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Territorial Cooperation Objective: Financial Management Handbook
Territorial Cooperation Objective: Financial Management Handbook
(
was
Article
10
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Project checks
Audit
Authority
(MA country)
Commission
Group
of
Auditors
Project checks
Annual control
report
(
was
Article
13)
INPUT
National auditor
Compiled
project
audit report
(
was
Article
10
report
)
Project checks
Audit
Authority
(MA country)
Commission
Group
of
Auditors
Project checks
Annual audit
report
(
was
Article
13)
INPUT
In regulatory terms, the Audit Authority must be a national, regional or local public authority or
body, functionally independent of MA and CA, designated by the MS of each OP. The Audit
Authority will:
Ensure that audits are carried out to verify the effective functioning of the management
and control system of the operational programme; (= systems audit)
Ensure that audits are carried out on operations on the basis of an appropriate sample to
verify expenditure declared; (= check of an appropriate, representative sample
of programme expenditure)
Present to the Commission within nine months of the approval of the OP an audit strategy
covering the bodies which will perform the audits (as in point 1 and 2), the method to be
used, the sampling method for audits on operations and the indicative planning of audits
to ensure that the main bodies are audited and that audits are spread evenly throughout
the programming period;
By 31 December each year form 2008 to 2015:
Submit to the Commission an annual control report setting out the findings of the
audits carried out during the previous 12 month period ending on 30 June for the year
concerned in accordance with the audit strategy of the operational programme and
reporting any shortcomings found in the systems for the management and control of
the programme. The first report to be submitted by 31 December 2008 shall cover the
period form 1 January 2007 to 30 June 2008 (= annual audit report)
Financial Management Handbook
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Issue an opinion, on the basis of the controls and audits that have been carried out
under the responsibility of the Audit Authority, as to whether the management and
control system functions effectively, so as to provide a reasonable assurance that
statements of expenditure presented to the Commission are correct and as a
consequence reasonable assurance that the underlying transactions are legal and
regular (= annual audit report)
Submit any declaration for partial closure assessing the legality and regularity of the
expenditure concerned
Submit to the Commission at the latest by 31 March 2017 a closure declaration
assessing the validity of the application for payment of the final balance and the
legality and regularity of the underlying transactions covered by the final statement of
expenditure which shall be supported by a final control report. (= winding up
declaration)
The Audit Authority shall ensure that the audit work takes account of international
accepted audit standards;
Where the audits and controls are carried out by a body other than the Audit Authority,
the Audit Authority shall ensure that such bodies have the necessary functional
independence;
37
The programme systems audit ensures that programme bodies, procedures and documents
have been set up and function in line with the principles described earlier in this handbook.
Very importantly it will also check the day-to-day working of programme systems - particularly
in relation to the link between programme management and projects. Some of the project
checks will then follow-up on the project side of these procedures to combine the results of
the systems of audit and the audit of projects and gain an overall picture of the programme
38
.
We focus here on the audit of projects. These audits must cover a minimum of 5% of the total
programme expenditure. The projects to be included in the checks are selected on the basis
of two sampling techniques carried out in line with various International Standards on
Auditing (ISA) and with different purposes. The main technique used is representative
random statistical sampling. As the name suggests, the aim is to find a random sample of
projects which can be assumed to be a fair representation of the programme as a whole: If
there are few problems in these projects it can be reasonably assumed that there are few
problems in the rest of the programme. The only weighting here is that projects receiving the
largest grants should be more likely to be selected (though some small projects must also be
included).
In addition, a complementary sample is selected. This aims firstly to ensure the completeness
of the checks by guaranteeing coverage of:
An adequate mix of different types and sizes of operations
All the priorities under the operational programme
Operations managed by the main Authorities and intermediate bodies
Operations concentrated under certain beneficiaries
The second aim is to allow the use of risk analysis results to target the projects that are most
likely to have problems. The intention here is clearly to identify and correct irregularities by
going after the weakest projects rather than those that fairly represent the programme as a
whole. As a result, the results of audits on these projects are treated separately and are not
used when calculating the overall irregularity rate for the programme.
The methods used for selecting different samples, the projects selected and a plan for
carrying out the actual audits are combined in a regularly updated audit strategy.
37
Based on General Regulation (1083/2006), 62
38
The information here draws heavily on the Implementing Regulation, 16-18 and the relevant
annexes (especially Annex V, VI, VII, VIII, XII)
Financial Management Handbook
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The purpose of second level control checks
is to gain an overall picture of the programme and how many errors there normally are in
the expenditure declared. Second level control should not just target the highest risk
projects, as this will create a distorted picture of the programme with a higher rate of
irregularities than is true for the whole programme. In the new period, high-risk projects are
targeted separately and the same principle needs to be applied in the control of the current
programmes.
Second Level Control work should start as soon as the programme has been approved. The
initial systems audit is carried out as part of the procedure to gain Commission approval for
the programmes systems and procedures. It should be completed in the early months of the
programme as its purpose is to confirm that sound management practices are in place: It is
pointless to suggest major changes later in the programme when most of the damage will
already have been done and needless effort will be required to correct errors.
