A NEW APPROACH IN THE AUDIT OF THE EU FUNDS

A NEW APPROACH IN THE AUDIT OF THE EU FUNDS BRAGA FILOFTEIA VIORICA NAFTANAILA CRISTINA ALINA SPIRU HARET UNIVERSITY FACULTY OF ACCOUNTING AND FINANCE CÂMPULUNG Abstract According to the European Union norms, the operations financed from the European funds should be subject to the audit work. Until 2013 these activities are carried out according to the International Standard on Related Services (ISRS) 4400 Engagements to perform agreed upon procedures regarding the financial information; since 2014 will apply ISA 800 Audit of the financial statements prepared in accordance with special purpose frameworks and ISA 805 Audits of the individual components of the financial statements of the specific elements, accounts or other aspects of the financial statements. Therefore, in this paper I shall present the auditors responsibilities and the way of reporting in the new context, starting from some statistics that reflect the absorption situation of the European funds up to 2013. Keyword: audit, operations financed from the European funds, audit report JEL classification: M40, M42 Introduction EU aims to strengthen the economic and social cohesion in order to promote the harmonious, balanced and sustainable development of the Community. This measure is applied using funds (ERDF, ESF, and Cohesion Fund), the European Investment Bank (EIB) and other existing financial instruments. The measure aims to reduce the economic, social and territorial disparities which, particularly, have arisen in the countries and regions with developmental delays and related to the economic and social restructuring and population aging. The absorption of these funds was done in a different way by the European Union countries, depending on several factors such as experience, legal provisions, economic and social conditions and the possibility of co-financing, both at the public institutions and the commercial companies level etc. Below we present the state of implementation of the Operational Programs financed by the Structural Instruments in Romania. 1.1 Brief presentation on the implementation of the Operational Programs financed by the Structural Instruments on 31 December 2013 Situation of the submission and approval of the projects, contracts signing, making payments to the beneficiaries and the amounts reimbursed by the European Commission reported to the EU allocation for 2007-2013 reached the sums of 19.21 billion euro. [1] For those of seven operational programs were submitted 41,640 projects, totalling approximately 72.2 billion euros, of which approx. 47.6 billion euro represent the EU contribution. From all the submitted projects, 14,876 projects were approved, totalling approx. 33.2 billion euro of this amount, approx. 19.8 billion euro represent the EU contribution. There were signed 11,772 grant agreements with beneficiaries, with the eligible worth of approx. 22.9 billion euro of which approx. 17.9 billion euro represent the EU funds. The EU contribution for the signed contracts, in relation to the 2007-2013 EU allocation is approximately of 93%. The total payments to the beneficiaries (pre-financing and reimbursements), except for reimbursement of VAT were amounted to about 7.84 billion euros. From this value, the EU contribution amounted approx. 7 billion euro, or 36.47% of the 2007-2013 allocation. There was received from the European Commission, the total amount of 7.20 billion euro, which represents 37.48% of the 2007-2013 allocation. From these funds, the intermediate reimbursed payments totalling 5.089 billion euro, which represents 26.49% of the 2007-2013 allocation. The value of the statements of expenditure submitted to the European Commission is 6.430 billion euro, which means a current absorption of 33.47% of the EU allocation. Ministry of European Funds (MEF) informs the current absorption rate of the structural and cohesion funds reached 33.47% on December 30, 2013, four times higher than in early May 2012, when he was only 8, 53% how it is related by Agerpres. In the period 1 January to 30 December 2013 it was requested to the European Commission the reimbursement of over 3.56 billion euro, an amount greater than that required in the entire period 2007-2012. 536

At that time, the rate of repayments to Romania by the European Commission was 26.49%, 3.5 times higher than that in early May 2012. Ministry explains in the press release quote: Romania has received 5.09 billion euro from the structural and cohesion funds in the current programming period. The amount of reimbursed funds to Romania in 2013 exceeds 2.88 billion euro, an amount greater than that received in all the years of 2007-2012. In the first ten months of 2013, Romania registered the highest increase of the amounts reimbursed by the European Commission to all Member States: the amount of structural funds and the cohesion received by our country was 115% higher than in 2007-2012. On 30 December, the European Commission has to reimburse to Romania an amount exceeding 1.34 billion euro. Teodorovici, minister of the European Funds, highlights in the press release that our country has recorded this year, two great performances. "This year has been a success in the absorption of structural and cohesion. Thanks to those who understand that this year is one in which Romania is required to obtain better results, in 2013, Romania has made two great performances: the absorption rate increased more than in all other years of the current programming period and our country did not lose a single euro from the structural and cohesion funds allocated by the European Union. The official says that in 2013, the European funds have been a strong support both for the economy and the private sector, a good example being the current absorption rate recorded in the Operational Programme Increase of Economic Competitiveness, which increased of 2.5 times this year, exceeding the 36% at December 30, 2013. 