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The Audit of subsidies by the Court of Audit. Spain.

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1 The Audit of subsidies by the Court of Audit. Spain.

2 TRIBUNAL DE CUENTAS. SPAIN The general legal framework that regulates subsidies in Spain is the following one: - General Act on subsidies, of Regulation that develops the Act, of Budgetary General Act of

3 TRIBUNAL DE CUENTAS. SPAIN Also, the calls of most subsidies establish the conditions of entry or rules (particulars conditions that regulate how to obtain, manage, justify and control).

4 TRIBUNAL DE CUENTAS. SPAIN As it can be observed, this legal framework is very recent. 4. Previously to year 2003, the regulation of subsidies was concise, presenting numerous legal gaps that outlined serious problems for the audit.

5 TRIBUNAL DE CUENTAS. SPAIN In fact, the need of a new legal framework was shown in an Audit Report of the Court on subsidies to the professional training of workers and in a Motion, both submitted to the Spanish Parliament.

6 TRIBUNAL DE CUENTAS. SPAIN. 6 6.Subsidy concept in the Act on subsidies. It is understood for subsidy all money orders carried out by the public Administrations or by the organizations and other public entities dependent of them, in favour of public or private people or entities, and that fulfils the following requirements: a) That the delivery is carried out without the beneficiaries' direct consideration.

7 TRIBUNAL DE CUENTAS. SPAIN. 7 b)That the delivery is subject to the execution of a certain objective, a project, carrying out an activity or the adoption of a singular behaviour already carried out or to be developed. The beneficiary has to fulfil the material and formal obligations that had been settled down. c)That the project, the action, behaviour or financed situation has for object the development of an activity of public utility or social interest or the promotion of a public purpose.

8 TRIBUNAL DE CUENTAS. SPAIN They are not included in the scope of application of the Law on subsidies: a) The monetary contributions among different public Administrations, as well as between the Administration and the entities and other dependent public entities of these ones, allocated to finance the activity of each entity globally in the environment characteristic of its competencies. In these cases it is of application that stipulated in a specific way in their regulations.

9 TRIBUNAL DE CUENTAS. SPAIN. 9 b) Neither they will be included in the scope of application of this law the monetary contributions that in concept of contributions, either ordinary or extraordinary, carry out the entities that integrate the local Administration in favour of certain associations.

10 TRIBUNAL DE CUENTAS. SPAIN In accordance with the Law on Subsidies don't have character of subsidies: a) The benefits of the System of the Social Security. b) The assistance pensions for the elderly in favour of the Spaniards non-residents in Spain, in the terms settled down in their regulations. c) The assistance benefits and the economic subsidies in favour of Spaniards non-residents in Spain, as well as the benefits in favour of those affected by the AIDS virus and the handicapped.

11 TRIBUNAL DE CUENTAS. SPAIN. 11 d) The benefits in favour of those affected by certain illnesses, (specified in the Law itself). e) The pensions of the civil servants, and other pensions (acts of terrorism, etc…). f) The benefits recognized by the Salary Guarantee Fund.

12 TRIBUNAL DE CUENTAS. SPAIN. 12 g) Fiscal benefits and benefits in the payments to the Social Security System. h) The official credit, but not in the cases when the public Administration subsidizes the borrower the whole or part of the interests or other considerations of the credit operation.

13 TRIBUNAL DE CUENTAS. SPAIN The following cases are excluded of the scope of application of this law:The prizes that are given without the beneficiary's previous application.Subsidies foreseen in the Electoral legislation.Subsidies foreseen in the law for the Financing of the Political Parties.Subsidies to the parliamentary groups of the Spanish Parliament's Chambers, of the regional Assemblies and to the political groups of the municipalities.

14 TRIBUNAL DE CUENTAS. SPAIN Subjective elements. a) Awarding bodies. In accordance with the current legislation effective in Spain these are the public Administrations. It is understood for public Administrations to the effects of the legislation of subsidies: 1) The General State Administration. 2) The entities that integrate the local Administration. 3) The Administration of the Autonomous Communities (Regions). The subsidies awarded by public bodies linked to any of the public Administrations.