The check of projects should also start as soon as possible though it is possible to wait and
audit a sample of the combined expenditure from 2007 and the first part of 2008, as few
programmes will have much project spending in 2007. Most auditors prefer not to consider
projects that have spent less than 50% of their budgets. There are two reasons. Firstly, the
auditors need a reasonable amount of spending to check if their conclusions are to be of
value. Secondly, they need to check an appropriate sample of the total programme spending
and are obviously able to reach this target quicker if they are able to check a project when it
has spent 1 million rather than 500.000. In some cases this means that auditors prefer to
check completed projects but this needs to be balanced against the difficulty of taking
corrective action: There is not much that a project can do after it has submitted its final report
and claim. Ideally therefore, second level control should be carried out on ongoing projects
and it is requirement of the regulations that these audits are spread evenly across the
programmes lifetime.
Audit visits are coordinated to take place simultaneously, with each auditor visiting the project
offices of a partner in their own Member State so different parts of the project partnership are
checked (only the expenditure of the partners checked counts towards achieving an
appropriate sample required by the regulation). These results are then merged into a report
on each project including an overall opinion and any follow-up actions that need to be taken.
Every year the Audit Authority also submits to the Commission an annual audit report
summarising the work that it has carried out and its opinion of the way that the programme is
functioning. If a large number of problems have been detected, this can lead to a suspension
of payments to the programme until the problems are resolved.
Financial Management Handbook
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Likely division of tasks between the Audit Authority and the Group of Auditors
AA (= Audit Authority)
AA + GoA (=Group of Auditors)
Compliance assessment opinion on the Art
71 Description of management and control
systems
Members of the Group of Auditors may be
involved in compliance assessment of
management bodies outside the MA host
country
Audit strategy
Audit strategy
Audit methodology
Audit methodology and selection of an
appropriate sample
Systems audit
Audits of operations
Compiling integrated project audit reports
Partial (national) reports
Integrated annual control reports to
Commission
Annual opinion on the management and
control systems
AA is a coordinating body for the MSs,
contact point with the Commission and
usually auditor in the MA Member State
The costs for this audit work can be met in full or in part from the TA budget. However, it is
recommended by the Commission that the costs of second level control should be borne by
the MS as the establishment of control and audit systems are MS responsibilities. This should
be agreed in advance between Member States. The AA may also draw on the assistance of
the JTS though this relationship needs to be carefully defined and is normally limited to
administrative support because the JTS is a key part of the programme and project system
that is being audited.
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Audit Authority and Group of Auditors basic procedures
JTS
Commission
Member
States
Audit
Authority
Group of
Auditors
Meeting arrangement
and papers
Project
documentation
Administrative
reports
Feedback /
follow-up
Instructions
Audit reports and
recommendations
Quarterly
irregularity
report
Annual audit
report
SOME BASIC PROCEDURES
JTS
Commission
Member
States
Audit
Authority
Group of
Auditors
Meeting arrangement
and papers
Project
documentation
Administrative
reports
Feedback /
follow-up
Instructions
Audit reports and
recommendations
Quarterly
irregularity
report
Annual audit
report
SOME BASIC PROCEDURES
7.2.1 Content of audits and common problems detected
As noted, second level control is fundamentally a check of the work carried out during first
level control and as such the things that are checked are very similar. One major difference
already mentioned is that first level control only considers the expenditure in the claim that is
being certified. Second level control addresses the whole of the project. In technical terms,
audit of an appropriate sample of the programme expenditure can include actions to:
Verify practical application and effectiveness of project management and control systems
Prevent and take actions against irregularities
Recover any amount lost as a result of an irregularity or negligence
Verify selectively declarations on expenditure made at the various levels concerned
Verify the correctness of accounting records held by the final beneficiaries and the firms
carrying out the projects and in particular that:
o Programme records correspond with supporting documents held by the
project
o The nature and timing of the relevant expenditure comply with Community
provisions and correspond to the approved specifications and the work
actually executed
o Services and actions funded under the Structural Funds are procured on the
basis of a proper call for tenders according to public procurement rules, if
applicable, and are fully evaluated before a final decision is made on the
supplier of the service
o Project LP/PP complied with the Community rules on publicity, information,
equality and the environment and any other relevant Community law
Verify the presence of a suitable audit trial and that:
o
o The first level controller is qualified and familiar with relevant regulations and
has experience with auditing EU-funded projects
o The first level controller signs a confirmation of project first level control
Verify that the appropriate national co-financing has in fact been made available
Facilitate the identification of possible weaknesses or risks in the execution of actions and
operations
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Provide for corrective measures to be taken to eliminate weaknesses or risks in the
execution,
in particular as regards financial management
We could summarise this by saying that the audit again checks whether there is proof that
costs have been incurred only for relevant activities, whether the expenditure is eligible (note
the specific mention of public procurement) and whether project systems and procedures
provide reasonable assurance that this is the case for all of the partners expenditure. Where
problems are detected, auditors are also specifically responsible for making corrections and
ensuring that any money owing to the programme as a result is paid back.
As such, projects that are part of the second control audits should not expect anything
fundamentally different from other controls: It is a check of the same evidence that should be
available before any expenditure is claimed. The amount of deliberate fraud detected in
audits is low. Most problems arise because of confusion about programme requirements and
poor first level control. This is particularly true when first level controllers do not ask to see
supporting documents in the audit trail: Project managers sometimes assume this means
they are not needed or take a gamble and hope they will not be included in the second level
control sample. This can be an expensive mistake.