2013 will remain a reference year in absorption of the EU funds and due to the simplification and streamline measures that have been implemented. In 2014 we committed to complete the reform of the implementation system for absolutely all stages of using of the EU funds by the beneficiaries to be simplified to the maximum, and the economy to receive a consistently support from the funds provided by the EU, also says the minister Teodorovici. Even in the context of these results, Romania remains on the last place in the European Union regarding the absorption of European funds, how to statistics released by Brussels in October 2013 - the latest available data at the Community level. Bulgaria overtook us since the end of 2010. Then, the absorption of the Structural Funds in Bulgaria was 10.2%, while in Romania it amounted to 8.6%, the lowest level of the EU states. As of October, the absorption rate of European funds allocated to Bulgaria reached 37%, said Zinaida Zlatanova, deputy in the government in Sofia. A report published at the beginning of that month, by the European Parliament, shows that Romania and Bulgaria are on the last places in terms of attracting the European funds. Regarding the audit on the beginning of 2014, professor Ph.D. Horia Neamţu, CAFR President and Minister of European funds, signed a Cooperation Agreement on the Organization and functioning of the financial audit for European funds and other non-reimbursable funds from other donors, which provides that the responsible authorities for licensing, regulation and supervision of the financial system of the structural instruments must work together to ensure transparency, stability and integrity of the system, and the protection against non-compliance with the practices of beneficiaries of funds established by national and European regulations. In turn, the financial auditors must take the responsibility for the Financial Independent Report on the independent opinion on the expenditure and funding sources of the project audited in accordance with International Standards on Auditing of the International Federation of Accountants (IFAC), fully adopted by Chamber. It is noted that this cooperation should focus, in particular, on issues arising from the interplay of what happened at the institutional and operational level, in order to prevent duplication of some activities. The objective of collaboration is undertaking the common actions to contribute to achieving the best conditions of the tasks and responsibilities of each authority, respectively: training of the auditors on national and 537

European legislation harmonized with the requirements of eligibility of the expenditure and income and their legal approaching in terms of financial and adopting the common measures on the supervisory of the auditors. So, the Chamber of Financial Auditors of Romania will ensure the takeover from the Ministry of European Funds and dissemination to the auditors of the rules by which auditors are required to achieve the assurance services for a special purpose (ISA 100-805) on the eligibility of the expenditure and sources of funding received and/or required by applications for reimbursement by the beneficiaries and to provide reasonable assurance to the Managing Authority or to other entities involved in the management and certification of the non-reimbursable funds from other donors on any information required in connection with the audit. 2.2 Audit of the financing contracts from the European funds until 2013 Until 2013 the expenditure verification activity and reporting on the financing contract is achieved both in accordance with these technical specifications and: - In accordance with the International Standard on Related Services 4400 ( ISRS ) Commitment to achieve the agreed procedures on the financial information issued by IFAC and adopted by the CAFR; - In accordance with the Code of Ethics by IFAC and adopted by the CAFR. Although ISRS 4400 provides that independence is not a requirement for the commitments of the agreed procedures, the Managing Authority / Intermediate Body require that the auditor to respect the independence requirements of the Code of Ethics. ISRS 4400 requires performing the specific agreed procedures in accordance with a commitment between the beneficiary of the funding and auditor, regarding the expenditure verification of a non-reimbursement financing contract. The objective of the commitment is to verify by the financial auditor that the amounts claimed for reimbursement by the Beneficiary in the requesting of the reimbursement for the financed action under the financing contract were performed (reality of deployment) are legal (legality), accurate (accuracy) and eligible as well as the submission of the report of the factual findings on the performed procedures to the Beneficiary. Such commitment is not an assurance commitment, the auditor does not provide an audit opinion and not expresses an assurance. The financial auditor should plan the activity so that to perform an effective verification of the expenses. For this purpose the auditor performs the specified procedures in the Technical Specifications of the funding program (scope of activity - procedures to be performed) and uses the evidence obtained from these procedures as the basis for the report of the factual findings. The auditor should use the documents that are important in providing the evidence to support the Report on the Factual Findings and evidence showing that the work was carried out in accordance with ISRS 4400 and Technical Specifications. The report of the factual findings should describe the purpose and the agreed procedures of this commitment in sufficient details, so, to allow the Beneficiary and the Managing Authority/ Intermediate Body to understand the nature and extent of the procedures performed by the auditor. Using the reporting format it is compulsory the one proposed by the ST. During the completion of these procedures the Auditor may apply techniques such as inquiry and analysis, (re)calculation, comparison, other accuracy varification, observation, inspection of the records and documents, inspection of the assets and obtaining the confirmations. The financial auditor obtains sufficient and appropriate evidence from these procedures to draw up a report of the factual findings. On this purpose, he may use the guidance provided by the International Standard on Auditing 500 