ERC EA European Research Council Executive Agency Unit C3 Audit Management and Implementation Toni Amanda SKEEN, Audit

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2. Unit C3 Audit management & implementation Background New in FP7 Financial provisions Audit implication and sanctions Questions/Answers Background: - Why we audit - FP7 Audit Strategy - Coordination across Research DG’s New in FP7 - Different Terminology - Certificate on the Financial Statements (agreed upon procedures) - Certifcates on Methodology - No more costs modes (AC/FC) – ‘actual eligible costs’ Financial Provisions - How to avoid errors - Personnel Costs – ACW TO TAKE OVER AFTER THIS - Common errors found Audit Implications & Sanctions - not to scare you but to bring them to your attention and inform you of the way we intend to implement them Q&A Background: - Why we audit - FP7 Audit Strategy - Coordination across Research DG’s New in FP7 - Different Terminology - Certificate on the Financial Statements (agreed upon procedures) - Certifcates on Methodology - No more costs modes (AC/FC) – ‘actual eligible costs’ Financial Provisions - How to avoid errors - Personnel Costs – ACW TO TAKE OVER AFTER THIS - Common errors found Audit Implications & Sanctions - not to scare you but to bring them to your attention and inform you of the way we intend to implement them Q&A

3. BackgroundWhy audits? Tax payers' money Legality and regularity of expenditure (eligibility) Opinion by European Court of Auditors to European Parliament on the Commission's yearly Declaration of Assurance Audits are part of the FP7 internal control system Help improve beneficiaries' sound project cost accounting for ERC/EU projects FP7 vs FP6: 'lighter' financial reporting ? audits carry more weight FP7 = susbstantial increase in budget – Commission must demonstrate the effective use of this money and report back – publc accountability – even more important in today’s society (public spending tightly controlled) - By carrying out Compliance Audits we can asess the regularity and legality of transactions under FP7 and provide input into the ERC-EA’s Annual Declaration of Assurance. The CoA subsequently provide an opinion to the Parliament via theiir Annual Statement of Assurance Audits provide the basis for corrective and recovery mechanisms put in place as part of the respective internal control systems of each Commission service Above two points form the two main objectives of the FP7 Audit Strategy which will be presented in the next slide - two-way process – both sides learn – audit of 1st cost statements helps correct problems early on in the project. - Lighter reporting requirements ulitmately mean that audits gain importance to provide assurance on the expendture and therefore will increase in numberFP7 = susbstantial increase in budget – Commission must demonstrate the effective use of this money and report back – publc accountability – even more important in today’s society (public spending tightly controlled) - By carrying out Compliance Audits we can asess the regularity and legality of transactions under FP7 and provide input into the ERC-EA’s Annual Declaration of Assurance. The CoA subsequently provide an opinion to the Parliament via theiir Annual Statement of Assurance Audits provide the basis for corrective and recovery mechanisms put in place as part of the respective internal control systems of each Commission service Above two points form the two main objectives of the FP7 Audit Strategy which will be presented in the next slide - two-way process – both sides learn – audit of 1st cost statements helps correct problems early on in the project. - Lighter reporting requirements ulitmately mean that audits gain importance to provide assurance on the expendture and therefore will increase in number

