FP7 CERTIFICATION MODALITIES

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1 KP7 bijeenkomst Nederlandse accoutants Nijenrode Business Universiteit, Breukelen 12 January 2010 FP7 CERTIFICATION MODALITIES Laurence DECHEVRE European Commission - DG Research, Unit A5 1

2 Overview of presentation Background to FP7 certification system Types of FP7 Certificates Practical issues (certification process, main challenges, etc.) State of play Audit strategy & extrapolation Questions & Answers 2

3 FP7 Audit Certification Background (I) Research FP implemented by multi-annual work programmes with specific financial and legal provisions, covering various topics (health, energy, ) in the EU Member States and even beyond implying a large number and variety of participants ( ), each operating with their own internal control and accounting systems EC contribution to FP7 projects is based on cost-sharing sharing (% of the costs incurred) and reimbursement of actual eligible costs which can be problematic for some items (personnel and indirect costs, VAT, ) Commission s cost reimbursement model did not capture all national accounting rules Inherent risks for errors 3

4 FP7 Audit Certification Background (II) Problems noted by Commission auditors and European Court of Auditors when re-auditing certified FP6 projects (80% of errors in personnel and indirect costs). Need for tighter control over work carried out by beneficiaries auditors Decision to adopt Agreed Upon Procedures rather than audit certificates based on assurance opinion In addition to the Certification of periodic grant payment requests (Certificates on the Financial Statements), introduction of the Certificates on the Methodology Reduce risk of errors Stimulate transparent accounting 4

5 FP7 Certificates at a glance CFS Certificates on the Financial Statements (CFS) Replace FP6 Audit Certificates Verification of costs and receipts CoMAv CoM Form D - Annex VII of model Grant Agreement (Terms of Reference, Report on Factual Findings, Table of procedures) Cover the costs declared in the Forms C To be submitted only when cumulative EC contribution is (exception : if project duration 2 years, only at the end of the project) 5

6 FP7 Certificates at a glance CFS Certificates on the Methodology for Average Personnel Costs (CoMAv CoMAv) Verification of systems CoMAv Form E Annex VII of model Grant Agreement (Terms of Reference, Report on Factual Findings, Table of procedures) Mandatory for beneficiaries intending to charge average personnel costs physical persons and SME owners who do not receive a salary Cover the methodology used to calculate average personnel costs only (no reference to indirect costs) 6

7 FP7 Certificates at a glance CFS CoMAv CoM Certificate on the Methodology for Personnel and Indirect Costs (CoM CoM) Verification of systems Form E Annex VII of model Grant Agreement (Terms of Reference, Report on Factual Findings, Table of procedures) Optional for beneficiaries fulfilling the eligibility criteria At least 8 participations in FP6 contracts with EC contribution for each OR At least 4 FP7 Grant Agreements signed before 01/01/2010 with EC contribution for each OR At least 8 FP7 Grant Agreements signed with EC contribution for each anytime during FP7 Covers the methodology used to calculate personnel costs (actual or averages) and indirect costs (analytical, simplified or flat-rate) 7

8 FP7 Certificates at a glance CFS CoMAv CoM Advantages - CoM for Personnel and Indirect Costs No CFS for interim payments (only a CFS at the end of the project when EC contribution ) Accepted CoM valid for the duration of FP7 (unless change of methodology ) Assurance that methodology used to calculate personnel and indirect costs conforms to FP7 requirements (early detection and correction of possible methodological errors) Contributes to reduce : audit scope for the certifying auditor in CFS and for ex-post auditors (compliance to methodology versus audit tests / individual recalculations) administrative burden (less CFS to be submitted by beneficiaries of multiple grants) costs for the whole certification system (less funds spent on certificates) 8

9 Submission of the Certificates on the Methodology (CoM/CoMAv CoM/CoMAv) CoM CoMAv Eligibility request 1) Request for eligibility submitted to the Commission by the beneficiary (via functional mailbox) at any time during FP7 2) Acceptance/Rejection by the EC within 30 calendar days Submission process 3) Submission of the CoM/CoMAv during lifetime of FP7 and at the earliest on the start date of the first FP7 project (warning: the certifying auditor needs a sound basis to perform the agreed-upon-procedures) 4) Acceptance/Rejection by the EC normally within 60 calendar days 9

10 Commission Certification Process CoM DGs concerned Research Information Society Energy & Transport Enterprise & Industry CoMAv Inter service Joint Assessment Committee on FP7 Certification Commission s reply Taking into account FP7 rules for participation Model Grant Agreement Financial Guidelines Certification Guidelines Other legal and audit information Approval Rejection Pending 10

11 Main challenges encountered with submitted certificates Mandatory form not respected Terms of Reference are missing (sections 1.1 to 1.8 of the form) and/or not signed by both parties Agreed-upon-procedures are performed partially Benchmarks and support documents are missing to enable proper evaluation of the average personnel costing methodology (Form E, procedure 3) Long delays in providing to the additional information requested by the EC 11