Audit Evidence and particularly the paragraphs that refer to sufficient and appropriate audit evidence. The auditor exercises a professional judgment about what constitutes the sufficient and appropriate evidence if it considers that the guidance provided by ISA 500, the terms and conditions of the financing contract and ST for this commitment are not enough. The indicative list of the types and nature of evidence which the auditor can often find at the verification of the expenditure, include: Accounting records (electronic or manual) from the Beneficiary's accounting system as Journal Register, its subchapters and salary accounts, fixed asset registers and other relevant accounting information; Proof of the procurement procedures and the auctions documents, offers for auction and the evaluation reports; Proof of commitments such as contracts and the order forms; Proof of providing the services such as approved reports, time sheets, transport tickets (including boarding passes), evidence for participation at seminars, conferences and training courses (including relevant documentation and obtained material, certificates), etc.; Proof of receiving the goods and the reception documents from the suppliers; Proof of completion the works such as invoices and receipts; Proof of payment such as bank statements, notices of payment, proof of payment of the subcontractors; 538

For the petrol and diesel costs, a centralizing list of the covered distances, consumption of the used vehicles, fuel and maintenance costs; Registers on the salary payments and staff and the related contracts, the payroll and the time sheets. For the recruited locally staff for a fixed period contracts, details of the paid remuneration, proved by the locally responsible persons, broken down into gross salary, social contributions related, insurance and net salary. For the experts and/or staff from the EU (if the activity is implemented in Europe) analyzes and breakdowns of monthly expenditure of the labour services: assessed based on the unit prices per quantifiable unit of time and broken down into gross salary, contributions and social insurance and net salary. This can vary depending on the nature of the costs and practices in the country concerned. 2.3 Audit of the financing contracts from the European funds from 2014 Financing contracts from European funding represent a reporting framework with special purpose and the auditing concerns the aspects of the financial statements. Therefore, starting from January 1, 2014 it will be applied ISA 805 Audits of the individual components of the financial statements, specific elements, accounts or other aspects of the financial statements, and ISA 800 Audit of the financial statements prepared in accordance with general frameworks with special purpose. This involves the application and adaptation of all relevant auditing standards and issuing an audit report in which to express the independent opinions on the expenditure and financing sources of the audited project. The objective of the auditor in applying ISAs in an audit of the individual components of the financial statements or of a specific element, account or issue of a financial situation is to adequately address the specific considerations that are relevant to: (a) Accepting the mission; (b) Planning and conducting that mission, and (c) Formulate an opinion and reporting on the individual financial situation or the specific element, account or appearance of the financial statements [2]. ISA 200, Objectives and General Principles Governing an Audit of Financial Statements requires the auditor to comply with: (a) Relevant ethical requirements, including those relating to independence, relating to the audits of financial statements, and (b) All the relevant ISAs for the audit. It also provides that the auditor to comply with each requirement of an ISA unless the entire ISA is not relevant or the requirement is not relevant because it is a condition that does not exist. In the exceptional circumstances, the auditor may consider necessarily to depart from a relevant requirement of an ISA, he performing the alternative audit procedures to achieve that requirement. Formulation of the audit opinion ISA 210, Terms of Audit Engagements provides that agreed terms of the audit mission include the expected form of any reports to be issued by the auditor. In case of an audit of individual components of the financial statements or a specific element of the financial statements, the auditor should consider the extent to which the expected form of opinion is appropriate in the circumstances. When the auditor is formulating an opinion and reporting on an individual component of the financial statements or a specific element of the financial statements, he should apply the requirements of ISA 700 The Auditor's Report on Financial Statements adapted as necessary in the circumstances of the mission. The purpose of this International Standard on Auditing (ISA) is to establish rules and provide guidance on the form and content of the audit report issued as a result of an audit by an independent auditor on the financial statements of an entity. Basics elements of the audit report The audit report includes the following basic elements, usually presented in the below format: (a) Title; (b) Receiver; (c) Opening or introductory paragraph (i) Identifying the audited financial statements; (ii) A statement of responsibility of the entity management and the auditor's responsibility. (d) Paragraph on the scope of the engagement (in which it is presented the nature of an audit) (i) A reference to IAS or to the standards or national practices or relevant auditing; (ii) A presentation of the audit report; (e) The paragraph regarding the opinion, which contains 2 2 Paragraph 5 (e) reflects the revised text and becomes effective for the audit engagement of the financial statements for periods ending on or after 30 September 2002. Initial paragraph 5 (e) is shown below: (e) Opinion paragraph containing an expression of opinion on the financial statements 539

