EU Funding: What the Auditor want to prove?

The funds: payment

Payment terms are set out in the model grant agreement for the project. Payment is spread out over the lifetime of the project and is subject to a series of reports.

• First pre-financing Projects receive pre-financing totaling 30% of the EU grant within 45 calendar days from the date when the signed grant agreement and all the mandates are officially received by the EACI.
• Second pre-financing The coordinator may request a second pre-financing payment if the first 30% of the total budget have been used. Total pre-financing may not exceed 60% of the EU grant. This request must be accompanied by a report including a technical and financial part and proof of transfer of the funds made available under the first pre-financing agreement.
• Final payment Once the project has been completed the coordinator may request the final payment, the balance. The request must be accompanied by the final technical and financial report.

The purpose of the audit is to certify that all cost incurred comply with national legislation, accounting rules and SAP/CP. The audit will cover the use of funds from all project sources of financing including partner's expenses.

The audit report should be drawn up to allow the Commission to check and to validate in an effective way the statements of expenditure and income, in order to close the project as soon as possible.


The Commission can organise additional reviews and request additional information to the reports, and what is more important they can at any time during the project and up to five years after closure decide to carry out an audit, financial and/or technical.

The European Court of Auditors audits EU finances. Its role is to improve EU financial management and report on the use of public funds. It was set up in 1975 and is based in Luxembourg. The Commission's Directorates General, Executive Agencies and Joint Undertakings exchange any relevant information in order to coordinate their audit efforts. The Commission has also increased the frequency of joint audits with the Court of Auditors.

Project participants should be ready for an audit by the Commission making sure that they have the required supporting documents available up to 5 years after end of the project. It is important that they pay close attention to the eligibility criteria of costs before submitting their cost claims. 

Any claimed ineligible costs will be recovered or deduced from the next payment. Moreover, any systematic error may give rise to extrapolation of the audit results onto the non-audited grant agreements or the non-audited periods. Besides these corrections other measures or sanctions may apply. 

Some of the direct factors/variables that can lead to an audit:

• Problems with the Coordinator: (not prompt; not clear; company has difficulties; person has difficulties) 
• Problems with key partners 
• Problems with deliverables: (late; poor quality; do not comply with DoW; non-existent; plagiarism)
•  Blind chance

Indirect factors:

• The institution/partner is involved in many projects
• The institution/partner has very large budget(s)
• The institution/partner has noticeable administrative difficulties 
•  There are severe scientific/technical difficulties
•  The institution/partner is selected 'out of the pot'

The following documents will be requested during an audit and must be saved in a well-structured order for five years after project closure:

• Personnel costs: employment contracts (or other independent/legal justification of personnel costs claimed), Ledgers/Accounts, payroll records (salary slips), time sheets, detailed breakdown and justification of the productive hours, denominators used for the calculation of hourly  rates, proof of payment
• Overheads: in case the actual overhead model was used: full documentation concerning the calculation  of the overhead costs and the back-up documentation thereto, analysis, reconciliation and summary of the final breakdown of overhead costs (by category of expense, charged to the project(s) subject to audit)
• Consumables/equipment/other: invoices, proof of payments, in case of rented equipment - rental contract, records concerning the computer usage, if applicable
• Third party assistance: Sub-contracts, invoices, verification of payments, original deliverables from the subcontractors, evidence of own internal management and supervision procedures to confirm completion of work required to specification needed and reasonableness of costs claimed in connection herewith
• Travel and subsistence: invoices, mission approval forms, report, minutes of the meetings, participants of the meetings, e-mail documentation, etc.
• Bank statements - in case of the Coordinator, bank statements relating to the payments of EC contribution and the distribution to the beneficiaries
• General Ledger/management: salient extract and reconciliations of costs claimed back to underlying accounting records/general ledger to facilitate easy and swift verification of costs claimed and their eligibility
• Auditor certificate: copies of any auditor certification statements issued with a claim for cost reimbursement

A typical audit is lasting for 2-5 days at the premises of the beneficiary involved in the audit. After that, it usually takes another 2-5 months for the auditors to prepare the Draft Audit Report. Before sending it to the EC, the beneficiary can include its comments to the report. The majority of the audits  with no further financial consequences (i.e. financial
mismanagement, overcharging, etc.), but some of them will lead to the next stage: Sanctions. 

