Communication campaignCommunication campaignFCH JU control systemFCH JU control system

Elena Climent Vañó Elena Climent Vañó FCH JU Audit ManagerFCH JU Audit Manager

1.1. FCH JU control strategy: main featuresFCH JU control strategy: main features

2.2. Ex-ante vs. Ex-post verificationsEx-ante vs. Ex-post verifications

3.3. CFS (ex-ante) vs. Financial Audit (ex-post)CFS (ex-ante) vs. Financial Audit (ex-post)

4.4. The processesThe processes4.a. The 4.a. The ex-ante reviewex-ante review process process

Actors / Contact pointsActors / Contact points Key steps Key steps

4.b. The 4.b. The ex-post auditex-post audit process process Actors / Contact pointsActors / Contact points Key stepsKey steps ExtrapolationExtrapolation

Agenda

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• Embraces the whole ‘Embraces the whole ‘Grant Management cycleGrant Management cycle’’ Call planningCall planning Evaluation of proposalsEvaluation of proposals Negotiation and Signature of Grant AgreementsNegotiation and Signature of Grant Agreements Project implementationProject implementation

• Covers two main Covers two main aspectsaspects: : Sound financial management Sound financial management (i.e. economy, effectiveness, efficiency)(i.e. economy, effectiveness, efficiency) Legality and Regularity Legality and Regularity (i.e. in accordance with rules)(i.e. in accordance with rules)

• Is a combination of Is a combination of ex-ante and ex-postex-ante and ex-post verifications verifications• ActorsActors: :

Internal: FCH JU Operations / Finance / AuditInternal: FCH JU Operations / Finance / Audit External:External:

Independent experts (e.g. Mid Term Review)Independent experts (e.g. Mid Term Review) External auditors (CFS, Financial audits)External auditors (CFS, Financial audits) Other bodies (Court of Auditors, OLAF, IAS)Other bodies (Court of Auditors, OLAF, IAS)

1. FCH JU control strategy – main features

Focus of presentation !

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2. Ex-ante vs. Ex-post verifications

  'Ex-ante' 'Ex-post'

When? Before the transaction is authorised After the transaction is authorised (up to 5 years after the end of the project)

Frequency? Obligatory on all transactions Carry out on a sample basis

How? Mainly desk review of documents On-the-spot checks at beneficiary's premises.

What/Sources? •Project periodic reports

•Mid term review

•Certificates methodology (CoM) / CoMav

•Certificates on Financial Statements – CFS

• Technical audits or reviews• Financial audit

Impact? Errors detected are corrected, by the beneficiary (new Form C) or by the JU (ineligible costs), before the transaction is approved.

Errors detected are corrected after the transaction is approved and undue amounts are recovered

Cost Eligibility: Costs charged to the project in accordance with FCH JU Grant Agreement

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FAQs: Certificates issued by external auditors (CFS/CoM/CoMav)http://www.fch-ju.eu/content/how-participate-fch-ju-projects

3. CFS vs. Financial Audit

  ‘CFS’ (ex-ante) ‘Financial Audit’ (ex-post)

Legal Basis • Grant Agreement (article II.4.4) • Grant Agreement (article II.22)

When? • If above thresholds (Example!) Interim payments: JU contribution >= 325.000 € Final payments: JU contribution > 50.000 €

• Sample selected by FCH JU• Representative• Risk-based

What? • Objective: Costs & receipts declared in accordance with GA• Scope: Agreed Upon Procedures• Output:

Independent report of factual findings (incl. ToR & table) Model (GA, Form D)

• Objective: Costs & receipts declared in accordance with GA • Scope: Financial Audit• Output:

Audit Report Model (agreed with audit firms)

Who? • Auditor selected by beneficiary Independent from the beneficiary Qualify to carry out statutory audits Special case: public bodies, secondary and higher

education establishments and research organisations Competent public officer (legal capacity & independent).

• FCH JU Framework contract with 3 External Audit Firms PricewaterhouseCoopers (PwC) KPMG Littlejohn (POLARIS)

Conflict of Interest (‘CoI’) check If 3 firms declare CoI, use of DG BUDG contract

Cost? • Paid by beneficiary• Declared by the beneficiary as eligible costs (*)• Reimbursed by the JU at the corresponding funding rate

• Paid by FCH JU

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(*)•Costs incurred for the CFS issued by the external auditors are eligible direct costs charged under the "Management" activity in the "Subcontracting" category.•However the costs for the CFS established by the competent public officers can be treated as "Other direct costs" under the "Management" activity. Where it is the usual practice of the beneficiary to consider these costs as indirect costs, they cannot be charged as direct eligible costs.