4. Background Audit strategy Common audit strategy (2010-2016) used by all Research DGs and Agencies Detect & correct systematic & non-systematic errors Audits as per representative sample Audits on Top beneficiaries Risk-based audits FP7 Audit Strategy builds on the experience of FP6 Systematic Error – an error which is repeated - provide e.g. – also referred to as ‘systemic’ Non-Systematic Error – a one-off error – provide e.g. – also referred to as ‘non-systemic’. If at least 9 FS in 3 GA have been audited and no material errors have been found a Beneficiaryy’s budget is considered to be free of systematic errors – they are then treated differently for –no longer fall into the Risk Based or TOP audit selection – Representative Samling only – interesting for large organisations. REPRESENTATAIVE audits (MUS) ) on basis of EC share of amount claimed – Sampling undertaken on received FS. TOP beneficiaries also included in MUS. Help provide a Representative Error Rate. CORRECTIVE STRAND – all received FS which are not part of the Rep Sample will be part of the Corrective Strand TOP ERC beneficiaries (cover atleast 50% of budget). This will result in ‘cleaning’ a significant part of the budget from systematic material errors thru audit & extrapolation TOP beneficiaires will also fall into the Risk based audits due to their size//N° ERC grants - Risk-based audits – Variious factors considered: eg. Type of organisation, beneficiaries highly dependent on EU funds, significant differences between budgeted and actual expenditure, results of financial viability check – assessment of the organisation as a whole, data-mining (new tools & methods). Indications from Operational Units. FP6 error rate for risk-based audits = 40% Other Types of Audit: Systems Audit, Joint Audits (Technical/Financial) and Follow-up audits to monitor the implementation and extrapolation of audit results FP7 Audit Strategy builds on the experience of FP6 Systematic Error – an error which is repeated - provide e.g. – also referred to as ‘systemic’ Non-Systematic Error – a one-off error – provide e.g. – also referred to as ‘non-systemic’. If at least 9 FS in 3 GA have been audited and no material errors have been found a Beneficiaryy’s budget is considered to be free of systematic errors – they are then treated differently for –no longer fall into the Risk Based or TOP audit selection – Representative Samling only – interesting for large organisations. REPRESENTATAIVE audits (MUS) ) on basis of EC share of amount claimed – Sampling undertaken on received FS. TOP beneficiaries also included in MUS. Help provide a Representative Error Rate. CORRECTIVE STRAND – all received FS which are not part of the Rep Sample will be part of the Corrective Strand TOP ERC beneficiaries (cover atleast 50% of budget). This will result in ‘cleaning’ a significant part of the budget from systematic material errors thru audit & extrapolation TOP beneficiaires will also fall into the Risk based audits due to their size//N° ERC grants - Risk-based audits – Variious factors considered: eg. Type of organisation, beneficiaries highly dependent on EU funds, significant differences between budgeted and actual expenditure, results of financial viability check – assessment of the organisation as a whole, data-mining (new tools & methods). Indications from Operational Units. FP6 error rate for risk-based audits = 40% Other Types of Audit: Systems Audit, Joint Audits (Technical/Financial) and Follow-up audits to monitor the implementation and extrapolation of audit results

5. Background Co-ordination Co-ordination and harmonised approach by Commission services Audit methodology, sampling, planning field audits, joint audits Extrapolation Sharing audit results External audit firms working for the Commission and Executive Agencies Joint coordinated/harmonised approach across 5 RDG’s ‘(RTD, ENTR, INFSo, TRANS & ENERGY)+ 2 Agencies (ERC & REA) will further help achieve the objectives of the FP7 Audit Strategy Common Research Family tools – audit planning, identify clashes etc. RTD Extrapolation Committee – discusses cases put forward Sharing results – standard reporting format – full audit reports available across Research Family (WIKI) - Framework contract – External Audit Firms – joint inter RTD Family audits Joint coordinated/harmonised approach across 5 RDG’s ‘(RTD, ENTR, INFSo, TRANS & ENERGY)+ 2 Agencies (ERC & REA) will further help achieve the objectives of the FP7 Audit Strategy Common Research Family tools – audit planning, identify clashes etc. RTD Extrapolation Committee – discusses cases put forward Sharing results – standard reporting format – full audit reports available across Research Family (WIKI) - Framework contract – External Audit Firms – joint inter RTD Family audits