The list of common problems included below is based on the findings reported by one
Member State but seems fairly representative:
Requirements of regulations (particularly the eligibility rules) were unknown
Public procurement rules were unknown
Documentation was not available to demonstrate a clear link between work actually
executed and the declared expenditure (i.e. parts of the audit trail were missing)
The EU sign was missing on all publications and the relevant papers had already been
distributed (i.e. EU communication and publicity rules were broken)
No documents and evidence for the co-financing were available
The project partner had changed address without informing the programme
The project title was missing from some invoices
Financial departments are decentralised and the book-keeping system could not be
checked
Payments were without invoices, only bank account statements
The project partner did not submit all original invoices. Original invoices for travelling
costs were not available
Invoices from one sub-partner were paid after payments were received from the EU
Personnel costs included overheads without a comprehensible calculation
One invoice was included twice
Exchange rate - invoices contained two different exchange rates
The financial report was not signed by the first level controller
If you have read the other sections of the handbook, most of these problems will come as no
surprise they are exactly the same issues that turn up again and again at every level of
checking. Avoiding problems in programme audits is therefore a matter of sticking to a few
simple rules but these findings suggest that programmes still have more to do on
communicating these rules and projects have more to do on making sure they are respected.
7.3 Financial Corrections and Recovery
One last important point needs to be made about second level control. As it concerns the
audit of funds that have already been paid out by the programme, any errors detected may
result in the project having to pay back money. The errors are termed irregularities. The
process of getting the money back is called recovery
39
.
39
Based largely on the Implementing Regulation which in turn closely follows EC Regulation
2035/2005 amending Regulation (EC) No 1681/1994 concerning irregularities and the recovery of
sums wrongly paid in connection with the financing of the structural policies and the organisation of an
information system in this field.
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Any irregularities detected must be demonstrated to have been resolved before the project
(or indeed the programme) can close. The Certifying Authority is responsible for launching
the recovery procedure and initially recovers the funds directly from the Lead Partner. The
Lead Partner then initiates a recovery of the funds from the project partner concerned.
Problems are relatively rare but can occur that the project partner involved will not or cannot
return the funds concerned (in cases of bankruptcy for example). In these cases the Member
State where the non-paying partner is located will pay the funds to the Certifying Authority,
which will then repay the Lead Partner
40
. This is another reason that a Lead Partner needs a
certain level of financial resources in order to be able to take on the role.
Beyond this programme level treatment of irregularities, however, there are also additional
procedures between the Member States and the Commission. Two months after the end of
every quarter, every MS must send the Commission a report with details of all irregularities
concerning amounts over 10.000 detected on its territory and a description of the follow-up
action taken on previously reported irregularities (information generally provided by the
second level controllers). If there have been no irregularities over 10.000, the report must
state this and still needs to be sent. These reports ensure that action is taken and that there
are continual deadlines at each step of the procedure.
As has been discussed previously, the official definition of irregularities is extremely broad
and covers not just funds incorrectly paid but also actions that could have led to funds being
paid out incorrectly. For this reason the Implementing Regulation introduces some
qualifications to the concept and what needs to be reported to the Commission. The following
are not reported:
cases where the irregularity consists solely of the failure to partially or totally execute an
operation included in the co-financed operational programme owing to the bankruptcy of
the beneficiary;
cases brought to the attention of the Managing or Certifying Authority by the beneficiary
voluntarily and before detection by either of them, whether before or after the payment of
the public contribution;
cases detected and corrected by the Managing or Certifying Authority before any
payment to the beneficiary of the public contribution and before inclusion of the
expenditure concerned in a statement of expenditure submitted to the Commission and
which do not involve suspected fraud.
However, irregularities preceding a bankruptcy and cases of suspected fraud must be
reported.
41
In these cases (which cover the majority of irregularities detected in cooperation
programmes) the programme has the power to resolve the issue independently though the
amounts concerned will still need to be recovered and reported on by the Certifying Authority.
One final improvement in the new system should also be mentioned. In the past some
Member States have refused to accept second level control findings because they create the
need for a recovery from partners on their territory. The new regulation therefore contains a
trigger point for defining when a problem should be treated as an irregularity or possible
irregularity the primary administrative or judicial finding which:
means a first written assessment by a competent authority, either administrative or judicial,
concluding on the basis of specific facts that an irregularity has been committed, without
prejudice to the possibility that this conclusion may subsequently have to be revised or
withdrawn as a result of developments in the course of the administrative or judicial
procedure.
42
The reports of the national auditors will constitute such findings and once the written
assessment has been provided, all Member States are obliged to include all the operations
40
ERDF Regulation (EC) 1080/2006, 17
41
Implementing Regulation, 28.2
42
Implementing Regulation, 27 (b)
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covered in these findings in their quarterly irregularity reports to the Commission. In future it
will therefore be impossible to avoid taking action on control findings.
