AUDIT AUTHORITY ANNUAL AUDIT REPORT EUROPEAN ECONOMIC AREA FINANCIAL MECHANISM, NORWEGIAN FINANCIAL MECHANISM 2013 / Riga

Transcription

1 AUDIT AUTHORITY ANNUAL AUDIT REPORT EUROPEAN ECONOMIC AREA FINANCIAL MECHANISM, NORWEGIAN FINANCIAL MECHANISM 203 / 204 Riga

2 Contents ABBREVIATIONS... 4 SUMMARY INTRODUCTION INDICATION OF THE AUDIT AUTHORITY RESPONSIBLE FOR THE PREPARATION OF AAR INDICATION OF AAR REFERENCE PERIOD IDENTIFICATION OF THE FINANCIAL MECHANISMS, PROGRAMMES AND NATIONAL ENTITIES COVERED BY AAR DESCRIPTION OF THE STEPS TAKEN TO PREPARE AAR CHANGES IN MANAGEMENT AND CONTROL SYSTEMS AUDIT STRATEGY FINALISATION OF THE COMPLIANCE ASSESSMENT AUDITS SYSTEM AUDITS INDICATION OF THE BODIES THAT CARRIED OUT THE AUDITS SUMMARY OF AUDITS CARRIED OUT DURING AAR REFERENCE PERIOD DESCRIPTION OF THE BASIS FOR SELECTION OF THE AUDITS IN THE CONTEXT OF THE AUDIT STRATEGY PRINCIPAL FINDINGS AND CONCLUSIONS DRAWN FROM THE AUDIT WORK FOR THE MANAGEMENT AND CONTROL SYSTEMS AND THEIR FUNCTIONING CONCLUSION REACHED ON THE NATIONAL FOCAL POINT AND CERTIFYING AUTHORITY CONCLUSION REACHED ON THE PROGRAMME LV CONCLUSION REACHED ON THE PROGRAMME LV INDICATION OF WHETHER ANY PROBLEMS IDENTIFIED WERE CONSIDERED TO BE OF A SYSTEMIC CHARACTER, AND OF THE MEASURES TAKEN, INCLUDING A QUANTIFICATION OF THE IRREGULAR EXPENDITURE AND ANY RELATED FINANCIAL CORRECTIONS PROJECT AUDITS INDICATION OF THE BODIES THAT CARRIED OUT THE AUDITS DESCRIPTION OF THE BASIS FOR SELECTION OF THE SAMPLE(S) DESCRIPTION OF THE PRINCIPAL RESULTS OF THE AUDITS CONCLUSIONS DRAWN FROM THE RESULTS OF THE PROJECT AUDITS WITH REGARD TO THE EFFECTIVENESS OF MANAGEMENT AND CONTROL SYSTEM INFORMATION ON THE FOLLOW-UP OF IRREGULARITIES PROBLEMS WHICH ARE CONSIDERED SYSTEMIC IN NATURE AND THE MEASURES TAKEN ASSESSMENT OF THE AUDIT AUTHORITY

3 8. JUSTIFICATION FOR THE AUDIT OPINION Annex Summary of Management and Control System Audits Annex Summary of key requirements and evaluation criteria covering AAR reference period Annex Summary of assessment of audited programmes and overall assessment of the management and control system Annex Declared and audited expenditures Annex Calculation of the error rate

4 ABBREVIATIONS AAR CA CoM Donor states EEA EU EUR Financial Mechanisms FMO IFR ISA LIDA MCS MoC MoE MoEPRD MoES MoF MoI MoJ NFP PMB PO Regulations on the implementation of the EEA/ Norwegian Financial Mechanisms SEDA SIF SRDA Annual Audit Report Certifying Authority Cabinet of Ministers European Economic Area Financial Mechanism Committee and Norwegian Ministry of Foreign Affairs European Economic Area European Union Euro European Economic Area Financial Mechanism and Norwegian Financial Mechanism Financial Mechanism Office Interim financial report International Standards on Auditing Latvian Investment and Development Agency Management and control system Ministry of Culture Ministry of Economics Ministry of Environmental Protection and Regional Development Ministry of Education and Science Ministry of Finance Ministry of Interior Ministry of Justice National Focal Point Procurement Monitoring Bureau Operator Regulation on the implementation of the European Economic Area Financial Mechanism , adopted by the European Economic Area Financial Mechanism Committee on 3 January 20, and Regulation on the implementation of the Norwegian Financial Mechanism in adopted by the Norwegian Financial Mechanism Committee on February 20 State Education Development Agency Society Integration Foundation State Regional Development Agency 4