Sanctions
If any irregularities are found committed by a beneficiary (infringement of a provision of Community or national law or any breach of a contractual obligation) during an audit or any project review, four types of sanctions are foreseen:

1. Exclude from the Grant Agreement – Exclude the beneficiary from the Grant Agreement
2. Exclude from Grant Agreement – Exclude the beneficiary from other Framework Programme Grant Agreements and from agreements under other Community programmes
3. Ineligibility – Declare the beneficiary ineligible to participate in future Framework Programme activities, and in programmes under other Community policies
4. Liquidated damages - The Community, with the aim of protecting its financial interests, is entitled to claim liquidated damages from a beneficiary who is found to have overstated expenditure and who has consequently received an unjustified financial contribution from the Community

Participating in any project is an excellent experience and can be very beneficial for any organisation, but it is a lot of work and requires huge investments on the side of the beneficiary. In order to succeed, having the proper skills and abilities to help avoid any problems that may arise is essential

Ms.Grabiella experience and though:

What if the auditors come with a pure paper-based approach? They are not interested in the results, the impact, the evidence of the work done, but they are interested in the invoices, contracts, the certificates, delivery notes, insurance papers, the signatures, the stamps, etc...

• I fully understand the economic check, the need to see that all administrative issues were tackled, but what about the result-based monitoring approach that the Commission is focusing on?
• How much should a subcontracted auditing company follow their own approach for an audit and how much they should consider the process that the Audit unit of the European Commission is following?
• The beneficiaries follow the rules of the Commission, so they are collecting and archiving all evidence documentation on the achieved results. What if in a small organisation the delivery notes are not kept in the accounting department?
• Does it matter if there is a printed copy kept of the material delivered or shall they go back to the supplier and ask for an additional paper, a certification that the material has been indeed delivered?
• What if in a major organisation the catering invoice does not have an order form or a contract and/or a certificate on delivery attached?
• Does it matter if the manager has a nice conference proceedings printed with photos proving the catering was done and of course the invoice is properly booked? Shall they search for the e-mail communication between the catering company and the event organising department to prove the service has been ordered?
• Which one is the more efficient auditing method to prove the eligibility of the costs? Showing the e-mail about ordering a translation service and the contract or showing the actual translated report linked to the invoice?

I think the newly initiated audits are broadcasting a wrong message. "Keep all papers and make sure all papers have a back-up paper."

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Responding to Audit Findings

Working for Audit Finding

After the audit, the audit committee, executive director, and senior financial staff are responsible for reviewing the draft audit report, asking questions about the auditors' findings, and evaluating any recommendations before they are presented to the board in the final report.

What is the client representation "letter to management”? This letter, sometimes referred to simply as the "management letter" serves to identify areas of operations or procedures that the nonprofit may want to improve or redesign. Since auditors work with a variety of organizations, they often are aware of "best practices" or -- at the very least -- "better practices" that they can point out in the letter to management. The audit committee or staff often asks to review a draft of the management letter just to make sure that the letter is accurate before the final version goes to the board of directors, since the board is likely to be concerned about any deficiencies or even less serious concerns that the auditors identify in the letter. The accounting standards require the auditors to report to the board any "material weaknesses" and significant deficiencies. (SAS Nos. 114, 115)

Issues that auditors may point out in the client representation letter typically fall into two categories:

• Material internal control issues: Issues that auditors would identify include any weaknesses in the processes, systems, and internal procedures that help to ensure that all financial transactions are recorded properly. Strong internal controls (e.g., early detection and correction) serve to highlight errors and irregularities in financial operations. Correcting the issues will provide additional integrity to the financial statements and may help to reduce audit costs in the future. The auditors will point out any material internal control issues in the management letter so that the nonprofit can address those issues before the next audit.
• Operating inefficiencies: Management letters may identify issues that are, or could become red flags, and propose improvements to resolve problems and strengthen operations. Sometimes it takes an independent or outsider’s eye to identify inefficiencies that could be improved or new technologies that will improve operations. The auditor’s letter to management may also point out operating procedures that are inefficient or unnecessary.