6. New in FP7 New Terminology: ‘Contract’ becomes ‘Grant Agreement’ ‘Contractor’ becomes ‘Beneficiary’ ‘Audit Certificate’ becomes ‘Certificate on the Financial Statements) No more cost models (AC/FC) Certificate on the Financial Statements ‘Agreed upon procedures’ Terms of reference aligned to International Standards in Audit profession Mandatory when requested funding for the period cumulatively > € 375.000 per Grant Agreement per beneficiary! - Agreed upon procedures – use of a standard template which should not be modified/adapted - ERC (almost always) mono beneficiaries = 100 % need a CFS Inclusion of full-time staff now possible for Public Bodies previously using AC model Audit Certification Background IDENTIFIED PROBLEM AREAS - Numerous inherent risks for errors (risk linked to the activity itself) – direct management from Brussels, multi-annual FP with specific financial & legal provisions, EU 27 and beyond, large number and variety of participants (+/-15.000) with different interal control and accounting systems, grant payments based on « actual eligible costs », risk that material errors willnot be detected and corrected Unreliable FP6 audit certificates Need for tighter control over work carried out by beneficiaries’ auditors DECISION Adoption of ‘Agreed Upon Procedures’ rather than audit certificates based on ‘assurance opinion’ ULTIMATE AIM Reduce risk of errors and stimulate transparent accounting - Agreed upon procedures – use of a standard template which should not be modified/adapted - ERC (almost always) mono beneficiaries = 100 % need a CFS Inclusion of full-time staff now possible for Public Bodies previously using AC model Audit Certification Background IDENTIFIED PROBLEM AREAS - Numerous inherent risks for errors (risk linked to the activity itself) – direct management from Brussels, multi-annual FP with specific financial & legal provisions, EU 27 and beyond, large number and variety of participants (+/-15.000) with different interal control and accounting systems, grant payments based on « actual eligible costs », risk that material errors willnot be detected and corrected Unreliable FP6 audit certificates Need for tighter control over work carried out by beneficiaries’ auditors DECISION Adoption of ‘Agreed Upon Procedures’ rather than audit certificates based on ‘assurance opinion’ ULTIMATE AIM Reduce risk of errors and stimulate transparent accounting

7. New in FP7 Certificate on Methodology Certificate on Methodology for calculating average personnel costs (CoMaV) Obligatory when average instead of actual costs used One single evaluation unit (DG RTD) assesses ALL requests No CFS for interim payments (only a CFS at the end of the project when EU contribution >=375.000€) Certificate of Methodology for calculating direct and indirect costs (CoM) Not relevant for ERC Grant Agreements But if a beneficiary has one for FP7 => CFS only with the final payment (Form E – Annex VII of model GA) guidance is available on the web – how to apply, acceptable deviations (normally 5%) etc. Single entry point (RTD Joint Assess Com - acts for all Research DG’s) CoMaV – Useful for large organisations with specific personnel categories and defined salary bands. Accepted if consistent with the management principles and accounting procedures and costs do not significantly differ from actual personnel costs.Beneficiaries who are not ‘certified’ will have to apply ‘actual’ costs (no margin for deviations). Simplified procedure for CFS with final FS – auditors needs only check methodology is correct CoM – N° of eligibility criteria: – atleast 8 participations in FP6 with EU contribution of >=375.000€ each or - atleast 4 FP7 GA signed before 1/1/10 with EU contribution for each >=375.000€ or - atleast 8FP7 GA singed with EU cont for each >=375.000€ anytime during FP7 EC RTD A5 - Inter service - Joint Assessment Committee on FP7 Certification (Form E – Annex VII of model GA) guidance is available on the web – how to apply, acceptable deviations (normally 5%) etc. Single entry point (RTD Joint Assess Com - acts for all Research DG’s) CoMaV – Useful for large organisations with specific personnel categories and defined salary bands. Accepted if consistent with the management principles and accounting procedures and costs do not significantly differ from actual personnel costs.Beneficiaries who are not ‘certified’ will have to apply ‘actual’ costs (no margin for deviations). Simplified procedure for CFS with final FS – auditors needs only check methodology is correct CoM – N° of eligibility criteria: – atleast 8 participations in FP6 with EU contribution of >=375.000€ each or - atleast 4 FP7 GA signed before 1/1/10 with EU contribution for each >=375.000€ or - atleast 8FP7 GA singed with EU cont for each >=375.000€ anytime during FP7 EC RTD A5 - Inter service - Joint Assessment Committee on FP7 Certification