5 SUMMARY. AAR is prepared by the Audit Authority according to Paragraph (e)(i) of Article 4.6 of the Regulations on the implementation of the Financial Mechanisms The functions of the Audit Authority under the Financial Mechanisms are fulfilled by the Ministry of Finance European Union Funds Audit Department (Section.). 3. This AAR covers work which in accordance with the Audit Strategy (see Section 3) should have been performed from July 203 to 30 June 204 (Section.2). 4. This AAR covers both Financial mechanisms as well as all the programmes (LV02, LV03, LV04, LV05, LV06, LV07, LV08) approved under Financial mechanisms as well as Technical Assistance project LV0 (including Fund for Bilateral Relations at National Level) (Section.3). 5. AAR and audit opinion is prepared based on the results of the Audit Authority s performed management and control system audits and project audits. More detailed steps of preparation of AAR are described in Section Within the AAR reference period no significant changes in the management and control system were made (Section 2). 7. The Audit Authority has prepared and submitted Joint Audit Strategy (covering all the programmes) to the Donor states on 28 May 203 (Section 3). 8. The Audit Authority has finalised the work on the compliance assessment of the programmes MCS and continue to perform follow-up activities on implementation of recommendation. Detailed information is set out in Section As the result of the management and control system audits performed by the Audit Authority, the NFP and CA is assessed with category - the management and control system of the NFP and CA is determined as working well, only minor deficiencies detected, which do not affect the operation of the MCS. MCS of programme LV03 and programme LV06 is assessed with category 2 the MCS within the programmes works, but some improvements are needed. Detailed information of the work done regarding management and control system audits is set out in Section Maximum error rate identified by the Audit Authority in accordance with the results of the project audits is 0,30% that is below the materiality level, thus the expenditure declared to the Donor states is within the materiality level and are legal and regular. Results of the project audits and overall opinion are detailed in Section 6.. During the second half of 205 the Ernst&Young Baltic performed external quality assessment of the Audit Authority. Conclusions of the external quality assessment are detailed in Section The Audit Opinion on the effective functioning of the management and control system, so as to provide a reasonable assurance that IFRs, submitted to the Donor states during AAR reference period, are correct and as a consequence reasonable assurance that the underlying transactions are legal and regular is based on the results of the management and control system audits and project audits. The management and control system has been assessed in category 2 and the error rate of the project audits is below the materiality level, thus the Audit Authority concludes to have an unqualified Opinion as it is set out in Table 0 of Section 8. 5

6 . INTRODUCTION.. Indication of the Audit Authority responsible for the preparation of AAR In accordance with the Law on the Management of the EEA Financial Mechanism and the Norwegian Financial Mechanism for the Period of and CoM Regulations No 502 Procedures for Ensuring the Functions of the Audit Authority in the Management of the EEA Financial Mechanism and the Norwegian Financial Mechanism for the Period of the MoF fulfils the functions of the Audit Authority. In compliance with the Regulations of the MoF the European Union Funds Audit Department performs functions of the Audit Authority for the Financial Mechanisms In order to ensure functional independence the Audit Authority is directly subordinated to the State Secretary of the MoF according to the Regulations of the MoF. In addition, the power to report directly to the CoM via Minister of Finance is set by the Law on the Management of the EEA Financial Mechanism and the Norwegian Financial Mechanism for the Period of There is single Audit Authority in Latvia. No functions of the Audit Authority are delegated..2. Indication of AAR reference period In accordance with the Paragraph (e)(i) of Article 4.6 of the Regulations on the implementation of the Financial Mechanisms the AAR set out the findings of the audits planned to be carried out in accordance with the Joint Audit Strategy during the previous 2 month-period ending on 30 June of the year concerned. This AAR covers the audit work which in accordance with the Audit Strategy (see Section 3) should have been performed from July 203 to 30 June 204, however due to circumstances described in Section 5.3 actually have been finished in December, 204 hereinafter called AAR reference period. This AAR covers the expenditures which were incurred during the period from May 203 to 3 December 203, as these expenditures were included in IFRs submitted to Donor states during AAR reference period..3. Identification of the financial mechanisms, programmes and national entities covered by AAR Summary of the Financial mechanisms, their relevant programmes and national entities designated for the implementation of these Financial mechanisms is presented in the Table. Regulations of the Ministry of Finance No 2-6/7 dated June 20, Regulations of the Ministry of Finance No 2-6/5 updated on July 203, Regulations of the Ministry of Finance No 2-6/ updated on October 204 6

7 Financial mechanism EEA and Norwegian Financial Mechanisms No LV 0 LV 05 Technical Assistance (including Fund for Bilateral Relations at National Level) Norwegian-Latvian Research Support Fund and Scholarship Table : Financial mechanisms, programmes and designated national entities operator MoF MoES Executor of the Operator s delegated functions Agency / Partner No functions are delegated SEDA Donor states approval date / Date of signing agreement First date of eligibility of expenditures is / Agreement signed / National Focal Point Certifying Authority Up to signed projects agreements NA - LV 02 National Climate Policy MoEPRD SRDA / pre-defined project EEA Financial Mechanism LV 03 NGO Fund SIF No functions are delegated / Ministry of Finance State Treasury pre-defined project NGO Activity support measure 74 projects NGO Project measure 66 projects in st selection, 4 projects in 2 nd selection LV 04 Conservation and Revitalisation of Cultural and Natural Heritage MoC No functions are delegated / pre-defined projects Norwegian Financial Mechanism LV 06 LV 07 LV 08 Green Industry Innovation Capacity-building and Institutional Cooperation between Beneficiary State and Norwegian Public Institutions, Local and Regional Authorities Reform of the Latvian Correctional Services and Police Detention Centres MoE MoEPRD MoJ LIDA SRDA MoI / / / pre-defined projects 3 pre-defined project 7