12 State of Play on FP7 ex-ante certification (as of 8 January 2010) Eligibility Requests CERTIFICATES Type of Certificate Submitted Accepted Submitted Accepted Rejected Withdrawn Pending CoM Average Personnel Costs and IC CoM Real Personnel Cost and IC Certificate Average Personnel Costs (CoMAv) N/A TOTALS

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14 Time-recording : Basic Principles Art II.15.1 of the FP7 model Grant Agreement With regard to personnel costs, only the costs of the actual hours worked by the persons directly carrying out work under the project may be charged. FP7 Guide to Financial Issues Employees have to record their time on a daily*, weekly, or monthly basis using a paper or a computer-based system The time-records have to be authorised by the project manager or other supervisor The complete time recording system should enable reconciliation of total hours in cases where personnel work on several projects There must be some system allowing the beneficiary to indicate the activity to which the hours have been attributed. 14 * An example of timesheet is included in the FP7 Guidance Notes on Audit Certification (version 3/9/2009, Annex V)

15 Time-recording and CoM Person-based full time-recording system* = Requirement for the Certificate on the Methodology (Form E) Time recording per researcher/employee working on EC research projects with, at least, the next characteristics: Covering all productive hours of the researcher/employee Differentiating time by activities EC projects: research, demonstration, management, others Non-EC: projects, administration, training, sickness, holidays, etc Covering the full year Recording actual data; no estimations Duly authorized Project-based time-recording system = Minimum requirement for Form D (CFS) but could be questioned at the time of an audit (no sufficient audit evidence on the annual productive hours, on the absence of double-charging, etc). 15

16 Example of daily full time-recording (per person) Due to the fact that different activities have different reimbursement rates, work on EC projects is to be recorded not only differentiating by individual EC project but also by activities (further details as for instance the work-package are advisable) The level of detail of this section is to be defined by the beneficiary. The Commission requests at least time-records by main activities Absences are necessary to verify the accuracy of the annual productive hours used to calculate the hourly rates Date Mon 02/02 Tue 03/02 Wed 04/02 EC-Projects R&D Activities Project x 3 4 Project y 5 5 Demonstration Project x Project y Management Project x Project y Other Activities Project x Project y Other research projects and Internal activities Teaching Training National Projects ( ) Absences Annual Leave Special Leave 8 Illness 16 Total hours 8 8 9

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18 Average personnel costs Legal basis: Article 31.3 of the FP7 Rules of Participation Regulation (EC) No 1906/2006 Article II.14.1 of the model Grant Agreement Two conditions are to be fulfilled by an average personnel costs methodology to be approved by the Commission: The very well known: It should be the usual accounting practice of the beneficiary and the sometimes forgotten: It can not lead to significant deviations vis-à-vis the actual costs 18

19 ACCEPTABILITY CRITERIA Adopted by Commission Decision on 23 June 2009 Methodologies in which, for each personnel category, the difference between the average rate and the extreme values (upper and lower rates) is 5%: the methodology is acceptable. Methodologies in which, for any personnel category, the difference between the average rate and the extreme values (upper and lower rates) > 25%: the methodology is not acceptable. Methodologies not fulfilling the first criterion and in which, for each personnel category, the difference between the average rate and the extreme values (upper and lower rates) 25%: only methodologies applied by beneficiaries having participated in at least 4 FP6 projects with an EC contribution 1 in each of them equal or above EUR or 4 FP7 projects with an EC contribution in each of them equal or above EUR are acceptable. 1 In this context, EC contribution is defined as the Community financial contribution allocated to the beneficiary in the estimated breakdown of the budget 19

20 PRACTICAL EXAMPLE The following table presents the different categories of an hypothetical methodology along with the data requested in Form E regarding the personnel costs - Category Number of employees Lowest pay Highest pay Average Median Lower % variation with the average Upper % variation with the average Annual Prod. hours Average rates Heads of department , , , , , , , ,42-7,33% -6,98% 6,46% 5,24% ,14 64,66 Senior Researchers , , , , , , , ,49-14,38% -6,98% 33,62% 5,24% ,20 48,98 Junior Researchers , , , , , , , , , , , ,70-11,73% -11,73% -11,73% 13,00% 13,00% 13,00% ,80 39,60 35, , , , ,42-4,94% 3,76% ,37 Technicians , , , , , , , ,55-11,73% -30,87% 13,00% 16,04% ,34 23, , , , ,99-11,73% 13,00% , , , , ,88-11,73% 13,00% ,87 Assistants , , , ,99-11,73% 13,00% , , , , ,52-13,67% 28,12% ,08 Trainees , , , , , , , ,86-11,73% -4,90% 13,00% 3,80% ,03 10,95 20

21 Particular case of SME owners and physical persons not receiving a salary In FP6 no specific provisions for the particular case of SME owners without a salary; general eligibility criteria applied (only actual costs registered in the accounts are eligible) FP7 Guide to Financial Issues states that: «[Physical persons without a salary] must opt to declare average personnel costs, on the basis of a certified methodology approved by the Commission [ ], based on their income (e.g. tax declarations) as recognised by national law (usually fiscal law) In FP7, personnel costs charged by the beneficiary (in this case SME owner or physical person) on the basis of a certified methodology are deemed not to differ significantly from the actual costs 21