Comparison: Control in the current and new period
2000 2006
2007 2013
First Level Control
Not all MSs designate FLC bodies
FLC sometimes carried out at LP level only
MS designate FLC bodies for each OP
FLC carried out at all partners level
No deadline for certifying expenditure MS must ensure a 3 month deadline for
certifying expenditure is respected
Second Level Control
Second Level Control Group is not formalised
and sometimes not established until late in the
programme
SLC is carried out by Audit Authority, formal
programme body
Audit Authority is based in the same MS as MA
Audit Authority is assisted by group of auditors
from MS in the OP
Group of Auditors is established within 3 months
after OP approval
Audit Authority presents to the Commission the
audit strategy within nine months of the OP
approval
Audit Authority approves OP description of
systems and procedures
Recovery of funds unduly paid
LP ultimately responsible for the unduly paid
amount
LP repays the irregularly paid amount to CA
LP initiates a recovery process and recovers the
amount from a Project Partner responsible
MS of the project partner responsible for
irregularity is ultimately responsible for unduly
paid amount
Eligibility
-National rules
-(EC) General Reg. 1260/1999
-Implementing Reg. 448/2004 covering 12
Eligibility Rues
-National rules published by MS within 12
months of OP approval
-General Reg. (EC) 1083/2006
-ERDF Reg. (EC) 1080/2006
-Implementing Reg. 1828/2006
More transparent rules
A step towards harmonisation
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8. Project and programme closure
The closure of the new programmes (2007-2013) is a long time in the future while the current
programmes will be closing over the next few years. This section therefore focuses on the
current period and uses the corresponding terminology.
Project and programme closure: Summary
The main aim in this phase is to properly account for the resources used to meet
programme objectives
Quick problem-free project closure depends on the effectiveness of the project
management that has been in place for the duration of the operational phase of the
project.
It also depends on the efficient working of the Member States or regions with the
financial controllers for the programme and the PA
Programmes should try to avoid delays in making final payments to projects particularly
those with very small budgets and cash flows
Programmes could use the opportunity given in final reporting from projects to seek
feedback on the future operation of financial activities at the programme level.
Programme closure documents must be submitted to the Commission no later than 15
months after final programme eligibility date (31 December 2008), i.e. 31 of March
2010.
It is possible for programmes which will continue in 2007 2013 to finance programme
closure related activities of the old programme with the new TA budget
8.1 Project closure
Project closure: Summary
Focus on the end goals, results and impacts
No questions can be left open
It is the last chance to identify and deal smoothly with irregularities
It is a final confirmation of the findings of all first level control checks
After closure projects are still subject to second level control or checks by Commission
auditors
Project closure is the final phase in the project implementation process and if implementation
has been successful, it should be relatively problem-free. The focus at project closure is on
the end-goals, results and impacts achieved in comparison to the activities proposed in the
application and changes approved by the programme. Attention therefore needs to be paid to
indicators and the completion of all work packages. If these have been successfully
completed within budget the project can close once it has completed the final financial
control.
Programmes need to be confident to answer a number of fundamental questions:
Has the project delivered the activities outlined in the application?
Is there sufficient evidence to support this?
Has first level control been good enough to ensure that no serious problems
should be experienced if the project is later controlled by another body?
Have all questions and problems identified by first level control been satisfactorily
resolved?
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While projects are in the main implementation phase, programmes can afford to be flexible:
Deductions can always be made from later payments and it is not yet possible to provide a
final assessment of activities. Project closure means, however, that no more questions can
be left open. This is the main challenge of project closure: It represents the last chance to
identify and deal with irregularities relatively easily.
The extent of programme concerns will be determined by the systems in place for normal
project control. If a centralised first level control system is in place, there should be few
doubts about the eligibility of expenditure but there may be concerns about the need for
verifying the reality and quality of the outputs delivered (on-the-spot checks are rare in
centralised systems). If a decentralised model is being used, there may be doubts about the
quality of the first level control work carried out and whether controllers have sufficient
knowledge of INTERREG requirements. The special procedures for processing final reports
and claims for expenditure need to be designed to compensate for whatever weaknesses the
general system may be felt to have.
Another tool that programmes make use of is to withhold payment of a portion of the project
budget (typically 5%) until all project closure procedures have been completed (though this is
not a regulatory requirement). This means that even at this stage most irregularities can be
resolved by simply deducting the amount concerned from the payment to the project. Some
programmes go further and retain up to 20% in order to ensure that they are withholding
sufficient funds to deal with this type of problem.
Programmes that only retain 5% should also decide whether this should be 5% of the total
project budget or 5% of the total funds claimed: The average under-spend for projects in
INTERREG programmes seems to be about 5% so if programmes are working on the total
approved budget, they will actually have little room for manoeuvre. If programmes instead
work on 5% of the claimed budget, they will have to monitor projects closely when they are
nearing closure to be sure that none of this final 5% is actually paid out. In addition to
providing insurance against irregularities, the 5% retention also gives programmes leverage
to ensure that projects submit final reports in good time. After the 5% has been paid out,
errors can only be corrected by initiating a recovery procedure and programmes prefer
understandably to avoid this if at all possible.
Project closure should be a final confirmation of the findings of other first level control checks
and there is no real difference in procedure as far as financial checks are concerned (other
than the need to use an external controller if this has not been done before). Activity checks
are generally stricter in order to ensure that the project has delivered all outputs and that
there is a reasonable probability that expected results and impacts will be achieved.