8 .4. Description of the steps taken to prepare AAR The Audit Authority prepares AAR in accordance with the Paragraph (e) of Article 4.6 of the Regulations on the implementation of the Financial Mechanisms and the CoM Regulations No 502 Procedures for Ensuring the Functions of the Audit Authority in the Management of the EEA Financial Mechanism and the Norwegian Financial Mechanism for the Period of The Head of the Audit Authority approves the AAR as authorized by the Ministry of Finance Order No 288 About a circulation of documentation dated July The following information was used for preparing the AAR: ) the results of the management and control system audits carried out by the Audit Authority over the AAR reference period; 2) the results of the project audits covering the expenditures which were included in IFRs submitted to Donor states during AAR reference period; 3) during AAR reference period the Audit Authority finalised compliance assessment audits in accordance with the Paragraph 3 of Article 4.8 of the Regulations on the implementation of the Financial Mechanisms The results of these audits were also used for preparing the AAR; 4) information from follow-up procedures. In the Joint Audit Strategy the Audit Authority performed risk assessment of entities involved in the management of the financial mechanisms and programme, based on which the Indicative plan for the period from 203 till 207 has been prepared. Within the AAR reference period the management and control system audits have been performed in accordance with the Indicative plan for the period from 203 till 207 (In total 3 management and control system audits in 5 entities). During these audits all the key requirements and criteria developed specially for the EEA and Norwegian Financial Mechanisms on the basis of the guidance of the European Commission COCOF 08/009/00-EN 3 have been assessed. Scope of each particular audit is determined based on the risk analysis and previous knowledge. At the planning stage of the management and control system audits the internal control environment of the audited institution is assessed and the main risk factors for each key requirement are determined. In addition, all existing internal controls are identified for the audited institution, whether the controls are in compliance with the Donor states and national rules and regulations and the controls are sufficient to reduce the risks. The actual controls are tested and results assessed within the course of the audit. System audits: The preparation of the AAR is set out in the Audit Authority s procedure No EUFAD-3 Procedure for the Preparation of AAR and Opinion, as well as Final Audit Report and Closure Declaration. Entire process of the AAR to reach the overall assessment of the management and control system can be set in 3 stages: 2 Replaced with the Ministry of Finance Order No 57 (8 February 203), Order No 43 (2 October 203) and Order No 399 ( August 204). 3 COCOF 08/009/00-EN Guidance on a common methodology for the assessment of management and control systems in the Member States ( programming period) (24 April 2008) 8

9 STAGE Evaluation of assessment criterion Key requirement evaluation Key requirement evaluation may not exceed the lowest evaluation of the assessment criterion Entity evaluation Total evaluation regarding the management and control system set up in the entity may not exceed the lowest key requirement evaluation STAGE 2 Total evaluation of management and control system of each programme ) is comprised of evaluations of management and control systems of all entities involved in the programme management 2) programme management and control evaluation does not exceed the lowest evaluation of the entity STAGE 3 Total evaluation of management and control system of each financial mechanism ) is comprised of evaluations of all programme management and control systems, as well as evaluation of the FP, The CA and the PMB, which does not exceed the lowest programme or entity's evaluation 2) is adjusted according to the identified risk mitigating/compensatory factors, materially reducing the risks inherent to the management and control system, as well as in line with the level of the remaining risk Image. Activities for preparation of the AAR Stage. The assessment of the key requirements and assessment criteria are determined in the management and control system audits that are performed by the Audit Authority in each entity. The audit results are summarized in the audit report and highlighted in the cumulative management and control assessment table. Detailed assessment of each key requirement and assessment criteria per institution audited are provided in Annex 2. Each assessment criteria and key requirement is assessed in 4 categories as defined in the EC Guidance on a common methodology for the assessment of management and control systems in the Member States ( programming period), see Table 2. Table 2: Category of the assessment criteria and key requirements CATEGORY Category. DESCRIPTION Works well: the system is efficient, deficiencies have not been detected or insignificant deficiencies have been detected, which do not affect the functioning of the financial mechanism or programme management and control system 9