8. Once accepted valid for duration of FP7 (unless methodology changes) Assurance that methodology used conforms to FP7 requirements No CFS for interim payments = reduced administrative burden Less funds need to be spent on certificates on the financial statements Reduced testing in case of audits New in FP7 Benefits of Certificate of Methodology - If applied for early on in the project beneficiary has the assurance that his methodolgy for calculating personnel costs is in line with FP7 requirements - Less money on CFS = more money for the project Reduced audit testing on Personnel costs – auditor just needs to check that methodology accepted corresponds to that being applied. The process is ongoing. Initial take-up is slow, multiplier effect expected once the benefits are known Typical problems with applications received to date: Mandatory form not respected - Terms of reference are missing and/or not signed by both parties - Agreed upon procedures only partically performed - benchmarks and supporting docs missing allowing proper evaluation of avg pers costing methodology - long delay in providing additional info - If applied for early on in the project beneficiary has the assurance that his methodolgy for calculating personnel costs is in line with FP7 requirements - Less money on CFS = more money for the project Reduced audit testing on Personnel costs – auditor just needs to check that methodology accepted corresponds to that being applied. The process is ongoing. Initial take-up is slow, multiplier effect expected once the benefits are known Typical problems with applications received to date: Mandatory form not respected - Terms of reference are missing and/or not signed by both parties - Agreed upon procedures only partically performed - benchmarks and supporting docs missing allowing proper evaluation of avg pers costing methodology - long delay in providing additional info

9. Financial provisionsHow to avoid errors? Understand the eligibility criteria from proposal writing onwards… Remember all costs must be: Actual Incurred during the duration of the project In accordance with the usual accounting & management principles Recorded in the accounts of the beneficiary Used for the sole purpose of achieving the objectives of the project Know the GA, Annexes and Financial Guidelines inside out…Get key financial people involved in the project from the start…. Remember the basic eligibility rules… Know the GA, Annexes and Financial Guidelines inside out…Get key financial people involved in the project from the start…. Remember the basic eligibility rules…

10. Financial provisionsPersonnel costs Directly hired by beneficiary Work under sole technical supervision and responsibility of beneficiary Be remunerated in accordance with normal practices of beneficiary Calculation: productive hours worked on the ERC project x hourly personnel rate Salary calculation Productive hours worked on the project i.e. those registered in time sheets multiplied by the hourly personnel rate Salary calculation Productive hours worked on the project i.e. those registered in time sheets multiplied by the hourly personnel rate

11. Hourly personnel rate = total annual personnel costs for the employee ?????????????????????? total annual productive hours for the employee or Standard annual productive hours for the organisation Costs taken from pay slip - total gross salary plus employer's share of social charges Productive hours worked by the employee or standard productive hours for the organisation over a period of 12 months, excluding holidays, sick leave and other activities Financial provisionsPersonnel costs How to calculate the total Annual productive hours of a Researcher: Standard N° of working hours per week X The N° of weeks during the period Minus Time for Absences (Annual holidays, statutory holidays, illness and continued expertise i.e. training) How to calculate the total Annual productive hours of a Researcher: Standard N° of working hours per week X The N° of weeks during the period Minus Time for Absences (Annual holidays, statutory holidays, illness and continued expertise i.e. training)