CFS - Example of thresholds

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Claim N° Eligible costs FCH JU contribution

Cumulative amount for which a CFS has NOT been submitted

CFS required Notes

1 EUR 380,000 EUR 190,000 EUR 190,000 NO

2 EUR 410,000 EUR 205,000 EUR 395,000 YES (1)

3 EUR 500,000 EUR 250,000 EUR 250,000 NO

4 EUR 350,000 EUR 175,000 EUR 425,000 YES (2)

5 (final) EUR 600,000 EUR 300,000 EUR 300,000 YES (3)

(1) Cumulative FCH JU contribution = EUR 190,000 + EUR 205,000 = EUR 395,000. A CFS has to be provided because cumulative interim requested FCH contribution amounts ≥ EUR 325,000. After the submission of CFS, the calculation of the cumulative amount re-starts from 0 for period 3. It is important to remember that the CFS has to cover the eligible costs incurred for the whole period and not just the FCH JU contribution.

(2) Cumulative FCH JU contribution = EUR 250,000 +EUR 175,000 = EUR 425,000. A CFS has to be provided because the cumulative amount ≥ EUR 325,000. After the submission of the CFS, the calculation of the cumulative amount re-starts from 0 for period 5. The CFS covers the eligible costs for the periods 3 and 4 (EUR 500,000 + EUR 350,000 = EUR 850,000.

(3) FCH JU contribution for period 5 (final payment) = EUR 300,000. It is > EUR 50,000, therefore CFS for the last reporting period has to be

provided. ---

CFS - Example of thresholds if Ex-post audit

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Claim N° Eligible costs FCH JU contribution

Cumulative amount for which a CFS has NOT been submitted

CFS required Notes

1 EUR 400,000 EUR 200,000 EUR 200,000 NO

FCH JU (ex-post) audit covering EUR 400,000 (including 200,000 of FCH JU contribution)

2 EUR 250,000 EUR 125,000 EUR 125,000 NO (1)

3 (final) EUR 200,000 EUR 100,000 EUR 225,000 YES (2)

(1) The audit restarted the counter from 0 for the second period. The cumulative amount is lower than EUR 325,000 thus a CFS is not required.

(2) Final cumulative financial contribution of the FCH JU under the form of reimbursement of costs exceeds EUR 50,000. Therefore, a CFS is required.

However, it will cover only the costs non-audited by the FCH JU ( EUR 450,000) ---

Principle : Costs covered by ‘ex-post audit’ are not subject to CFS and related JU contribution is excluded from the calculation of the thresholds for CFS.

• Model:Model: Form D Form D updated June 2012updated June 2012

• Content:Content: 3 documents 3 documents completeness completeness Independent report of factual findings Independent report of factual findings (*)(*)

Signed by auditorSigned by auditor Terms of reference Terms of reference

Signed by beneficiary & auditor and appended to auditor’s reportSigned by beneficiary & auditor and appended to auditor’s report Table of procedures Table of procedures

Completed by auditor and appended to auditor’s reportCompleted by auditor and appended to auditor’s report

• The independent report of factual findingsThe independent report of factual findings (*)(*): : ScopeScope: Agreed procedures (no audit) on costs declared (Form C): Agreed procedures (no audit) on costs declared (Form C) ResultsResults: :

How? List of exceptions How? List of exceptions (e.g. no time records available, subcontracting (e.g. no time records available, subcontracting not specified in Annex 1 of GA, costs not allocated to project..) not specified in Annex 1 of GA, costs not allocated to project..)

Impact: Impact: FCH JU uses this information FCH JU uses this information to draw conclusions to draw conclusions on eligibility on eligibility of costs claimed and decide the amounts to be paidof costs claimed and decide the amounts to be paid..

3. CFS (ex-ante)

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3. CFS (Independent report)

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Independent Report of Factual Findings …

To be printed on letterhead paper of the Auditor In accordance with our contract …with .. “the Beneficiary”and the terms of reference attached thereto, we provide our Independent Report of Factual Findings..