10 Category 2. Category 3. Category 4. Works, however, some improvements are required: some deficiencies have been detected, which have a medium effect on the functioning of the financial mechanism or programme management and control system. The Audit Authority has provided recommendations for improvement of the system, and the relevant authority has developed a plan of measures for introduction of recommendations Works, however, significant improvements are required: deficiencies have been detected, which have a significant effect on the functioning of the financial mechanism or programme management and control system and which may cause non-conformities. The Audit Authority has provided recommendations for improvement of the system, and the relevant authority has developed a plan of measures for introduction of recommendations Does not work: many different or systemic deficiencies have been detected, which have a significant effect on the functioning of the financial mechanism or programme management and control system and which may cause non-conformities. The Audit Authority has provided recommendations for improvement of the system, and the relevant authority has developed a plan of measures for introduction of recommendations The assessment of each key requirement cannot be classified more favourably than the worst of the assessment criteria. Stage 2. The Audit Authority reaches a conclusion by the programme, based upon the results of the categorisation of each key requirement under Stage. The overall assessment of each programme cannot be higher than the lowest assessment of relevant key requirement. For example, if one of the institutions is assessed according to category 3, overall assessment of the programme cannot be higher than category 3. The conclusion of assessment of each programme is summarized in Annex 3. Stage 3. The Audit Authority concludes on the overall assessment of the management and control system by identifying any mitigating factors/compensating controls that may exist in one authority which effectively reduce the risk in the overall management and control system, in addition the residual risk to regularity is determined as concluded in Annex 3. The overall conclusion by the management and control system provides a basis for formulating audit opinion, taking into account also the results of project audits as provided in detail in Section 8. Project audits: When performing the assessment of risks of entities involved in the management of financial mechanisms and programme risk assessment, the Audit Authority analyses and assess the risk of material misstatements of each programme, which is used for determination of the scope of project audits. Project audits are carried out on the basis of the appropriate sample, formed by using: ) project risk assessment; 2) random selection (in case of necessity). Image 2 schematically shows the formation of project audit sample: 0

11 Updated risk assessment of entities involved in the management of financial mechanisms and programme Risk of material misstatement High Moderate Low High risk projects are audited+ if necessary, samples of moderate and low risk projects High risk projects are audited+ if necesarry, samples of moderate and low risk projects Only high risk projects are audited Coverage 20% Coverage 0% Coverage 5% Random selection Random selection Random selection Low risk projects Moderate risk projects High risk projects Project risk assessment Image 2. Formation of project audit sample More details on sampling methodology applied and the results see in Section 6. The overall opinion is based on the results of the management and control system audits and results of project audits, detailed evaluation is set out in Table 0 of Section 8.

12 2. CHANGES IN MANAGEMENT AND CONTROL SYSTEMS In accordance with the CoM Regulations No 502 Procedures for Ensuring the Functions of the Audit Authority in the Management of the EEA Financial Mechanism and the Norwegian Financial Mechanism for the Period of the NFP should update the description of the national management and control systems and submit to the Audit Authority until 3 August. The NFP has updated the description of the national management and control systems on 9 August 204. The changes of the management and control system are not significant and mostly due to the fact that all PO have prepared and approved their own descriptions of the programme management and control system, as well as the CoM has approved several new programmes regulations, and changes have been made in NFP s and CA s internal procedures based on the Audit Authority s recommendations or changes in the external legal acts. As well as the description of the national management and control systems has been supplemented with the new Section on the complaint mechanism placed on the website of the NFP. In accordance with the Paragraph 2 and 3 of Article 4.8 of the Regulations on the implementation of the Financial Mechanisms all POs have prepared and approved the detailed descriptions of the management and control systems of the PO and their functions. In accordance with the CoM Regulations No 502 Procedures for Ensuring the Functions of the Audit Authority in the Management of the EEA Financial Mechanism and the Norwegian Financial Mechanism for the Period of PO updated description of the programme management and control system regarding the AAR reference period, see Table 3. Table 3: Information on detailed descriptions of the management and control systems of the POs and their functions No. 2. LV02 LV07 and operator Date of initial approval of the description of the programme management and control system MoEPRD with updates on LV03 SIF with updates on , and Date of approval of updated version regarding the AAR reference period and justification for update updated because the CoM approved programme No LV02 regulations. In addition the information about the MoEPRD and SRDA internal procedures has been updated as well as other information related to the implementation of the programmes. Updated version was evaluated by the Audit Authority in the follow-up of the implementation of the recommendations of the compliance assessment audit, the changes in the management and control system are not considered significant , , updated based on the implementation of recommendations of the SIF internal audit and amendments in the external legal acts. 2

13 Updated version was evaluated by the Audit Authority during management and control system audit of the programme LV03 performed during the AAR reference period, the changes in the management and control system are not considered significant. LV04 MoC updated because the CoM approved programme No LV02 regulations, as well as in accordance with recommendations made by the Audit Authority. LV05 MoES NA Updated version was evaluated by the Audit Authority in the follow-up of the implementation of the recommendations of the compliance assessment audit, the changes in the management and control system are not considered significant. LV06 MoE updated due to the changes made in the internal procedures of the MoE and LIDA, as well as in accordance with recommendations made by the Audit Authority. LV08 MoJ NA Updated version was evaluated by the Audit Authority during management and control system audit of the programme LV06 performed during the AAR reference period, the changes in the management and control system are not considered significant. 3. AUDIT STRATEGY In accordance with the Paragraph (d) of Article 4.6 of the Regulations on the implementation of the Financial Mechanisms the Audit Authority has prepared and submitted Joint Audit Strategy (covering all the programmes) to the Donor states on 28 May 203. No changes have been made to the Joint Audit Strategy. 4. FINALISATION OF THE COMPLIANCE ASSESSMENT AUDITS 6 compliance assessment audits concerning all programmes management and control systems have been finalised during the AAR reference period and corresponding reports and opinions submitted to the Donor states. 3