22 Personnel Costs & Most common errors Use of budgeted/estimated rates instead of actual rates Use of the hours worked in research only for calculating the hourly rate, thus overcharging the EC project Wrong calculation of productive hours Insufficient time recording or insufficient evidence on working times For average personnel costs : Insufficient number of categories: salary range is too wide and, therefore, the average is not representative enough Total calculated personnel costs using the averages is higher than the actual cost 22

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24 Indirect costs methods Based on actual indirect costs : as registered in the accounts of the beneficiary according to its usual accounting and management practices adjusted, when necessary, in order to eliminate all ineligible costs Normal Normal (analytical accounting system) Simplified Simplified (at entity level) Flat-rates on eligible direct costs: to be calculated on the direct eligible costs excluding subcontracting and costs of resources made available by third parties which are not used in the premises of the beneficiary Flat rate 20% (general) Flat rate 60%* (for funding with RTD and for certain types of entities (non-profit public bodies, research organisations, secondary and higher education establishments, SMEs) * Commission decided on 15 June 2009 to maintain the flat-rate for indirect costs at 60% 24

25 Which indirect cost method in FP7? Real Indirect Costs Flat Rate Normal Simplified 20% 60% 1 Do I have an analytical accounting system allowing to determine with certitude the indirect cost related to research activities? NO IF THE ANSWER IS NO, THEN: YES Do I have an accounting system allowing to identify all my indirect costs and a reliable cost driver to allocate them? YES NO 1 Only applicable to Non-profit public bodies, Secondary and higher education establishments, Research organisations and SMEs 25

26 Simplified Method Article II.15.2 of the FP7 model Grant Agreement states that: «A beneficiary is allowed to use a simplified method of calculation of its full indirect eligible costs at the level of its legal entity if this is in according with its usual accounting practice» «The simplified approach must be based on actual costs derived from the financial accounts of the last closed accounting year» The FP7 Guide to financial issues establishes the following requirements: 1/ The system must allow to remove the ineligible costs 2/ It must at least allow for the allocation of the overheads at the level of the legal entity to the individual projects by using a fair "driver 3/ It should follow the normal accounting principles and practices of the beneficiary 26

27 Indirect Costs & Most common errors Cost driver is unsubstantiated estimation (cost driver must be factual and easy to reconcile with the accounts) Use of budgeted/estimated rates instead of actual rates Identifiable indirect costs not related to research are charged to the project (cost of sales, self-funded research, provisions, costs of capital, ) For beneficiaries using flat-rates : percentage is applied on subcontracting costs and on resources made available by third parties not used on the premises of the beneficiary For beneficiaries using simplified method : Pool of costs contains clearly differentiable indirect costs not related to research activities Only research hours (and not all productive hours) are used for the allocation of the indirect costs to the projects 27

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29 FP7 Audit Strategy - Objectives Assess legality and regularity of transactions and provide input to the Annual Declaration of Assurance of the Directorate General but also Provide the basis for corrective and recovery mechanisms as part of the internal control system Provide feedback on potential corrective actions to the relevant operational services and to beneficiaries, based on the analysis of audit findings Improve awareness within research beneficiaries 29

30 Overview 30 FP7 Audit Strategy

31 FP7 Audit Strategy Types of audits Representative audits Contribute towards an error rate representative for the whole population of beneficiaries Use of a representative selection method (Monetary Unit Sampling) Corrective audits For top beneficiaries : maximise impact of audits and audit coverage, with the use of both extrapolation and follow-up procedures For beneficiaries with specific risks : provide additional audit information supporting assurance to management based on risk profile analysis of both whole population and individual contractors Other types of audits : system audits, joint audits (technical and financial), follow-up audits, audits on requests 31

32 EXTRAPOLATION : SYSTEMATIC ERRORS Definition Errors that are considered repetitive and recurring => contractor is not complying with the contractual obligation in a systematic way Assumption Can imply that all currently open and closed contracts under the same framework program (FP) are affected and might need to be (retroactively) adjusted Impact Contractor asked to reconsider all financial statements handed in under the same FP (recalculation/revision where necessary) 32

33 EXTRAPOLATION PROCEDURE Common decision of all Research DGs (RTD, INFSO, ENTR, TREN) concerned and having contracts/grant agreements with organisation audited However, decentralised follow-up of implementation of results Detailed formal Letter of Closure of the Audit indicating procedures to be followed and including the list of contracts/grant agreements subject to extrapolation (consolidated for all Research DGs) 45 days delay to hand in revised financial statements or appropriate explanations on the listed contracts 33

34 ADDITIONAL INFORMATION Guidance notes on FP7 audit certification doc_en.html#guidance FP6 / FP7 Audit certification policy website certification/home_en.html FP7 Certification FAQs ftp://ftp.cordis.europa.eu/pub/fp7/docs/faq-certification_en.pdf certification_en.pdf And in case of doubts, don't forget: RESEARCH HELPDESK ec.europa.eu/research/enquiries 34

35 Thank you very much for your attention! 35