15 TRIBUNAL DE CUENTAS. SPAIN. 15 b) Beneficiary. It will have the consideration of beneficiary of subsidies the public or private person or legal entity that must carry out the activity that based their granting or that it is in the situation that legitimates their granting. It will also be considered the beneficiary's condition, the groups of public or private natural persons or legal entities, partnerships or any other type of economic unit that, even lacking of legal status, can carry out the projects, activities or behaviours or be in the situation that brings about the granting of the subsidy.

16 TRIBUNAL DE CUENTAS. SPAIN. 16 c) Collaborating Entity. It is that one that acts in name and on behalf of the awarding body. It delivers and distributes the public funds to the beneficiaries when it is settled down this way in the regulations, or it cooperates in the administration of the subsidy not including the previous delivery and distribution of the funds received by the collaborating entity. These funds will never be considered part of their assets.

17 TRIBUNAL DE CUENTAS. SPAIN. 17 The Act on Subsidies regulates who will be able to be collaborating entity. They should be public or private legal entities that gather the conditions of solvency and effectiveness that are settled down. The Act also regulates their obligations.

18 TRIBUNAL DE CUENTAS. SPAIN The beneficiary's obligations. a) To complete the objective, to execute the project, to carry out the activity or to adopt the behaviour that bases the granting of the subsidy. b) To justify before the awarding body or the collaborating entity, to have fulfilled the requirements and conditions, as well as the realization of the activity and the execution of the purpose that determined the granting of the subsidy.

19 TRIBUNAL DE CUENTAS. SPAIN. 19 c) To undergo the monitoring to be made by the awarding body or the collaborating entity, as well as any other control that can carry out the competent control organs, both national and EU ones, contributing with as much information as required. d) To communicate to the awarding body or the collaborating entity the obtaining of other subsidies, aids, revenues or resources to finance the subsidized activities. This communication will be made as soon as it is known and, in any event, previously to the justification of the application given to the funds received.

20 TRIBUNAL DE CUENTAS. SPAIN. 20 e) To demonstrate, previously to be dictated the proposal of granting resolution, that tax obligations and Social Security System contribution have been accomplished as determined by the regulations. f) To have the accounting books, registers and other documents properly audited in the terms demanded by the applicable legislation to the beneficiary in each case, as well as others accounting statements and specific registers demanded by the subsidies regulations, with the purpose of guaranteeing the appropriate monitoring.

21 TRIBUNAL DE CUENTAS. SPAIN. 21 g) To keep the documents justifying the application of the received funds included the electronic documents, as long as they can be object of checking and control performances. h) To adopt the established spreading measures in the applicable legislation. i) To proceed to the refund of the funds received in the cases foreseen in the law.

22 TRIBUNAL DE CUENTAS. SPAIN Obligations of the Collaborating Entity. a) To give the beneficiaries the funds received from the awarding body in accordance with the criteria settled down in rules (call) of the subsidy and in the agreement signed with the awarding body. b) To check the execution and effectiveness of the conditions or decisive requirements for the subsidy, as well as the execution of the activity and the achievement of the purpose that determined the award of the subsidy.

23 TRIBUNAL DE CUENTAS. SPAIN. 23 c) To justify the delivery of the funds received before the awarding body and to provide the justification presented by the beneficiaries. d) To undergo the monitoring that regarding the administration of these funds the awarding body can perform, as well as any other that can carry out the competent control bodies, both national and EU ones, contributing with all required information.

24 TRIBUNAL DE CUENTAS. SPAIN Objective element. The objective element of subsidies and aids are the public funds provided.