14 The detailed summary of all programmes compliance assessment audits and status of implementation of recommendations provided in the result of these audits is provided in Table 4. Table 4: Results of compliance assessment audits Audit No / Title Opinion date Audit Authority s opinion Recommendations LV 03 LV 02 LV 07 LV 04 No EEZ-VKS-SIF-3/6 Compliance assessment of the management and control system of the EEA Financial Mechanism programme LV03 NGO Fund at the SIF No EEZ/NOR-VKS- VARAM/VRAA-3/6 Compliance assessment of the management and control system of the EEA and Norwegian Financial Mechanism programme LV02 National Climate Policy and LV07 Capacitybuilding and Institutional Cooperation between Beneficiary State and Norwegian Public Institutions, Local and Regional Authorities at the MoEPRD and SRDA No EEZ-VKS-KM-3/3 Compliance assessment of the management and July December December December 203 The MCS of programme LV03 NGO Fund in all the material respects has been established in accordance with the assessment criteria. The MCS of programme LV02 National Climate Policy in all the material respects has been established in accordance with the assessment criteria. The MCS of programme LV07 Capacity-building and Institutional Cooperation between Beneficiary State and Norwegian Public Institutions, Local and Regional Authorities in all the material respects has been established in accordance with the assessment criteria. The MCS of programme LV04 Conservation and Revitalisation of Cultural Without affecting the opinion, Audit Authority drew attention to the following deficiencies identified with regard to the MCS of programme LV03 NGO Fund and the resulting recommendations:. With respect to criterion.4 Reliable accounting, monitoring and financial reporting systems in computerised form, at the time of the performance of the audit: a. The security measures of the Project Electronic Management System (PEMS) were in the process of being implemented. The deficiency is eliminated during the AAR reference period, as the recommendations have been implemented. b. Only the development of the PEMS project selection module had been completed, for which a user guide was produced, whereas the guides for the remaining modules had not been developed. The guides have been still under development during the AAR reference period. The deficiency have a low impact on the functioning of the MCS as the Audit Authority during the system audit performed during the AAR reference period get assurance that the PEMS is actually working and the projects information is maintained there. Without affecting the opinion, Audit Authority drew attention to the following deficiencies identified with regard to the MCS of programme LV02 National Climate Policy and the resulting recommendations:. CoM Regulation (MoEPRD) as well as SRDA administration procedures regarding programme LV02 National Climate Policy small grant scheme and open calls for proposals MCS section were not elaborated. All the recommendations have been implemented during the AAR reference period. No recommendations were provided. Without affecting the opinion, Audit Authority drew attention to the following deficiencies identified with regard to the MCS of programme LV04 Conservation 4

15 LV 05 LV 06 control system of the EEA Financial Mechanism programme LV04 Conservation and Revitalisation of Cultural and Natural Heritage at the MoC No EEZ/NOR-VKS- IZM/VIAA-3/5 Compliance assessment of the management and control system of the EEA Financial Mechanism and Norwegian Financial Mechanism LV05 Research and Scholarships at the MoES and the SEDA No NOR-VKS- EM/LIAA-3/2 Compliance assessment of the management and control system of the Norwegian Financial Mechanism programme LV06 Green Industry Innovation at the MoE and the LIAA 2 February January 204 and Natural Heritage in all the material respects has been established in accordance with the assessment criteria. The MCS of programme LV05 Research and Scholarships in all the material respects has been established in accordance with the assessment criteria. The MCS of programme LV06 Green Industry Innovation in all the material respects has been established in accordance with the assessment criteria. and Revitalisation of Cultural and Natural Heritage and the resulting recommendations: 2. At the moment of the audit following documents were not elaborated: a. MoC internal procedures regarding selection of small grant scheme projects, supervision of projects implementation, preparation of programme reports and reporting and monitoring procedures for irregularities and for the recovery of amounts unduly paid. b. Detailed guidance for the project promoters regarding carrying out procurements where price does not reach thresholds. All the recommendations have been implemented during the AAR reference period. Without affecting the opinion, Audit Authority drew attention to the following deficiencies identified with regard to the following criteria and the recommendations resulting therefrom:. Criterion.3 at the moment of performance of the audit the following is not yet developed and submitted to the CoM: c. Draft Cabinet Regulation on Scholarships Activity, stating therein also the project cost eligibility conditions and procedure for selection and approval of the projects. The Regulations have been developed and approved by the CoM during the AAR reference period. d. Draft Cabinet Regulation on Research Activity, stating therein also the project cost eligibility conditions and procedure for selection and approval of the projects, including the process for selection and approval of the independent project appraisers. The Regulations have been developed and approved by the CoM during the AAR reference period. 2. Criteria.5 and.8 at the moment of performance of the audit there is no internal procedure for implementation developed in the MoES, stating therein also the procedure for cooperation between the MoES and the SEDA, the procedure for monitoring of functions delegated to the SEDA, procedure for preparation of reports, procedure for reporting irregularities. The internal procedure was still under development during the AAR reference period. Without affecting the opinion, Audit Authority drew attention to the deficiencies identified with regard to the following criteria and the recommendations resulting therefrom: a. Criterion.2. on the moment of performance of the audit the separation of the structural unit of LIDA responsible for verification of payment claims from other structural units of LIDA responsible for the implementation of the was not ensured. Recommendation is implemented. b. Criterion.3 on the moment of performance of the audit LIDA has not yet fully developed the procedures for selection and approval of the open call and the small grant scheme projects, monitoring of the project, and the MoE and 5