One other important issue is to make sure that projects understand the meaning of closure. It
is a closure of the programmes grant to the project but does not represent the end of
programme requirements towards the project. Even though the programme has accepted the
final report and made the final payment, the project is still subject to second level control and
checks by Commission auditors and the Court of Auditors. All project records and
documentation therefore need to be retained and stored until three years after the formal
closure of the programme (in theory this could mean until 2013). The same applies, of
course, on the programme level and a key weakness on both levels is that key staff who
could explain project actions have usually left the organisation long before later control visits
take place. Project and programme records (the audit trail) should therefore be good enough
to allow new staff to provide these explanations.
8.2 Steps to project closure
Accumulation of project records. The initial step in closing an INTERREG project is the
accumulation of all official project records. These records include all accounts, papers,
photographs or other documentary materials made or received by the project partnership
in connection with the implementation of this project. These records should be kept by the
project partnership.
Preparation of project final reports. In order to receive the final payment, projects need
to submit final reports. There are no standard rules about deadlines and documentation
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131
required to accompany final reports. In some programmes, the final report must be
submitted by the end date for the project. In others the end date is used as the time for
stopping implementation and the final report does not need to be submitted until three
months after this (the actual close date). No activities are eligible after the project close
date.
Only one exception is sometimes made in programmes that also regard the end date as
the close date. In these programmes it is sometimes possible to claim costs for activities
related to the development of the final report after the end date (e.g. staff costs, printing
and the final project audit) if these services have been contracted on a fixed cost basis
before project end. They may then be included in the final statement of project
expenditure even though they have not yet been formally incurred (the only time this is
possible).
Content of final reports. The required documentation differs across programmes though
in general, programmes tend to ask their projects for a lot of information in the final
reports. Programmes prefer to get more rather than less information to be sure they have
what they need in future.
A final report is divided into the activity and financial sections. The activity section
sometimes includes the last periodic report covering the activities carried out in the final
months of the project. Sometimes, however, the last standard report is kept separate and
the final report focuses on lasting impacts of the project activities as a whole. In general,
the activity report needs to include:
Executive summary. The executive summary is also a good source of information for the
programme database.
Results obtained referring to the targets for these in the approved application. Overall
project evaluation and project impact indicators
How the project results will be disseminated and activities followed up
Partnership evaluation. Programmes may use the project closure phase as an opportunity
to ask Lead Partners for the overall evaluation of the partnership, how it worked, what
kind of problems were experienced and what solutions were proposed. Programmes
should also ask projects to assess programme performance.
The finance section of the final report includes:
Completion of first level control - The final financial report must include audited
statements from all project partners and an audited statement for the whole partnership.
The final first level control refers not just to individual items of expenditure but to the
overall use of the funds granted in obtaining project goals. The controller here certifies all
expenditure for the whole project thereby declaring that all claimed expenditure is correct.
Controllers should also describe the first level controls carried out for each partner with
their findings and conclusions, sum up the extent to which the project has been carried
out in accordance with the approved application, subsidy contract and any other
conditions. The controller must also confirm that all control issues have been satisfactorily
resolved. Drawing up this report may also require that a new controller is used. Where
internal controllers have been allowed for interim claims in the current period, an
independent external controller must be used for the final report.
Assessment of the Final Report. At project closure, programmes assess final reports
against the project applications with approved changes. At this stage they may discover
that the project has not implemented all activities in the application or that it has carried
out activities not included in the application. Strictly speaking there should be a cut in the
ERDF grant in both cases as changes have been made but never discussed and agreed
with the programme and in many cases this is exactly what will happen. In some cases
programmes take a more lenient approach and try to analyse the activities performed and
paid for by projects even if they have not been approved before. If the activity is assessed
as having added value to the project and the amount in question is not significant, most
programmes approve it as an eligible cost. If the activity adds value to the project but the
amount is significant, the issue is discussed with the SC. If there is no added value (such
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132
as using extra funds to purchase new computer equipment) the amount should be
declared ineligible. The total paid to the project can never exceed the initial grant.
8.3 Programme closure
Once projects have been satisfactorily closed, the programme itself can move towards formal
closure. This is the subject of an upcoming handbook from INTERACT Point Toolbox and we
cover only the main points here. The programme closure procedure represents a declaration
to the Commission that all spending declared has been confirmed correct, that all
irregularities have been satisfactorily resolved and that it is safe for the Commission to make
the final payment (i.e. that it is reasonable to assume there will be no need to later recover
part of these funds). It can be a difficult time for programmes as it requires that all project
issues have been resolved and there are normally a few problematic projects whose closure
is delayed.
A recent and considerable extension to the deadline for submitting closure documents to the
Commission (the new deadline is 31 March 2010 15 months after programme end
43
) should
ease some of the closure pressure. It will be important, however, that programmes do not
become too relaxed about closure and still try to do as much as possible as soon as possible:
If the process takes too long key stakeholders will lose interest or move on and deadlines will
slip. Furthermore in principle, there is no funding available for closure activities after 31
December 2008 and this tends to mean that they are given a low priority after this date.
However programmes, which will continue to operate in the new period 2007 2013, may
use part of their new TA budget to cover costs strictly related to the closure of the current
programme. These include e.g. printing of the final report, staff costs etc. Nevertheless, the
advice must be to only make use of the extra time and new TA funds if absolutely required
and otherwise close quickly so final payments can be made to projects.
Three documents are required for programme closure: An audited statement of accounts
and application for the final payment, a final report and a declaration on winding-up
the assistance, which gives an audit opinion on the programme. We focus here on
producing the winding up declaration - or third level control as it is sometimes known.