Questions for the audit committee to discuss with the executive director (“ED”) after the audit:

• Did the auditors perform their work efficiently and effectively? Are you (ED) satisfied with the scope, nature, and timing of the audit?
• Are you (ED) satisfied with the knowledge, skills, and abilities of those assigned to do the audit?
• Did the auditors work with the organization to ensure complete coverage and effective use of resources without redundant efforts?
• Did the committee and ED review the fee arrangement between the organization and the auditors?
• Was there any documentation that the auditors requested that the staff could not produce?
• Were there any significant changes to the audit plan that occurred during the course of the audit?
• Were there any serious disputes or difficulties encountered by the staff during the audit?
• Does the staff believe that the auditors were diligent in their review?
• Was the auditors’ presence on site during fieldwork disruptive?
• Are you satisfied that the external auditors remain independent of the organization in spite of any audit-related, or non-audit services the auditors provide to the organization?

Six questions for the audit committee/board to ask the auditors after the audit:

When the draft report and client representation letter to management is ready but before they are finalized, the audit committee/board liaison should meet with the auditors one final time before the report and letter are dated and released to the board of directors. These questions are designed to determine whether there are any issues to bring to the board's attention in connection with the audit, and to anticipate questions that a board member may typically ask when presented with the independent auditor's report.

• Was the management team cooperative and forthcoming with requested information and documentation?
• How do our accounting policies and procedures compare with those of other comparable nonprofits?
• Are there any items that might be disputed by the IRS? If yes, what documentation should be on hand to bolster the item?
• Did the management team follow suggestions noted by auditors in prior years to correct weaknesses in the internal accounting system?
• Did you discover anything regarding the financial statements or internal financial management procedures that should be brought to the attention of the board of directors?
• Do you have any suggestions for improvements in accounting, reporting, or operating procedures?

Release of the auditor's report to management

After all questions have been asked and answered, including confirmations of anything that the auditors needed to check, the final step is that the auditors will sign and date the report, and deliver it to the board of directors with a client representation letter, the same date as the audit report.

Presentation of the audit report to the board of directors 

During the meeting that the board of directors receives the independent audit, the appropriate action for the agenda is for the  board of directors to "accept" the auditor's report and letter to management, rather than "approve" them. This is because the board's action in connection with the audit is literally to receive and "accept" the auditor's independent report. The findings in the report are not subject to change by the board after the report is submitted to the board, consequently, the board's action is not to approve/disapprove, but to accept the report. However, discussion by the full board of the audit report should be encouraged so that board members are familiar with the report's findings. Generally all board members receive a copy of the independent audit and management letter in their board materials for the meeting during which the report is accepted.

After the audit, the audit committee, executive director, and senior financial staff are responsible for reviewing the draft audit report, asking questions about the auditors' findings, and evaluating any recommendations before they are presented to the board in the final report. - See more at: https://www.councilofnonprofits.org/nonprofit-audit-guide/after-the-audit#sthash.VamQjBcR.dpuf

After the audit, the audit committee, executive director, and senior financial staff are responsible for reviewing the draft audit report, asking questions about the auditors' findings, and evaluating any recommendations before they are presented to the board in the final report. - See more at: https://www.councilofnonprofits.org/nonprofit-audit-guide/after-the-audit#sthash.VamQjBcR.dpuf

Responding to Audit Findings

Example 1:

Finding: 

12 transactions did not contain documented supervisory approvals.

Good Response:

We agree with this finding and have amended procedures to require approvals. In addition for the 12 exceptions we have retroactively performed supervisory review and approval.

• Need to define Coordinator of the action plan (who is responsible to ensure completion)
• Need an expected date of completion that makes sense.
• Coordination of efforts, technical ownerships vs functional ownerships of issue.

Example 2:

Finding:
The department does not have written policies and procedures. 

Recommendation:
The department should perform the following:

• Develop and document all of its significant business processes
• Make the policies and procedures available to all personnel
• Ensure they are accurate, complete, and current at all times.
• Revise policies and procedures for changes in business processes and policies. This is particularly important when new systems are developed and implemented or other organizational changes occur.
• Communicate significant changes to all affected personnel immediately to ensure they are aware of any revisions to their daily duties and responsibilities.
• In the event that there are changes in personnel (i.e. new employees are hired, promotions granted, etc.), documented policies and procedures will facilitate training and provide guidelines for the respective positions.

Management’s Response

We agree with the auditors' comments, and the following action will be taken to improve the situation. We will have each unit supervisor to document the policies and procedures for their respective business processes by the end of the first quarter of 20XX. We will then consolidate these documents into one user manual that will be available to all staff members via our website. 

Revisions to the users’ manual will be made as needed to ensure the manual is current at all times. The staff will be advised of all revisions.

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