16 LV 08 Compliance assessment of the management and control system of the Norwegian Financial Mechanism programme LV08 Reform of the Latvian Correctional Services and Police Detention Centres in the MoJ and the MoI 3 January 204 The MCS of programme LV08 Reform of the Latvian Correctional Services and Police Detention Centres in all the material respects has been established in accordance with the assessment criteria. LIDA have not yet fully developed the procedures for performance of the on-the-spot checks and the conclusion of the trilateral project contracts. Recommendation is implemented partly as procedures for performance of the on-the-spot checks and procedures for signing of small grant scheme tripartite project contracts were still under development during the AAR reference period. c. Criterion.4 on the moment of performance of the audit LIDA has not yet fully developed the procedures for data input into the DoRIS system. Recommendation is implemented. d. Criterion.8 on the moment of performance of the audit LIDA has not yet fully developed the procedures for accounting and recovery of the non-eligible costs. Recommendation is implemented. e. Criterion 3 on the moment of performance of the audit LIDA has not yet fully developed the templates of interim and final project reports, as well as the guidance note for completion of these reports. Recommendation is partly implemented, as templates have been developed for the open call projects and predefined project, but not for the small grant scheme projects. Without prejudice to the opinion, Audit Authority drew the attention to deficiencies found in the following criteria and the recommendations pertaining thereto:. Criterion.2 at the moment of performance of the audit, Draft Cabinet Regulation Procedure for Implementation of the Norwegian Financial Mechanism LV08 Reform of the Latvian Correctional Services and Police Detention Centres was not submitted for approval to the Cabinet of Ministers. The Regulations have been approved by the CoM during the AAR reference period. 2. Criterion.3 the MoJ has developed the checklists for performance of the on-the-spot checks and ex-ante procurement verifications, but there are no internal procedures developed, and the MoI has not developed the internal regulations of implementation of the tasks of the National Partner. Recommendation is partly implemented as only procedure for the ex-ante procurement verifications have been developed. 3. Criterion.5 the MoJ has not developed a detailed internal procedure for preparation of the reports. Recommendation is not yet implemented. 4. Criterion.8 there is no procedure prescribed for the actions of the MoJ and the MoI in the event of detection of irregularity within the pre-defined project of the State Police, and it is also not determined, which of the ministries would adopt the final decision on the irregularity. Procedure have been prescribed in the CoM Regulations 6

17 The Audit Authority will continue to follow-up implementation of recommendations from the compliance audits during next AAR reference period. 5. SYSTEM AUDITS 5.. Indication of the bodies that carried out the audits During the AAR reference period all system audits solely have been performed by the Audit Authority that is located within the Ministry of Finance in EU Funds Audit Department (more details see in Section.) Summary of audits carried out during AAR reference period The summary of the management and control system audits carried out during the AAR reference period, indicating the financial mechanism, programme, the audit body, the date of the audit carried out, audit scope, principal findings and conclusions, and whether there were systemic deficiencies and the state of follow-up is set out in Annex. The Audit Authority assessed the effective functioning of the management and control system at the level of the Beneficiary State, as well the effective functioning of the management and control system at the level of individual programmes, performing 3 system audits in total. In order to assess the effective functioning of the management and control system at the level of the Beneficiary State one system audit has been carried out: - Audit on the effective functioning of the management and control system of the European Economic Area and Norwegian Financial Mechanisms in the Ministry of Finance as the National Focal Point and the Treasury as the Certifying Authority. In order to assess the effective functioning of the management and control system at the level of the individual programmes two system audits have been carried out: - Audit on the effective functioning of the management and control system of the European Economic Area Financial Mechanism in the Society Integration Foundation as the Operator of the LV03 NGO Fund ; - Audit on the effective functioning of the management and control system of the Norwegian Financial Mechanism in the MoE and LIDA as the Operator and Agency of the LV06 Green Industry Innovation ; 5.3. Description of the basis for selection of the audits in the context of the audit strategy During the AAR reference period the Audit Authority has updated the risk assessment of entities involved in the management of the financial mechanisms and programmes. As a result of the risk assessment, in total institution (State Treasury) and programme (LV06) were assessed at high risk. The updated risk assessment did not differ significantly from the initial risk assessment included in the Joint Audit Strategy and institutions / programmes assessed at high risk were the same. Wherewith the Audit Authority decided to adhere to the Indicative audit plan for the period from 203 to 207 included in the Joint Audit Strategy. The summary of the updated risk assessment is provided in Table 5. 7 have been approved during the AAR reference period. 5. Criterion 3 the MoJ has not developed a detailed internal procedure for aggregation and review of information about the identified risks and measures for mitigation thereof before the preparation of the annual report of the. Recommendation is not yet implemented.

