in an advisory capacity not only to auditing and accountancy
questions and tasks, but also to the legal developments of (future) participation rules and
model RTD grant agreements.
RTD A.4 liaises with R5 to provide a timely input for the interactions with the ECA.
CONFIDENTIAL
RTD A.4 ensures the 'Back-Office' function for the DG RTD external audit activity by
maintaining an audit workflow application and database, and ensuring the lead on the
development of tools and procedures for the sharing of audit results and follow-up
measures with other Research DGs and beyond, for example through the ABAC audit
module.
RTD A.4 coordinates the relations with OLAF on irregularities and fraud cases which
concern beneficiaries of DG RTD expenditure (external investigations). It ensures the
liaison between OLAF and the operational services on OLAF related matters, manages the
OLAF case files relevant to DG RTD and chairs and provides the secretariat of the FAIR
Fraud and Irregularities Committee with the other RDGs and Executive Agencies. It
performs risk-based audits and conducts specific inquiries in case of suspicion of
irregularities. RTD A.4 ensures the regular reporting to DG RTD hierarchy and the
Commissioner on irregularities and fraud cases. Moreover, it actively contributes to the
implementation of a Fraud prevention and detection strategy in DG RTD.
CONFIDENTIAL
MISSION STATEMENT RTD A.5 'Implementation of Audit certification policy and
outsourced audits'
RTD A.5 contributes to the assessment of the legality and regularity of the DG RTD payment
transactions by means of ex post financial audits, thereby providing a basis of reasonable
assurance to senior management and other stakeholders (including the budget discharge
authorities) that RTD contract participants are in compliance with the financial terms of the
RTD contract. The corrective actions and follow-up measures which result from the ex post
audit activity contribute to the protection and safeguarding of the European Union’s financial
interests in the research area.
Through the certification function for FP7, the unit aims to contribute in an ex ante manner to
the legality and regularity of future DG RTD payment transactions by ensuring that the cost
methodology systems of FP7 beneficiaries are in compliance with the rules, thereby resolving
main errors observed in the past from the outset.
RTD A.5 missions can be broken down as follows:
To perform, exclusively through independent professional audit firms, a number of batch
audits each year, which are selected from the 'auditable population' of RTD contractors,
and ensure that these audits are professionally managed and supervised, by proper
planning and follow-up of audit assignments, quality control of deliverables, liaison with
external audit firm representatives and other DGs of the 'research family'.
On the basis of the audit reports of the professional audit firms, for those RTD contractors
that fail to adhere to the contract, the Unit recommends financial adjustments and, in case
of systemic errors, the extrapolation of such adjustments to non-audited transactions.
To manage the public procurement and follow-up of the audit service framework
contracts.
To ensure support to the implementation of the audit certification, focusing in particular
on the cost methodology certification process introduced under FP7. Upon request, the
Unit also offers advice and guidance on the implementation of the FP6 audit certificate
function.
To monitor the implementation of the audit certificate policy in general and co-ordinate all
matters related to audit certification with other DGs of the research family and vis-à-vis
DG BUDG. Where applicable, the Unit ensures liaison with national or international
professional audit bodies.
RTD A.5 liaises with R5 to provide a timely input for the interactions with the ECA for
matters linked to audit certification and audit service framework contract matters.
RTD A.5 contributes in an advisory capacity to the legal developments of (future)
participation rules and model RTD grant agreements, in particular based upon the
knowledge gained in the certification process.