The last 5% of programme funds is retained until after these documents have been submitted
to the Commission and the Commissions auditors have assessed them as satisfactory. The
5% is calculated on the basis of total programme funds rather than funds claimed. If the
programme has lost money to de-commitment, this will be deducted from the programme
budget before calculating the 5%. This means of course that the last 5% of project payments
will also have to be delayed until the last funds are received from the Commission (project
final claims are generally paid on a first come first served basis until there are no funds left in
the programme account). If there is any problem with the closure statement this part of the
process can take a long time and some projects may be waiting for final payments for several
years. It is imperative that programme closure is completed as swiftly as possible and in a
way which enables quick Commission approval. The key actions which can be taken to assist
this are to have accurate financial management and control systems and records during the
lifetime of the programme.
43
General Regulation (1083/2006), 105.3. It is important to note that this part of the new regulation
applies to the current period 2000-2006.
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Figure: Project closing phase
P R O J E C T C L O S I N G P H A S E
Stage 1
Accumulation
of project
records
Stage 2 Stage 3
Stage 2
Preparation of Final report
Report on activities
Report of finances
Stage 3
Submission of
the Final Report
Stage 1
Potential problems encountered-
Unresolved FLC problems
- Unresolved SLC problems
How to facilitate Stage 2?
- Start early so there is enough time
to resolve control problems
- Use retention of final project
payment to encourage early delivery
of project materials
Potential problems encountered -
Missing documents =
incomplete audit trail
Eligibility after closure:
- Staff costs
- Audit of the final report
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1 January 2009
31 March 2010
2008
TA expenditure still eligible.
Advisable to get as much work as
possible done in this period.
Urgent need to close projects in
time to get final audited
statements of expenditure.
Provisional statement of total eligible
expenditure as soon as possible.
Completion of second level control work. Draw up final
statement of expenditure for programme including all
adjustments made as a result of control. Check against
final approved financial tables and programme accounting
records.
Costs incurred between 31.12.2008 31.03.2010 and
purely related to the programme closure can be covered by
TA of the new programmes. MA must be consulted about
it.
Completion of final report.
Preparation for Monitoring
Committee meeting.
MC meeting approves / comments on final
report
Revision of final report
All programme actions
completed. Completion of
winding up declaration.
Last chance to respond to
findings of winding up
declaration / take corrective
action.
Normal deadline for submission
Indicative timeline for programme closure
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8.4 Third Level Control
The winding up declaration is sometimes prepared by the second level controllers of the
Financial Control Group and sometimes by a separate body (and therefore called Third Level
Control). This control work again checks the quality of earlier checks at both project and
programme level and has to ensure that any recommendations made have been followed up.
More specifically, preparation of the winding up declaration focuses on:
The independence of the bodies carrying out second level control work
The sampling method used for second level control checks
How the final statement was drawn up
The nature and quality of the audit work carried out
The implementation of audit recommendations and correction of errors (meaning errors
are reported to relevant bodies, amounts concerned are deducted from the statement of
expenditure, recovery procedures are launched when necessary and systemic errors are
corrected).
Two negative results are possible. On the one hand, the winding up body may state that it
has no opinion. This happens for example when second level control checks have been
inadequate or serious management failures have not been addressed. The winding up body
may also deliver a qualified opinion if the second level control sampling technique is weak or
there are no formal procedures for identifying and treating systemic problems. Both of these
decisions will result in delayed final payment and a request to the winding up body to quantify
the extent of the problems (how much money to deduct).
The winding up declaration will also address the frequency of irregularities and errors found
during the second level control checks and any other audits that have been carried out. This
is used to assess the overall reliability of management and control systems though errors are
also weighted according to the impact they can be expected to have (for example, whether
they are formal or substantive, will have a financial impact etc.) In general, however, a 2%
rate of errors or irregularities is the limit. If the rate is higher this will lead to a qualified opinion
unless the MA and PA can take effective corrective action. It is therefore important to start the
winding up process as soon as possible in 2009 so that programme bodies have a chance to
act on any negative findings.
Programme closure also rests ultimately on the quality of first level control work carried out
and the soundness of the systems and procedures described in the original description of
programme management systems and procedures. These systems are perhaps the most
important element if they have been used properly, as they should ensure that the
programme avoids systemic errors (broadly speaking, errors that will probably be repeated
every time the procedure involved is used). Avoiding this type of error is particularly important
as they can lead to cuts in funding for all measures / priorities where these systems /
procedures are in place if corrective action cannot be taken.
On past experience it may take two or three years to complete programme closure. After
2008, however, funding for this process is ineligible and programme bodies may no longer be
in place unless the programme will be prolonged in 2007 2013 and uses part of its new TA
budget to cover closure related costs. Member States need to agree who has responsibility
for holding programme records and dealing with any associated issues which might arise and
how they are to be paid for this.
In most current programmes the actual amount of the final payment can be calculated
relatively easily as the balance of funds to be paid from the final statement of expenditure
after deductions arising from control work. In programmes using different ERDF rates or
including private co-financing in the financial tables, the situation can be more complex. This
situation will be more common in future if programmes make use of the chance to vary ERDF
rates between priorities. In these situations the 2% flexibility rule may be used. Its basic
purpose is to balance out the ERDF rate if the final amounts claimed do not correspond
exactly with the ERDF / co-financing split in the programme financial tables. Anyone wanting
to know more should see the Commission Guidelines on closure.