12. Financial provisionsPersonnel costs The use of the standard number of productive hours is the most efficient methods (time-saving). They must be calculated according to the beneficiariy’s normal practises Standard hours per week Standard 52 weeks for a year DEDUCTIONS: ANNUAL HOLIDAYS - Average number of holidays based on the normal practise of your company. (The relevant information to report is the number of days of holidays for which the right was generated during the period covered by the salary, not the days actually taken during the period.) STATUTORY HOLS - As per law, at country, region or sector level. ILLNESS - The average number of days of illness that can be considered as normal for your company. CONTINUED EXPERTISE - An average number of days corresponding to the normal practice of your company in relation to continued expertise i.e. training .Days for specific training in the context of the project should not be deducted here. UNPAID ABSENCES - Declare here the number of days for which no salary is paid by the company in line with the salary costs reported above. (Period of illness exceeding normal average can be reported here only if the salary was paid by social insurance during that period and is therefore not included in the total salary used for the calculation of the hourly rate.) N° WORKING HOURS PER DAY - Following the work contract or the normal practice of the company The number of productive hours worked on the project must exclude any time spent on sales, administration or maintaining general expertise. The use of the standard number of productive hours is the most efficient methods (time-saving). They must be calculated according to the beneficiariy’s normal practises Standard hours per week Standard 52 weeks for a year DEDUCTIONS: ANNUAL HOLIDAYS - Average number of holidays based on the normal practise of your company. (The relevant information to report is the number of days of holidays for which the right was generated during the period covered by the salary, not the days actually taken during the period.) STATUTORY HOLS - As per law, at country, region or sector level. ILLNESS - The average number of days of illness that can be considered as normal for your company. CONTINUED EXPERTISE - An average number of days corresponding to the normal practice of your company in relation to continued expertise i.e. training .Days for specific training in the context of the project should not be deducted here. UNPAID ABSENCES - Declare here the number of days for which no salary is paid by the company in line with the salary costs reported above. (Period of illness exceeding normal average can be reported here only if the salary was paid by social insurance during that period and is therefore not included in the total salary used for the calculation of the hourly rate.) N° WORKING HOURS PER DAY - Following the work contract or the normal practice of the company The number of productive hours worked on the project must exclude any time spent on sales, administration or maintaining general expertise.

13. Financial provisionsPersonnel costs Hours worked Time-sheets are highly recommended to justify a person’s time spent on the project (estimates of hours worked are not allowed) Full/complete time-recording system recording total productive hours spent on ALL activities (reconciliation of total hours for personnel working on several projects during the same period). However, time-sheets may not be necessary if: a person is working 100% on a project and has a specific contract to this effect, and there is appropriate/alternative evidence to support the declared working arrangements and this is compliant with the usual accounting practices of the beneficiary Time-sheets are the simplest/safest option. When they don’t exist, auditor is obliged to evaluate alternative evidence: - check existendce of staff - interview staff - verify how working hours split between different projects - match time charged with results - check publications, scientific reports and working papers Timesheets should ideally be completed on a weekly basis and include the person’s name, productive time spent on all EU projects (split according to projects), time spent on other projects/activities and absences. They should be signed by the Researcher/PI and or Line Manager and dated ACW TO TAKE OVER NOW….Common ErrorsTime-sheets are the simplest/safest option. When they don’t exist, auditor is obliged to evaluate alternative evidence: - check existendce of staff - interview staff - verify how working hours split between different projects - match time charged with results - check publications, scientific reports and working papers Timesheets should ideally be completed on a weekly basis and include the person’s name, productive time spent on all EU projects (split according to projects), time spent on other projects/activities and absences. They should be signed by the Researcher/PI and or Line Manager and dated ACW TO TAKE OVER NOW….Common Errors

14. Financial provisionsCommon errors identified during audits Personnel costs People not directly employed nor paid by the beneficiary Budgeted, standard or estimated rates instead of actual Average hourly rates used without approved CoMaV Billable hours used instead of productive hours Unpaid overtime charged Time sheets absent, incomplete, not signed by individual and supervisor Overhead costs included in personnel cost calculation Give examples! During audits personnel cost category see many corrections 80% of all corrections refer to personnel costs. Personnel costs only claimed for the staff listed in the DoW Not directly employed by beneficiary – such as visiting scientists, consultants (should be booked in the correct cost category (subcontracting/other cost) Budgeted, standard rates (only charge extra Christmas salary to costs once it has been paid out) Everything in FP7 is on the basis of actual costs, (only average costs allowed if they have the Certificate on Methodology on Average Personnel Costs CoMaV). The FP7 Audit Strategy states that beneficiaries found to have charged average personnel costs without approved CoMaV will be subject to a standard audit comparing costs charged with actual costs. Deviations from actual costs will be reported for relevant corrections including the application of extrapolation. Billable hours: What they would charge for external parties Overhead costs – Give examples! During audits personnel cost category see many corrections 80% of all corrections refer to personnel costs. Personnel costs only claimed for the staff listed in the DoW Not directly employed by beneficiary – such as visiting scientists, consultants (should be booked in the correct cost category (subcontracting/other cost) Budgeted, standard rates (only charge extra Christmas salary to costs once it has been paid out) Everything in FP7 is on the basis of actual costs, (only average costs allowed if they have the Certificate on Methodology on Average Personnel Costs CoMaV). The FP7 Audit Strategy states that beneficiaries found to have charged average personnel costs without approved CoMaV will be subject to a standard audit comparing costs charged with actual costs. Deviations from actual costs will be reported for relevant corrections including the application of extrapolation. Billable hours: What they would charge for external parties Overhead costs –