18 Institution Table 5: Summary of the risk assessment per institution Period in Total score of risk which audit is Actual audit Priority assessment planned to be period performed 4 - MoF 32 Medium PMB 32 Medium State Treasury 38 High LV07 MoEPRD / 30 Medium LV02 SRDA 33 Medium LV03 SIF 3 Medium LV04 MoC 3 Medium LV05 MoES / SEDA 32 Medium LV06 MoE / LIDA 37 High LV08 MoJ / MoI 34 Medium The Audit Authority carried out system audits in accordance with the Joint Audit Strategy, though it should be mentioned that the audit of the LV06 Green Industry Innovation although was foreseen to be carried out during the AAR reference period, actually started after 30 June 204 as the implementation of the LV06 have been delayed and until the second half of 204 there were no controls to test (even selection of the projects were not finalised). Though we are providing the results of this audit in this AAR: - in order to disclose the full state of the implementation of the Financial Mechanisms; - because the programme is indicated as a high risk programme in the Joint Audit Strategy Principal findings and conclusions drawn from the audit work for the management and control systems and their functioning LV03 (SIF) Category 2 LV06 (MoE and LIDA) Category 2 The National Focal Point Category The Certifying Authority Category Overall conclusion Category 2 Image 3. Conclusions drawn from the audit work for the management and control systems and their functioning 4 In accordance with the Joint Audit Strategy (see Section 3). 8

19 5.4.. Conclusion reached on the National Focal Point and Certifying Authority The Ministry of Finance performs functions of the NFP (including function of the entity responsible for the preparation and submission of irregularities reports) and the Treasury performs functions of the CA. In the result of the Audit on the effective functioning of the management and control system of the European Economic Area and Norwegian Financial Mechanisms in the Ministry of Finance as the National Focal Point and the Treasury as the Certifying Authority it was concluded that the MCS developed in the Ministry of Finance as the NFP and the Treasury as the CA functions effectively and complies to the Regulations on the implementation of the Financial Mechanisms and laws and regulations of the Republic of Latvia. Therefore it is concluded that the MCS established within the Ministry of Finance as the NFP and the Treasury as the CA is assessed in the category works well system is effective, only minor deficiencies were detected, which did not affect the operation of the MCS and were mostly immediately corrected. For the detailed findings please refer to Annex and for the detailed assessment of criteria and key requirements reached during audit please refer to Annex Conclusion reached on the LV03 Within the LV03 all the functions of the Operator are performed by the SIF. In the result of the Audit on the effective functioning of the management and control system of the European Economic Area Financial Mechanism in the Society Integration Foundation as the Operator of the LV03 NGO Fund it was concluded that MCS set up by the SIF as the PO for the programme LV03 NGO Fund operates efficiently and complies with the Regulations on the implementation of the Financial Mechanisms and laws and regulations of the Republic of Latvia, however separate improvements are necessary. The detected deficiencies do not significantly influence the operation of the MCS of the programme LV03 NGO Fund set up by the SIF. The project audits also revealed that separate improvements are necessary regarding the MCS of the programme LV03 (see Section 6.6), therefore it is concluded that the MCS established within the SIF as the Operator of the programme LV03 is assessed in the category 2 works, but some improvements are needed separate deficiencies detected, which have a moderate effect on the operation of the management and control system of the programme, and the Audit Authority has expressed the recommendations for improvement of the system and the SIF has developed the plan of measures for implementation of recommendations. For the detailed findings please refer to Annex and for the detailed assessment of criteria and key requirements reached during audit please refer to Annex Conclusion reached on the LV06 The MoE is the Operator for the programme LV06, but functions of the Operator have been partly (in regards of implementation, monitoring and control at the project level) delegated to the LIDA as the Agency. In the result of the Audit on the effective functioning of the management and control system of the Norwegian Financial Mechanism in the MoE and LIDA as the Operator and Agency of the LV06 Green Industry Innovation it was concluded that the MCS of the programme LV06 set up by the MoE and LIDA operates, but LIDA has not yet developed all the internal procedures foreseen in the description of the MCS of the programme, so there is a risk that the lengthy development process of internal procedures may interfere the acquisition of the funding allocated to the programme. It was concluded that MCS of LIDA works, but require separate improvements since following internal procedures are not developed: 9

20 - Procedure for tripartite contracting as well as a tripartite agreement form for the small grant scheme. - Procedure for the performance of the project on-the-spot checks. It was concluded that MCS of MoE works, but require separate improvements. It is necessary to MoE to strengthen the monitoring of implementation of functions delegated to LIDA. Therefore it is concluded that the MCS established within both the MoE as the Operator and LIDA as Agency of the programme LV06 is assessed in the category 2 works, but some improvements are needed separate deficiencies detected, which have a moderate effect on the operation of the management and control system of the programme, and the Audit Authority has expressed the recommendations for improvement of the system and the MoE and LIDA has developed the plan of measures for implementation of recommendations. For the detailed findings of audit please refer to Annex and for the assessment of criteria and key requirements reached during audit please refer to Annex Indication of whether any problems identified were considered to be of a systemic character, and of the measures taken, including a quantification of the irregular expenditure and any related financial corrections No deficiencies resulting in the irregular expenditure and financial corrections were identified during 3 system audits performed during the AAR reference periods and discussed in detail in Section 5.4. In total as a result of these system audits the Audit Authority issued 23 recommendations: - 3 average priority recommendations; - 0 low priority recommendations. For the implementation status of issued recommendations in the time of preparation of AAR see Table 6. Table 6: Implementation status of issued recommendations Recommendations priority Average Low TOTAL Recommendations implemented 6 7 Recommendations partly implemented The deadline of implementation of recommendations not yet in force Recommendations are not implemented TOTAL The Audit Authority performed the analysis of the errors and findings in order to identify their systemic nature. As it is shown in Chart 26 % of all deficiencies identified by the Audit Authority during the system audits are identified within Criterion Adequate management verifications. 20