Objective

We [the audit firm], established in [full address] represented for signature of this Report by [[name and function of an authorised representative] have performed agreed-upon procedures regarding the cost declared in the Financial Statement(s) of [name of beneficiary] …. This engagement involved performing certain specified procedures, the results of which the FCH JU uses to draw conclusions as to the eligibility of the costs claimed.

Scope of Work

Our engagement was carried out in accordance with the terms of reference appended to this Report….International Standard on Related Services (‘ISRS’) …t

Because the procedures performed by us did not constitute … an audit …, we do not express any assurance on the Financial Statements…

Sources of Information

The Report sets out information provided to us by the management of the Beneficiary…

Factual Findings

The above mentioned Financial Statement(s) per Activity was (were) examined and all procedures specified in the appended table for our engagement were carried out. On the basis of the results of these procedures, we found:

All documentation and accounting information to enable us to carry out these procedures…. Except as indicated below, no exceptions were noted.

Exceptions

• In some cases, the Auditor was not able to successfully complete the procedures specified. These exceptions are as follo ws:

Use of this Report

….This Report is prepared solely for the confidential use of the Beneficiary and the FCH JU

<dd Month yyyy>,<Signature of the Auditor

3. CFS (table with procedures)

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Procedures Standard factual finding and basis for exception reporting Personnel Costs

1. Recalculate hourly personnel and overhead rates for personnel (full coverage if less than 20 employees, otherwise a sample of minimum 20, or 20% of employees, whichever is the greater), indicate the number of productive hours used and hourly rates. Where sampling is used, selection should be random with a view to producing a representative sample. 'Productive hours' represent the (average) number of hours made available by the employee in a year after the deduction of holiday, sick leave and other entitlements. The auditor obtained the calculation of the productive hours after inspecting all necessary records, national legislation, labour agreements, contracts, any other relevant documentation. The calculation should be based on the period(s) corresponding to the Financial Statement(s) or on the last closed financial year (whichever is used by the beneficiary).

The auditor sampled _________ employees out of the total of _________ employees. For each employee in the sample of ___, the Auditor obtained the personnel costs (salary and employer's costs) from the payroll system together with the productive hours from the time records of each employee. For each employee selected, the Auditor recomputed the hourly rate by dividing the actual personnel costs by the actual productive hours, which was then compared to the hourly rate charged by the Beneficiary. No exceptions were noted. The average number of productive hours for the employees selected was _____________. The productive hours calculation corresponds to the usual accounting practice of the beneficiary.

If the productive hours or costs of personnel cannot be identified, they should be listed (together with the amounts) as exceptions in the main report.

If the productive hours calculation does not correspond to the usual accounting practice of the beneficiary, this should be listed as an exception in the main report.

2. For the same selection examine and describe time recording of employees (paper/computer, daily/weekly/monthly, signed, authorised).

Employees record their time on a daily/weekly/monthly basis using a paper/computer-based system. The time-records selected were authorised by the project manager or other superior.

If no time records are available which fit the above description, this should be listed as an exception in the main report.

3. Employment status and employment conditions of personnel. The Auditor should obtain the employment contracts of the employees selected and compare with the standard employment contract used by the Beneficiary. Differences which are not foreseen by the Grant Agreement should be noted as exceptions.

For the employees selected, the Auditor inspected their employment contracts and found that they were: – directly hired by the Beneficiary in accordance with its national legislation, – under the sole technical supervision and responsibility of the latter, and – remunerated in accordance with the normal practices of the Beneficiary.

Personnel who do not meet all three conditions should be listed (together with the amounts) as exceptions in the main report.

• Model:Model: Model audit report agreed with the 3 external audit firmsModel audit report agreed with the 3 external audit firms• Content:Content:

Auditor’s opinion Auditor’s opinion (*)(*) Summary of audit adjustmentsSummary of audit adjustments Analysis per cost category: Analysis per cost category:

Work performedWork performed Audit findings Audit findings

Systematic errors Systematic errors for ‘extrapolation’ for ‘extrapolation’ Other informationOther information (e.g. internal controls, differences with CFS ) (e.g. internal controls, differences with CFS )