15. Financial provisionsCommon errors identified during audits Accounting systems Costs not reported in the general accounts but project account only Non-eligible costs Not using usual accounting or management principles and practices Other Outside eligibility period Not budgeted nor clearly explained in DOW No appropriate supporting documents Incorrect conversion rates Not relevant to the project (hospitality/entertainment costs) Accounting systems: Non eligible costs (for ERC projects - according to the general conditions of the GA!) (e.g. indirect taxes including VAT, duties, interest owed, provisions for possible future losses, exchange rate losses, debt service charges, costs incurred for another Community project) Costs should be relevant to the project. different accounting practice in different faculties of a university Other Description of Work – significant differences, and if NOT reported to ERC/C2 already. appropriate supporting (ex invoices, receipts, time sheets – with common features, for quote you need signatures, date, specification, full name supplier, VAT number… Incorrect conversion rate – daily exchange rate or rate on 1st day of the month following the reporting period - not used Hospitality/entertainment costs: We give money for research, not entertainment. Working lunch more acceptable than working dinner. Up to the auditor on site to decide – if expenditure is judged to be reasonable it will be accepted, however, if it is judged unreasonable (reckless) it will be rejected. . Accounting systems: Non eligible costs (for ERC projects - according to the general conditions of the GA!) (e.g. indirect taxes including VAT, duties, interest owed, provisions for possible future losses, exchange rate losses, debt service charges, costs incurred for another Community project) Costs should be relevant to the project. different accounting practice in different faculties of a university Other Description of Work – significant differences, and if NOT reported to ERC/C2 already. appropriate supporting (ex invoices, receipts, time sheets – with common features, for quote you need signatures, date, specification, full name supplier, VAT number… Incorrect conversion rate – daily exchange rate or rate on 1st day of the month following the reporting period - not used Hospitality/entertainment costs: We give money for research, not entertainment. Working lunch more acceptable than working dinner. Up to the auditor on site to decide – if expenditure is judged to be reasonable it will be accepted, however, if it is judged unreasonable (reckless) it will be rejected. .

16. Financial provisionsOverlapping funding Community financial contribution can not give profit for the beneficiary Costs declared, incurred or reimbursed in respect of another Community funded project are not eligible Proposal should include list of already awarded funds PIs to distinguish different funding sources (e.g. Marie Curie International Re-integration / Initial Training Networks, national/private funding schemes) Commission services will reinforce monitoring Check of overlapping of funding is carried out at all stages (application, evaluation, grant preparation, financial evaluation & audit). Application checks include controls to see whether the PI is not already receiving funding from another EU source. In case of an audit, a large focus is placed on ‘Reliability of the Systems’ e.g. allocation of time across all projects. To avoid any overlapping of funding the time-sheets should clearly define the productive hours spent on each EU project. In no circumstances can total time charged to EU projects and time spent on other projects/activities exceed 100%. Double-funding of activities is an area in which the commission will be re-inforcing efforts. If a beneficiary is caught charging the same activity to two/more projects serious sanctions will be taken. For example we publish information about research grants on the ERC website to make it public that we fund a project (to aviod others to fund the same one) Total of funding sources could equal to a higher amount than the total costs for the project. Then the funding percentage needs to be reduced. No profit! Not funded twice. Check of overlapping of funding is carried out at all stages (application, evaluation, grant preparation, financial evaluation & audit). Application checks include controls to see whether the PI is not already receiving funding from another EU source. In case of an audit, a large focus is placed on ‘Reliability of the Systems’ e.g. allocation of time across all projects. To avoid any overlapping of funding the time-sheets should clearly define the productive hours spent on each EU project. In no circumstances can total time charged to EU projects and time spent on other projects/activities exceed 100%. Double-funding of activities is an area in which the commission will be re-inforcing efforts. If a beneficiary is caught charging the same activity to two/more projects serious sanctions will be taken. For example we publish information about research grants on the ERC website to make it public that we fund a project (to aviod others to fund the same one) Total of funding sources could equal to a higher amount than the total costs for the project. Then the funding percentage needs to be reduced. No profit! Not funded twice.