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Annex 1 Regulatory Framework
Current programme period 2000 2006
The INTERACT website http://www.interact-eu.net/604900/443793/0/0
provides downloadable list of EU regulations for Structural Funds and communications of
relevance to INTERREG.
INTERREG III - Communication from the Commission of 2 September 2004 laying down
guidelines for a Community initiative concerning trans-European cooperation intended to
encourage harmonious and balanced development of the European territory (2004/C 226/02)
Communication from the Commission of 2 September 2004
INTERREG III - Communication from the Commission amending the guidelines for
INTERREG III (2001/C 239/03)
Communication from the Commission amending the guidelines for INTERREG III
INTERREG III - Communication from the Commission to the Member States of 28 April 2000
laying down the guidelines for a Community Initiative concerning trans-European territory
INTERREG III
INTERREG - Communication from the Commission of 1 July 2003 COM(2003) 393 final -
Paving the way for a New Neighbourhood Instrument
INTERREG - Communication from the Commission to the Member States of 7 May 2001
'Inter-regional Cooperation' Strand C of the INTERREG III Community Initiative Commission
communication C(2001) 1188 final
Regulation - Commission Regulation (EC) No 448/2004 of 10 March 2004 amending
Regulation (EC) No 1685/2000 as regards to eligibility of expenditure of operations co-
financed by the Structural Funds and withdrawing Regulation (EC) No 1145/2003
Regulation - Commission Regulation (EC) No 1145/2003 of 27 June 2003 amending
Regulation (EC) No 1685/2000 as regards the rules of eligibility for co-financing by the
Structural Funds
Regulation - Commission Regulation (EC) No 2355/2002 of 27 December 2002 amending
Commission Regulation (EC) No 438/2001
Regulation - Commission Regulation (EC) No 438/2001 of 2 March 2001 laying down
detailed rules for the implementation of Council Regulation (EC) No 1260/1999
Regulation - Council Regulation (EC) No 448/2001 of 2 March 2001 laying down detailed
rules for the implementation of Council Regulation (EC) No 1260/1999
Regulation - Commission Regulation (EC) No 1685/2000 of 28 July 2000 laying down
detailed rules for the implementation of Council Regulation (EC) No 1260/1999
Regulation - Commission Regulation (EC) No 1159/2000 of 30 May 2000 on information and
publicity measures (...) concerning assistance from the Structural Funds
Regulation - Commission Regulation (EC) No 643/2000 of 28 March 2000 on arrangements
for using the euro for the purpose of the budgetary management of the Structural Funds
Regulation - Regulation (EC) No 1783/1999 of the European Parliament and of the Council of
12 July 1999 on the European Regional Development Fund
Regulation - Regulation (EC) No 1784/1999 of the European Parliament and the Council of
12 July 1999 on the European Social Fund
Regulation - Council Regulation (EC) No 1260/1999 of 21 June 1999 laying down general
provisions on Structural Funds
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Regulation - Commission Regulation (EC) No 1681/94 of 11 July 1994 concerning
irregularities and the recovery of sums wrongly paid in connection with the financing of the
structural policies and the organization of an information system in this field
New programme period 2007 2013
Regulation Council Regulation (EC) No 1083/2006 laying down general provisions on the
European Regional Development Fund, the European Social Fund and the Cohesion Fund
and replacing Regulation (EC) No 1260/1999
Regulation Regulation (EC) No 1080/2006 of the European Parliament and the Council on
the European Regional Development Fund and replacing Regulation (EC) No 1783/1999
Regulation Commission Regulation (EC) No 1828/2006 setting out rules for the
implementation of Council regulation (EC) No 1083/2006 and 1080/2006
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Annex 2 First level control in INTERREG 2000-2006
This annex covers some important features of the current system, which will however
disappear in the new period. Anyone wanting information on the content of first level control
checks should refer to the section handbook on first level control in the new period as there
are no substantial changes.
Who is checked?
This is an important question. In the current period FLC has been carried out at the final
beneficiary level: Anyone who is a final beneficiary gets controlled and likewise, if you are not
a final beneficiary, there is no direct control - invoices are instead sent to the final beneficiary
for control. The final beneficiary has been defined as the Lead Partner of a project meaning
that financial control of all partners should be carried out by the Lead Partners controller.
When this interpretation is used in INTERREG projects, it means that the Lead Partners
controller will have to control expenditure from other countries where other rules and laws are
in place and that he/she may also be unable to check supporting documents. Some
programmes have made this work by harmonising the rules on both sides of the border. A
shared language seems to be a minimum requirement for this kind of intensive cooperation.
Often, however, controllers have refused to certify expenditure incurred in other countries.
As a result, a number of different interpretations of the Lead Partner principle have developed
and each has different financial control implications. Different interpretations are appropriate
depending on the circumstances and in many programmes several different models are
possible with each partnership left to decide which will work best for them.