• The Auditor’s opinionThe Auditor’s opinion (*)(*): : ScopeScope: Audit : Audit ‘In our opinion, except for…, the audited financial statements (i.e. Form C) are ‘In our opinion, except for…, the audited financial statements (i.e. Form C) are

prepared , in all material aspects, in accordance with the grant agreement…’prepared , in all material aspects, in accordance with the grant agreement…’ ResultsResults: :

How? How? Opinion + Summary of audit adjustmentsOpinion + Summary of audit adjustments Impact: Impact: FCH JU endorses audit results & recover undue amounts (if any)FCH JU endorses audit results & recover undue amounts (if any)

3. Financial audit (ex-post)

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3. Financial Audit (Independent report)

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INDEPENDENT AUDITOR’S REPORT

…We have audited the accompanying financial statements (‘Form C’) Responsibility of the Beneficiary for the Financial Statements The Beneficiary is responsible for the preparation and presentation of the financial statements in accordance with the Grant Agreement(s) ... Auditor’s Responsibility Our responsibility is to express an independent opinion on the financial statements based on our audit. Our audit…comprised assessing whether the amounts of the eligible costs declared in the financial statements comply with the following cumulative conditions: They are actual….. (all conditions of article II.14) [Basis for Qualified Opinion] (if material adjustments) During our audit we noted adjustments of EUR …. (in favour of the FCH JU/Beneficiary) for project x. These are set out in the Summary of Audit Adjustments presented in section 2.1.]… [Qualified] Opinion In our opinion, [except for the (possible) effects of the matter(s) as described in the ‘Basis for Qualified Opinion’ section] …. the audited financial statements, are prepared, in all material respects, in accordance with the grant agreement(s) (i.e. properly reflect eligible costs, receipts (if any) and interest (if applicable) as well as apply the proper funding rates). [Signature] [Name Auditor]

The ProcessesThe Processes

4.a Ex-ante review process4.a Ex-ante review process4.b Ex-post audit process4.b Ex-post audit process

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4.a. The ex-ante review process

• Actors BeneficiariesCoordinator FCH JU (Project Manager & Financial Officer)

• Contact pointsConsortium: coordinatorFCH JU: Project Manager

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4.a.The ex-ante review process

Key steps (deadlines):

1. Coordinator submits periodic report to FCH JU (within 60 days of end reporting period) Technical report (via ‘SESAM’) Financial report (via ‘FORCE’ + paper original signed, if applicable (*))

CFS (compliant with Form D), if applicable

2. FCH JU completeness check

3. FCH JU sends ‘Acknowledgment of receipt - AoR’ letter to coordinator (if incomplete, suspension of time limit)

4. FCH JU analysis of report

5. FCH JU requests for clarifications, if any (suspension of time limit)

6. Coordinator submits requested clarifications Respect deadline Clarity/completeness of replies

7. FCH JU analysis of submitted clarifications

8. FCH JU approval of report & payment via coordinator (within 105 days (if periodic report due until

31/12/2012) or 90 days (if periodic report due from 1/1/2013) of ‘AoR’ letter (minus suspension period))

(*) GAs of Calls 2008 to 2011 unless amended for electronic submission. 1515

4.b. The ex-post audit process

• Actors Beneficiary Audit Firm

Audit coordinator: PwC (NL), KPMG (DE), Littlejohn(UK) Local audit firm

FCH JU: Ex-post audit team Head of Finance/ Financial Officer/ Audit Manager

• Contact points Beneficiary: contact person (to be) appointed Audit Firm: audit coordinator is the single contact point with FCH JU FCH JU: Project Manager

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4.b.The ex-post audit process

Key steps:

1. FCH JU sends Announcement Letter (A/L) to beneficiary2. Beneficiary appoints a contact person and communicate to audit firm3. Audit firm contacts beneficiary to agree on date fieldwork & documents

Start of audit fieldwork (normally 20 days after AL) Timely preparation of clear documents is key for an efficient audit

4. Execution of audit fieldwork5. Exit meeting ‘beneficiary – auditor’ to discuss audit findings6. Reporting

Draft audit report Beneficiary’s comments on Draft Report (14 days) Pre-final (benef. comments if different adjustments) & Final audit report

7. FCH JU sends ‘Letter of conclusion’ to beneficiary FCH JU endorses final audit report (i.e. adjustments on costs declared) FCH JU implements audit results:

Impact on FCH JU contribution Liquidated damages (art. II. 24) (Example!) & financial penalties (art II.25) Extrapolation (if systematic errors)