(i) A reference to the financial reporting framework used to prepare the financial statements (including identifying the country of origin 3 of the financial reporting framework when the used framework is not represented by the International Accounting Standards), and (ii) An expression of opinion on the financial statements; (f) Date of the report; (g) Address of the auditor, and (h) Auditor's signature. The object of the audit report is the of reimbursement request of the expense. The auditor should ensure MA/IB as the grant awarded that was spent in accordance with the terms and conditions of the financing contract. Basically, the auditor considers if those expenses required for reimbursement by the beneficiary are conformed to the financing contract, that it respects the criteria: 1. Eligible (according to HG 759/2007 and the contract) 2. Legal (there are legal back transactions and justified documents) 3. Real (there are real back transactions) 4. Accurate (the declared amounts are accurate and correctly classified) What happens if the auditor undertakes a mission to audit of a full set of circumstances and one to report on an individual component of the financial statements or a specific element of the financial statements in the same company? If the auditor undertakes a mission to report on the individual components of the financial statements or a specific element of the financial statements with an audit mission of a complete set of the financial statements, the auditor should express a separate opinion for each mission. If the auditor's report on a complete set of the financial statements is changed, the auditor should determine the effect that may have on the auditor's report to a specific element of those financial statements. If it is considered adequately, the auditor has to modify the opinion on the individual component of the financial statements or to its specific element, or to include a paragraph of comments or an explanatory paragraph in the auditor's report, as appropriate. Even when the changed report over the complete set of the financial statements is not related to the audited item, the auditor may refer to changes in the other explanatory paragraph in his report on the component of the financial statements or on the element because he considers that it is relevant to users' understanding the audited financial statements component or of the audited element or the related auditor's report. If the auditor concludes that it is necessary to express an adverse opinion or is unable to express an opinion on the complete set of the financial statements of the entity as a whole, but in the context of a separate audit of a specific element included in those financial statements, the auditor still considers adequately to express an unmodified opinion on that element, the auditor should do so, only if: (a) The auditor is not prohibited by law or regulation to do so; (b) That opinion is expressed in an auditor's report that is not published along with the auditor's report containing the contrary opinion or it is impossible to express an opinion, and (c) Specific element does not constitute a significant part of the complete set of the financial statements of the entity. 2.4. Conclusions and proposals Ø in 2007-2013 there were submitted 41,640 projects, 14,876 projects were approved which represent 35.72%, and there were signed 11,772 financing contracts with beneficiaries, which mean 28.27%, Ø rate of the current absorption of the structural and cohesion funds reached 33.47% on December 30, 2013, four times higher than that in the beginning of May 2012, when it was only 8.53%, Ø In the period of 1 January to 30 December 2013 there were requested to the European Commission the reimbursement of over 3.56 billion euro, an amount greater than that required in the entire period 2007-2012. At that time, the rate of repayments to Romania by the European Commission was 26.49%, which was of 3.5 times higher than that in the beginning of May 2012. Ø Until 2013, the auditing of the reimbursement applications is conducted in accordance with International Standard on Related Services 4400 ( ISRS ) Commitment to achieve the agreed procedures on the financial information. Such a commitment with the assumption of issuing an audit report and an opinion, but issuing a report of the factual findings; Ø The approved projects for 2014-2020, will be audited in accordance with ISA 805, Audits of the individual components of the financial statements, of the specific elements, accounts or other aspects of Financial Statements which requires more responsibility from the auditors, issuing an audit report and expression of an opinion. Such report follows applying of all the relevant standards provides a high assurance but not absolute. A comparison between the results of applying of the two standards is presented in Table. 1 3 In some circumstances it may be necessary to refer to a particular jurisdiction of the country of origin to clearly identify the used financial reporting framework. 540

Table 1 Comparison between ISRS 4400 and ISA 805 ISRS 4400 ISA 805 Not available insurance High insurance, not absolute Report of Factual Findings Opinion expressed in an auditor's report Different Letter of Commitment Different Letter of Commitment Higher materiality Lower materiality Independence is not necessarily required Independence is required by applying the Code of Ethics There are applied: The agreed procedures All ISA adapted Less coverage More coverage Restriction in using of the report Restriction in using of the report ISA optional ISA-compulsory but can be adapted and will be used only the relevant Testing the internal control system, risk Testing the internal control, risk assessment, fraud - assessment, fraud - optional compulsory Source: Chamber of Financial Auditors from Romania References: 1. http://www.fonduri-structurale.ro 2. Manual of the International Regulations of the Quality Control, Auditing, Review, Other Services and Assurance and Related Services, Edition 2012, vol. I IAASB, translated and republished by CAFR, Bucharest, 2013; 3. Regulation (CE) no. 1083/2006 for establishing the certain general provisions on the European Regional Development Fund, European Social Fund and the Cohesion Fund as amended. 4. http://www.fonduri-ue.ro 541