Some projects have operated under a central cash system. In these projects the Lead
Partner receives the majority of the grant and pays partner invoices in effect serving as the
bank for the rest of the project. The other partners generally have a small grant of their own
to pay for e.g. travel costs and meetings. The Lead Partner is therefore responsible for First
Level Control of the whole project but can monitor all spending carefully as it occurs. This
system is particularly useful for projects with large numbers of small and/or inexperienced
partners as it removes much of the administrative burden from them. It is also a good way of
reducing audit costs.
Another way of including small partners has been to make use of the sub-partner concept.
Sub-partners are not part of the formal partnership and do not therefore need to appear in the
application or contract - although the programme should be informed of all sub-partner
participation. Sub-partners are organisations that play a minor but integrated role in
implementation of the project. As such their costs are generally limited to small amounts of
staff time. Evidence for this time can be collected and controlled at the partner level and
expenditure included in the partners statements. If this is done, it is essential that the audit
trail is secured and arrangements are made for preserving documentation after the end of the
project. Sub-partners also need to fulfil the criteria laid out in the Interpretative note from the
Commission Services on Council regulation 1260/1999 Article 32 (1). These criteria ensure
that the Lead Partner retains ultimate responsibility, that there is a documented agreement of
the full partnership on the participation of any sub-partners and that standard financial
management requirements apply equally to spending incurred by sub-partners.
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Control structure of Lead partner project with sub-partners (2000-2006)
In this connection, it is also worth noting the role of other final recipients. These are not part
of the partnership at all and make no contribution in terms of hours etc they only receive
funding. An example would be businesses receiving small grants under a scheme
administered by a partner. It is important to recognise that these final recipients are still
covered by financial control requirements and that steps must be taken to ensure the
correctness of their expenditure and document the audit trail. Responsibility for ensuring that
this is done will lie with the partner making the grant.
INTERREG also allows projects to use the Extended Final Beneficiary Principle according to
which all of the partners in a project can become final beneficiaries and are therefore
controlled independently. This means that each partner can be controlled by a controller from
its own country and this is the system in place in most programmes. The Lead Partner
controller then signs a declaration that they have received properly certified statements of
expenditure from all partners: They do not have to assess the quality of the control work done
as this remains the responsibility of the first level control body in each country.
In order for this system to work, programme management bodies have to agree on how the
Lead Partners responsibilities will be interpreted in terms of First Level Control. The
INTERREG Guidelines state that the Lead Partner will bear financial and legal
responsibility to the Managing Authority. (INTERREG Guidelines, Point 31) Many
programmes have interpreted this as meaning that the Lead Partner has financial liability for
all expenditure even if another partner incurred and the expenditure and had it certified.
Although most project partnership agreements transfer the responsibility for incorrect
expenditure to the partner concerned, the financial liability of the Lead Partner has been an
unreasonable demand in the current period and this will be changed.
Lead Partner
Sub-Partner
Sub-Partner
Sub-Partner
Project Partner Project Partner Project Partner
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Defining the final beneficiary for first level control (2000-2006)
A complex partnership could in theory contain all of the elements outlined above - as in the
example below. Partners 1, 2 and 3 are standard partners and take care of their own first
level control under the extended final beneficiary principle. Partners 4 and 5 on the other
hand are part of a central cash system and have most of their budget administered by the
Lead Partner. Partner 1 is responsible for a small group of NGOs and administers them as
sub-partners. Partner 2 makes grants to small businesses and is responsible for collecting
and holding evidence for the audit trail of this expenditure. Using all of these features in one
project would be extremely unusual and the complexity alone would make this a high-risk
project. This shows the flexibility of the Lead Partner principle and that there is no single
right structure for Lead Partner projects.
Project Partner 1 Project Partner 2 Project Partner 3
All partners are final
beneficiaries. FLC
carried out in partner
MS
Lead Partner
Project Partner 1 Project Partner 2 Project Partner 3
LP as only
final
beneficiary.
Whole
projects FLC
done here Lead Partner
2. Extended Final Beneficiary System
Removes most FLC barriers
1. Central Cash System
Generally more difficult to work with
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Who does the First Level Control?
First Level Control has been carried out by competent bodies in each Member State with the
Member States free to define the most appropriate bodies in their own country. There have
been two main systems though several programmes also operate a combination of the two.
Decentralised control. In decentralised systems invoices are controlled at the premises
of the final beneficiary by a controller appointed by the project. The Member State
concerned defines the competent bodies that can carry out this control work. Examples
include private audit firms, national public control bodies and controllers from the projects
organisation as long as they are completely independent from the projects management
(e.g. from the central finance or chief executives part of the organisation). This last option
is a cheap and easy solution in the short-term but can cause longer-term problems, as
the final control of the project must be carried out by an independent external controller.
Normally these external controllers are not identified by the Member States until the first
projects are ready to close. After they have been appointed, they have in some cases
refused to accept the control work carried out in internal controls. This again highlights
the need to identify all control bodies at the start of the programme and ensure that they
accept the rest of the control structure.
The main concern about the decentralised system is the quality of checks being carried
out. Each controller may only work with one or a few projects and it is not easy for them
to ensure consistency of approach to e.g. eligibility questions and to build up knowledge
of the particular demands of INTERREG project management. To combat this,
programme bodies are increasingly targeting these controllers with information and
guidelines on audit and checks. Many programmes also run training events for project
finance managers and/ or controllers immediately following project approval to ensure
that the necessary financial management and control systems are put in place from day
one.
First level control