Communication campaign
FCH JU control system
Elena Climent Vañó
FCH JU Audit Manager
Agenda
1. FCH JU control strategy: main features
2. Ex-ante vs. Ex-post verifications
3. CFS (ex-ante) vs. Financial Audit (ex-post)
4. The processes
4.a. The ex-ante review process
 Actors / Contact points
 Key steps
4.b. The ex-post audit process
 Actors / Contact points
 Key steps
 Extrapolation
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1. FCH JU control strategy – main features
Focus of
presentation !
• Embraces the whole ‘Grant Management cycle’




Call planning
Evaluation of proposals
Negotiation and Signature of Grant Agreements
Project implementation
• Covers two main aspects:
 Sound financial management (i.e. economy, effectiveness, efficiency)
 Legality and Regularity (i.e. in accordance with rules)
• Is a combination of ex-ante and ex-post verifications
• Actors:
 Internal: FCH JU Operations / Finance / Audit
 External:
 Independent experts (e.g. Mid Term Review)
 External auditors (CFS, Financial audits)
 Other bodies (Court of Auditors, OLAF, IAS)
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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
premises.
What/Sources? •
Impact?
•
•
Project periodic reports
•
Mid term review
•
Certificates methodology (CoM) / CoMav
checks
at
beneficiary's
Technical audits or reviews
Financial audit
• Certificates on Financial Statements – CFS
Errors detected are corrected, by the Errors detected are corrected after the
beneficiary (new Form C) or by the JU transaction is approved and undue
(ineligible costs), before the transaction is amounts are recovered
approved.
FAQs: Certificates issued by external auditors
(CFS/CoM/CoMav)
http://www.fch-ju.eu/content/how-participate-fch-ju-projects
Cost Eligibility: Costs charged to the project in accordance
with FCH JU Grant Agreement
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3. CFS vs. Financial Audit
‘CFS’ (ex-ante)
Legal Basis • Grant Agreement (article II.4.4)
‘Financial Audit’ (ex-post)
• 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
• FCH JU  Framework contract with 3 External Audit Firms
 Independent from the beneficiary
 PricewaterhouseCoopers (PwC)
 Qualify to carry out statutory audits
 KPMG
 Special case: public bodies, secondary and higher
 Littlejohn (POLARIS)
education establishments and research organisations 
Competent public officer (legal capacity & independent).
Conflict of Interest (‘CoI’) check
 If 3 firms declare CoI, use of DG BUDG contract
• Paid by beneficiary
• Paid by FCH JU
• Declared by the beneficiary as eligible costs (*)
• Reimbursed by the JU at the corresponding funding rate
Cost?
(*)
•
•
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.
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CFS - Example of thresholds
Claim N°
Eligible costs
FCH JU
contribution
Cumulative amount
for which a CFS has
NOT been submitted
CFS required
1
EUR 380,000
EUR 190,000
EUR 190,000
NO
2
EUR 410,000
EUR 205,000
EUR 395,000
YES
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)
Notes
(1)
(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.
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CFS - Example of thresholds if Ex-post audit
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.
Claim N°
Eligible costs
FCH JU
contribution
Cumulative amount
for which a CFS has
NOT been submitted
CFS required
1
EUR 400,000
EUR 200,000
EUR 200,000
NO
Notes
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)
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3. CFS (ex-ante)
• Model: Form D updated June 2012
• Content: 3 documents  completeness
 Independent report of factual findings (*)
 Signed by auditor
 Terms of reference
 Signed by beneficiary & auditor and appended to auditor’s report
 Table of procedures
 Completed by auditor and appended to auditor’s report
• The independent report of factual findings (*):
 Scope: Agreed procedures (no audit) on costs declared (Form C)
 Results:
 How? List of exceptions (e.g. no time records available, subcontracting
not specified in Annex 1 of GA, costs not allocated to project..)
 Impact: FCH JU uses this information to draw conclusions on eligibility
of costs claimed and decide the amounts to be paid.
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3. CFS (Independent report)
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 follows:
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
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3. CFS (table with procedures)
Procedures
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).
Standard factual finding and basis for exception reporting
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.
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3. Financial audit (ex-post)
• Model: Model audit report agreed with the 3 external audit firms
• Content:
 Auditor’s opinion (*)
 Summary of audit adjustments
 Analysis per cost category:
 Work performed
 Audit findings
 Systematic errors  for ‘extrapolation’
 Other information (e.g. internal controls, differences with CFS
)
• The Auditor’s opinion (*):
 Scope: Audit ‘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…’
 Results:
 How? Opinion + Summary of audit adjustments
 Impact: FCH JU endorses audit results & recover undue amounts (if any)
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3. Financial Audit (Independent report)
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]
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The Processes
4.a Ex-ante review process
4.b Ex-post audit process
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4.a. The ex-ante review process
• Actors
 Beneficiaries
 Coordinator
 FCH JU (Project Manager & Financial Officer)
• Contact
points
 Consortium: coordinator
 FCH 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.
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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 beneficiary
2. Beneficiary appoints a contact person and communicate to audit firm
3. 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 fieldwork
5. Exit meeting ‘beneficiary – auditor’ to discuss audit findings
6. 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)
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
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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:
Cost Claimed
Method 2
Personnel costs
Subcontracting costs
Other direct costs
Indirect costs
Receipts
Adj. Against Costs
claimed
Systematic part of the
adjustment against
costs claimed
10.000
- 2.000
0,00
0,00
- 1.000
5.000
-1.000
- 250
3.000
-600
- 600
0,00
0,00
Flat rate
-10%
-5%
-20%
 Method 3: application of an overall flat rate correction to the total costs proposed by the
FCH JU. Example:
Systematic part of the
Adj. Against Costs
Method 3
Grand Total
Receipts
Cost Claimed
adjustment against
costs claimed
claimed
18.000
- 3.600
-1.850
0,00
0,00
0,00
Flat rate
-10.3%
Method 2: not applicable if positive and negative systematic errors per cost category
Methods 2 and 3: other flat rates to those proposed by the JU are also possible  new audit paid by beneficiary
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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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