“Train the trainers”

1. Audit Approach with regard to flat rates for indirect costs, standard scales of unit costs and lump sumsIoannis KroustalisDG Regional Policy “Train the trainers” European Commission seminar for managing and certifying authorities 9 June 2009

2. Outline • Why an audit approach? • General approach • Fair, Equitable, Verifiable • Audit trail • Indirect costs declared on a flat rate basis • Flat rates based on standard scales of unit costs • Lump sums • Distinction between grants/public procurement

3. 1. Why an audit approach? • Simplified costs signify a departure from the principle of real costs, which auditors are accustomed to; • The Commission wishes to render its approach as transparent as possible; • Ensure that a uniform approach is applied by all actors: ECA, EC, national AAs; Member State audit authorities will be encouraged to apply the same approach.

4. 2. General approach (1/3) • No longer a need to trace every co-financed euro to individual supporting documents. • No audit of underlying financial documents. Amounts paid considered as paid expenditure, if justified by outputs. • The audit of simplified cost options remains a legality and regularity audit. Audits focus on verifying the method for setting the rate and on the outputs, rather than on individual supporting financial documents.

5. 2. General approach (2/3) • What will the audit work focus on? • Verification of the calculation method (MA/IB level); • Verification of the correct application of the established method (beneficiary level). • Verification on the basis of the "real cost" principle of the direct costs (in cases of flat rates for indirect costs)

6. 2. General approach (3/3) • The Commission will not call into question the national system, provided that the MS has put in place a well established methodology (fair, equitable, verifiable) • The obligation to observe all applicable Community and national rules is not waived. Verification of these principles is within the scope of audit work.

7. 3. Fair, Equitable, Verifiable • Fair: Reasonable, based on reality, not excessive or extreme. Duly justified and explained • Equitable: Not favouring some beneficiaries or types of operations over others • Verifiable: Based on documentary evidence which can be verified (see next slide – audit trail). Ex nihilo rates will not be accepted. The Commission will not question the reasons for selecting a specific method over another, provided that criteria are met

8. 4. Audit trail • Verification of the basis for setting the rates/scales/lump sums are part of the audit work.  Full records of the basis for setting the rates or lump sums should be kept. • At beneficiary level: obligation to maintain an adequate audit trail remains: supporting documents for outputs are required. • The requirements of article 90 of Regulation (EC) N° 1083/2006 apply.

9. 5. Indirect costs declared on a flat rate basis • Possibility to submit to the Commission system and calculation method for ex-ante approval: in such case, subsequent audits will verify whether the agreed system is correctly applied • It is generally expected that rate is based in classification or categories of direct and indirect costs • Front-loading of indirect costs will not be accepted • Irregularities may be considered: • Non respect of set rate or agreed system; • Inclusion of costs not foreseen in the categories of costs • Costs included both in direct and in indirect costs; A correction in direct costs will lead to a pro-rata reduction of the indirect costs

10. 6. Flat rates based on standard scales of unit costs • Main focus of the audits will be to verify the whether outputs have been delivered. This may be training hours, hours worked, subsistence allowances or other units • The audit will verify whether the declared amount equals the output multiplied by the standard scale of unit cost. • Irregularities may be considered: • Non respect of set standard scale; • Declared amounts do not reflect the actual outputs;

11. 7. Lump sums • Main focus of the audits will be to verify whether outputs have been delivered. • Payment of the lump sums without execution (full or partial) of a project will not be accepted • Irregularities may be considered: • Non delivery of the product or service (100% correction if delivery in full is a condition for payment); • Correction if intermediary payments are not justified by final delivery; • Payment of 100% of the lump sum without taking into account the provisions of the grant letter, where the latter foresees reductions of the lump sum

12. 8. Distinction between grants and public procurement (1/4) • Simplified cost options apply only to grants Why? • The legislator aimed to avoid cases where a tendered project generates an automatic proportional management fee for the contracting authority. If the project is implemented via public procurement:  No possibility to use the simplified cost options. Payment is made on the basis of a fixed price included in the contract.

13. 8. Distinction between grants and public procurement (2/4) • How to distinguish between grants/tenders: Who determines the detailed technical specifications of the service/product? • The contracting authority  Public procurement • The operator  Grant scheme What is the nature of the project? • Supply against a price of assets, execution of works or provision of services  public procurement • Financing of an action or functioning of an operator that contributes to a policy  grant scheme

14. 8. Distinction between grants and public procurement (3/4) • How to distinguish between grants/tenders: Applicable procedure: • Call for tenders  public procurement • Call for proposals  grant scheme Legal support: • Grant letter/agreement  grant scheme • Contract  public procurement

15. 8. Distinction between grants and public procurement (4/4 ) • Cases where a grant is given and parts of the project are outsourced: • Ensure that the beneficiary has the capacity to implement the project • No change in the nature of the project (the two previous slides) • Public procurement rules for the outsourced part need to be observed When setting the rates, standard scales or lump sums, the impact of outsourcing should be taken into account

16. Conclusions • Simplified costs are a new concept, to which the audit approaches need to be adapted • Departure from the principle of real costs: individual supporting documents of expenditure will not be verified • The Commission will not call in question the national systems (where they are well established, comply with criteria and there is no indication of fraud or abuse) • Audit trail: justification of outputs is still required! • Conformity with all Community and national rules • Grants vs public procurement

17. Thank you for your attention! Ioannis.Kroustalis@ec.europa.eu Tel: +32-2-298-44-16