17. Audit-oriented preparation of supporting documents to facilitate traceability of costs claimed Detailed breakdown of costs claimed (transaction listing) Access to book-keeping and accounting documents Access to HR documents (personnel files, contracts, job descriptions, pay slips) Print-out of payments received List of all EU projects currently involved in Income statement The percentage that EU funding represents of projects Relevant project correspondence Calculation of interest generated by project Financial provisionsDocuments to be Kept in Case of Audit Not go into details. But information should be readily available and costs should be tracable. Simple A4 file with GA, full transaction listing + supporting documents filed under budget headings (purchase orders, invoices, proof of payment), any correspondence etc. Transaction listing from General Ledger with detailed breakdown of all costs claimed Payments received for ERC project under audit Income statement –figures from Annual Report (Revenue and expenditure) Calculation of interest generated by pre-financing –simple Excel sheet is sufficientNot go into details. But information should be readily available and costs should be tracable. Simple A4 file with GA, full transaction listing + supporting documents filed under budget headings (purchase orders, invoices, proof of payment), any correspondence etc. Transaction listing from General Ledger with detailed breakdown of all costs claimed Payments received for ERC project under audit Income statement –figures from Annual Report (Revenue and expenditure) Calculation of interest generated by pre-financing –simple Excel sheet is sufficient

18. Audit implications and sanctionsOverview Recovery Extrapolation Liquidated damages Result of an audit can be to the benefit of the both positive or negative to the beneficiaryResult of an audit can be to the benefit of the both positive or negative to the beneficiary

19. Audit implications and sanctionsRecovery Audit findings on closed Grant Agreements Overpayment of amounts Termination of Grant Agreements Recovery of interest on pre-financing paid exceeding € 750.000 (FR 5a, IR 3-4) (at the end of each reporting period ) Explain recovery: to reclaim paid costs already paid. (invoice) Amount is agreed before recovery note is sent out. Late interest applied if not paid back in time. Contradictory procedure to give opportunity to explain or contest. Audit findings can be both to the benefit of the beneficiary or the EC. Offset against the next payment, but if final payment is paid, recovery of an amount can be done. If pre-financing and interim payments exceeds the final amount of accepted eligible cost. Prefinancing is considered the property the the European communities, thus the interest belongs also to the EC. Costs lower than prefinancing. Amounts smaller than 750 000 euro will be deducted in the payments Recovery of interest (can be done through offsetting recovery order against payment). Benenficiary will notice even though offset, since a letter will be sent out on the recovery. Could be offset against other payment due to them (from another DG) Explain recovery: to reclaim paid costs already paid. (invoice) Amount is agreed before recovery note is sent out. Late interest applied if not paid back in time. Contradictory procedure to give opportunity to explain or contest. Audit findings can be both to the benefit of the beneficiary or the EC. Offset against the next payment, but if final payment is paid, recovery of an amount can be done. If pre-financing and interim payments exceeds the final amount of accepted eligible cost. Prefinancing is considered the property the the European communities, thus the interest belongs also to the EC. Costs lower than prefinancing. Amounts smaller than 750 000 euro will be deducted in the payments Recovery of interest (can be done through offsetting recovery order against payment). Benenficiary will notice even though offset, since a letter will be sent out on the recovery. Could be offset against other payment due to them (from another DG)