21 Chart : Analysis of the errors and findings 5.. Formal agreement developed on the functions that are delegated to the agencies or project partners, as well as appropriate delegated functions are defined to assure effective performance monitoring, error 8.2. Procedures in place to ensure implementation of preventive and corrective action in case of systemic errors, 2 errors.. A clear definition of functions (organisation chart, indicative number of posts, documented procedures and manuals), 4 errors 3.. Adequate procedures for the selection of projects, 3 errors 3.5. The CA reconciles and does an arithmetical check of the financial report, error 3.3. Adequate information and strategy for provision of information, 4 errors 3.2. Adequate management verification, 6 errors 8.3. Irregularity reports are provided to the Donor states, error 2.. Compliance with the principle of separation of functions between and within the entities concerned in management of financial mechanism, error The Audit Authority performed qualitative evaluation of the deficiencies identified, and consider that (see Chart ): - Deficiencies found in criterion 3.2 Adequate management verifications mainly are related to keeping the evidence of the performed verifications (found in SIF and LIDA), as well as methodology for carrying out the on-the-spot checks (found in SIF and LIDA), as well as ability of CA to receive information on performed on-the-spot checks. These are considered minor systemic errors as have been found at the very beginning of the implementation of the MCS and recommendations have been provided for the improvement of the MCS. - Deficiencies found in criterion. A clear definition of functions are related to LIDA MCS as it was found that LIDA has not yet developed all the internal procedures foreseen in the description of the MCS of the programme. These are considered minor systemic errors as do not impact the operational effectiveness of the MCS, but there is a risk that the lengthy development process of internal procedures may interfere the timely acquisition of the funding allocated to the programme. - Deficiencies found in criterion 3. Adequate procedures for the selection of projects are related to traceability of the registration of project applications within Fund for bilateral relations at Level and Open call projects (found in LIDA). These are considered minor systemic errors as have been found at the very beginning of the implementation of the MCS and recommendations have been provided for the improvement of the MCS. - Deficiencies found in criterion 8.2. Procedures in place to ensure implementation of preventive and corrective action in case of systemic errors are related to MoE and LIDA as it was found that LIDA has not yet developed all the internal procedures foreseen in the description of the MCS of the programme and consequentially not all recommendations from the compliance audit are implemented. The deficiency found in criterion 5. Formal agreement developed on the functions that are delegated to the 2

22 agencies or project partners, as well as appropriate delegated functions are defined to assure effective performance monitoring relates to the same fact, as MoE need to strengthen the monitoring of functions delegated to LIDA, including elaboration of internal procedures of LIDA. These are considered minor systemic errors as do not impact the operational effectiveness of the MCS, but there is a risk that the lengthy development process of internal procedures may interfere the timely acquisition of the funding allocated to the programme. - Deficiencies found in other criteria have been already implemented and are considered to be minor. 6. PROJECT AUDITS 6.. Indication of the bodies that carried out the audits During the AAR reference period all project audits solely have been performed by the Audit Authority that is located within the Ministry of Finance in EU Funds Audit Department (more details see in Section.) Description of the basis for selection of the sample(s) This AAR covers the expenditures which were incurred during the period from May 203 to 3 December 204, as these expenditures were included in IFRs submitted to Donor states during AAR reference period:. Two IFRs (IFR#6 and IFR#7) of the LV0 Technical Assistance in which expenditures of Technical Assistance and Fund for Bilateral Relations at National Level were included. 2. Two IFR of each programme in total 4 IRFs for 7 programmes in which following expenditures were included: a. s management expenditures. b. Funds for bilateral relations at s Level expenditures. c. Complementary action expenditures. d. Project expenditures were declared only in following programmes: i. LV03 expenditures of pre-defined project and 32 projects; ii. LV08 expenditures of pre-defined project; iii. LV07 expenditures of pre-defined project. The decision regarding expenditures to be audited has been taken by the Audit Authority based on the following assumptions:. In accordance with the updated risk assessment of the entities involved in the management of financial mechanisms and programmes the average material misstatement risk for the Financial Mechanisms is moderate. Respectively in accordance with the Joint Audit Strategy high risk projects should be audited. If they do not provide sufficient coverage (at least 0% of expenditure included in IFRs submitted to Donor states during AAR reference period), the moderate and low risk projects are additionally sampled. 2. The first step was to identify the high risk projects which further on would be treated separately as a strata. But in accordance with the carried out projects risk assessment there were no high risk projects among those projects which expenditures were included in IFRs submitted to Donor states during AAR reference period. 3. The second step was therefore to select sample of moderate and low risk projects for the auditing using the random sampling. The characteristics of the population are summarised 22