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Example of Liquidated Damages (LD)

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Formula: (art. II.24 Grant agreement) overstated amount LD = unjustified FCH JU contribution X --------------------------------------------------

total FCH JU contribution claimed When? (FCH JU decision to limit the impact of LD) - If unjustified contribution > 2% of total contribution claimed - Ceiling of EUR 10.000

Example: Eligible costs declared by a beneficiary: EUR 1,000,000 as direct costs (for an RTD project funded at a 40% ratio) EUR 200,000 as indirect costs (flat rate 20%) FCH JU contribution claimed for that period = EUR 600,000 Direct cost: EUR 1,000,000 x 40% = EUR 400,000 Indirect costs: EUR 1,000,000 x 20% = EUR 200,000 Audit results: Overstated direct costs = EUR 200,000 Overstated indirect costs = EUR 40,000 Total overstated amount = EUR 240.000 Unjustified financial contribution from the FCH JU EUR 120,000 (EUR 80,000 + EUR 40,000) (> 2% total contrib. claimed LD apply) Liquidated damages the FCH JU shall claim is: EUR 120,000 X (EUR 240,000 / EUR 600,000) = EUR 48,000

ceiling aplies LD = EUR 10.000

4.b. The ex-post audit process

Extrapolation (i.e. extension of audit findings): •What? Only errors of ‘systematic’ nature•Why?

Non-audited cost claims may suffer from similar errors that need to be corrected But beneficiary can justify why other cost claims are NOT affected by the systematic error

To reduce administrative burden on beneficiary & JU linked with a new audit.•How? Beneficiary’s calculation based on 1 of the 3 methods:

Method 1: precise recalculation of the costs affected by the systematic error in each of the non-audited cost claims ( + supporting documentation)

Method 2: adjustment of the individual cost category affected by the systematic error by the application of a flat rate proposed by the FCH JU. Example:

Method 3: application of an overall flat rate correction to the total costs proposed by the FCH JU. Example:

Method 2: not applicable if positive and negative systematic errors per cost categoryMethods 2 and 3: other flat rates to those proposed by the JU are also possible new audit paid by beneficiary 1919

Method 2 Cost Claimed

Adj. Against Costs claimed

Systematic part of the adjustment against

costs claimed Flat rate

Personnel costs 10.000 - 2.000 - 1.000 -10%

Subcontracting costs 0,00 0,00

Other direct costs 5.000 -1.000 - 250 -5%

Indirect costs 3.000 -600 - 600 -20%

Receipts 0,00 0,00

Method 3 Cost Claimed Adj. Against Costs

claimed

Systematic part of the adjustment against

costs claimed Flat rate

Grand Total 18.000 - 3.600 -1.850 -10.3%

Receipts 0,00 0,00 0,00

4.b. The ex-post audit process

Extrapolation (i.e. extension of audit findings):

•Actors FCH JU: proposes flat rates Beneficiary: recalculates (Method 1) or confirms flat rates (Methods 2 or 3) Audit firm: ‘desk review’ of beneficiary’s calculation

•Information to be provided by the beneficiary and timing: Projects not concerned by extrapolation (if applicable) Method 1 (recalculations + supporting docs) / If methods 2 or 3 (confirm flat rates) The adjusting Form C (through FORCE and by post mail) When? Within 30 calendar days of the date of the ‘Letter of Conclusion’

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4.b. The ex-post audit process

Some ‘tips’ for a successful ex-post audit

•Fieldwork: Agree with the auditors the dates of fieldwork ASAP•Documents to be provided to auditors:

• Request the list of docs. ASAP and agree the deadline to send them• Clarify with auditors, in case of doubts• Respect deadline for submission of docs.

•Exit meeting: • Discuss findings with auditors at the end of Fieldwork & before preparation of

draft report. • Clarify your position in case of disagreement • Agree on the systematic nature of the errors (impact on ‘extrapolation’)

•Reporting (contradictory procedure)• Provide comments to Draft report on time• In case of disagreement, provide solid arguments and documentation

•Letter of Conclusion:• Respect the 30 days deadline for any comment or additional documentation in

case of extrapolation. •If extrapolation:

• Justify properly in case other cost claims are not affected• If Method 1: provide adequate supporting documents

•Lessons learnt: Ensure that errors identified in the ex-post audit are not present in future cost claims.

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