20. Audit implications and sanctionsExtrapolation Correction of systematic material errors by applying the audit results to all running and closed contracts in the same framework programme FP7: At least 9 financial statements in 3 different FP7 Grant Agreements need to be audited before concluding that no material systematic errors are present for a given beneficiary Extrapolation – correction of systematic errors also applied on non-audited contracts of a beneficiary Extrapolation is across DG’s and EA’s No liquidated damages for extrapolation cases Extrapolation for FP6 does not impact FP7 and vice-versa Extrapolation or not is decided in an interservice group (with Research DGs) Beneficiary submits revised financial statements in the following period Follow-up audits possible FP6 extrapolation was done if same systematic error detected in general >3 cost statements audited Early in FP7 – the policy for extrapolation is still not defined. Exact implementation not clear. Commission communication to use use flatrate for correction of non-audited contracts to simplify extrapolation. Extrapolation – correction of systematic errors also applied on non-audited contracts of a beneficiary Extrapolation is across DG’s and EA’s No liquidated damages for extrapolation cases Extrapolation for FP6 does not impact FP7 and vice-versa Extrapolation or not is decided in an interservice group (with Research DGs) Beneficiary submits revised financial statements in the following period Follow-up audits possible FP6 extrapolation was done if same systematic error detected in general >3 cost statements audited Early in FP7 – the policy for extrapolation is still not defined. Exact implementation not clear. Commission communication to use use flatrate for correction of non-audited contracts to simplify extrapolation.

21. Audit implications and sanctionsLiquidated damages Applied where EC finds overstatement after payment Due in addition to recovery of unjustified financial contribution from the beneficiary Does not depend on intentional or fraudulent overstatement of expenses Calculation:  Unjustified EC fin. contribution x Overstated amount EC fin. contr. claimed for the reporting period (not for the entire project duration) E.g. project 100% ERC funded: 100.000 x 100.000 = € 10.000 1.000.000 May be waived General conditions of the GA: II.24 «Liquidated damages shall in principle be claimed in all instances where an ex-post control has revealed overstated expenses that have effectively lead to the payment of unjustified EC contribution. » (05.02.2009 DG RTD Dir R) Financial penalties if intentional (on top of the liquidated damages) May be waived: If beneficiary finds overstatement and corrects before payment If Commission finds overstatement and beneficiary corrects before payment If beneficiary finds overstatement and corrects after payment Where extrapolation is applied and beneficiary finds overstatements and corrects other projects General conditions of the GA: II.24 «Liquidated damages shall in principle be claimed in all instances where an ex-post control has revealed overstated expenses that have effectively lead to the payment of unjustified EC contribution. » (05.02.2009 DG RTD Dir R) Financial penalties if intentional (on top of the liquidated damages) May be waived: If beneficiary finds overstatement and corrects before payment If Commission finds overstatement and beneficiary corrects before payment If beneficiary finds overstatement and corrects after payment Where extrapolation is applied and beneficiary finds overstatements and corrects other projects

22. TerminationRedress II procedure Complaint by beneficiary against Commission decisions to terminate Grant Agreement Objective: ensure beneficiaries are treated in consistent manner ? absence of administrative / procedural errors Does NOT call into question scientific judgement or results of technical audit NOT replacing legal / contractual appeal procedures Good to know, but will be used quite rarely. Rules for participation (18.8) mentions that there shall be a redress procedure for applicants (I) as well as participants (II) Redress I already in place, Redress II new. ERC monobenficiary, otherwise Redress II, case can also be that one participant is being terminated. Checks that procedures have been followed. Participant has 15 days to file a complaint Institution (ERC) has 45 days to set up a redress II procedure to examine the case and deliver a recommendation to the Authorising officer by delegation (director) Appeals may be brought to the Commission, Ombudsman the EU courtsGood to know, but will be used quite rarely. Rules for participation (18.8) mentions that there shall be a redress procedure for applicants (I) as well as participants (II) Redress I already in place, Redress II new. ERC monobenficiary, otherwise Redress II, case can also be that one participant is being terminated. Checks that procedures have been followed. Participant has 15 days to file a complaint Institution (ERC) has 45 days to set up a redress II procedure to examine the case and deliver a recommendation to the Authorising officer by delegation (director) Appeals may be brought to the Commission, Ombudsman the EU courts

23. Questions or suggestions? Talk to us now or contact ERC unit C3 Mail box: ERC-external-audit@ec.europa.eu

24. ¦ 24 Thank you !