25 TRIBUNAL DE CUENTAS. SPAIN The management of subsidies. It must be carried out in agreement with the following principles: a) Publicity, transparency, concurrence, objectivity, equality and non discrimination. b) Effectiveness in the execution of the objectives fixed by the awarding body. c) Efficiency in the allocation and use of the public resources. These principles have remained substantially unaffected after the legal change that took place recently.

26 TRIBUNAL DE CUENTAS. SPAIN To perform these principles. The conditions of entry or rules for the awarding of subsidies are settled down in a regulation (generally in the official call itself) that usually has annual character and that it will sum up as minimum the following items: a) Definition of the object of the subsidy. b) Requirements that the beneficiaries will gather for obtaining of subsidy, and the way and deadline for the applications to be presented.

27 TRIBUNAL DE CUENTAS. SPAIN. 27 c) Conditions of solvency and effectiveness that must gather bodies that act as collaborating entities. d) Procedure of awarding the subsidy. e) Objective criteria of awarding the subsidy and, if it is the case, weighting assessment of them. f) Individualized amount of the subsidy or criteria for their establishment.

28 TRIBUNAL DE CUENTAS. SPAIN. 28 g) The bodies entitled to carry out the procedure of awarding the subsidy and the deadline for the resolution to be notified. h) The books and specific accounting registers to guarantee the appropriate justification of the subsidy. i) Deadline and justification procedure to be followed by the beneficiary or by the collaborating entity of the execution of the purpose for which the subsidy was provided and the application of the funds received.

29 TRIBUNAL DE CUENTAS. SPAIN. 29 j) Guarantee measures, if it were the case, in favour of the awarding body (constitution means and cancellation procedure). k) Possibility to make prior advance payments and advance payments, as well as the regime of guarantees that the beneficiaries should provide. l) Circumstances that, as consequence of the alteration of the conditions considered for the allocation of the subsidy, may lead to modify the resolution.

30 TRIBUNAL DE CUENTAS. SPAIN. 30 m) Compatibility or incompatibility with other subsidies, aids, revenues or resources for the same purpose, coming from any Administrations or public or private national entities, or from the European Union or international entities. n) Approaches for graduation of the possible non- fulfilments of conditions for to the awarding of the subsidies. These criteria will be applicable to establish the quantity that finally the beneficiary must receive or the amount to be refunded according with the principle of proportionality.

31 TRIBUNAL DE CUENTAS. SPAIN Necessary contents of the calls for subsidies a) If the conditions of entry or rules are not included in the call itself, this will indicate the regulation that establishes them and where they are published. b) Budgetary credits to which the subsidies have to be charged and its maximum or estimated total amount. c) Object, conditions and purpose of the granting of the subsidy.

32 TRIBUNAL DE CUENTAS. SPAIN. 32 d) Statement if the granting is made by means of a regime of competitive concurrence. e) Requirements to apply for the subsidy and the way of proving them. f) Indication of the proper bodies to manage the award procedure. g) Deadline for applications. h) Term of resolution and notification.

33 TRIBUNAL DE CUENTAS. SPAIN. 33 i) Documents and information that the application should enclose. j) If it were the case, possibility of redefining the applications. k) Indication about whether the resolution can be or not appealed. l) Assessment criteria of the applications. m) Means for notification or publication.

34 TRIBUNAL DE CUENTAS. SPAIN The regulation of the agreements of collaboration. a) An agreement of collaboration will be settled down between the awarding body and a collaborating entity in which the conditions and obligations assumed by this will be regulated. b) The agreement of collaboration will not be valid for more than four years, although it might be foreseen its modification and its extension by mutual agreement of the parts. However the total length of the agreement cannot exceed of six years. Nevertheless, when referring to aids for loans, the validity of the agreement can be extended until the total cancellation of the loans.

35 TRIBUNAL DE CUENTAS. SPAIN. 35 c) Minimum content of the agreement of collaboration (comments). d) When the regions or the municipalities act as collaborating entities, the State Administration or their public entities will settle down agreements with hem. In them, it will be lay down: the requirements for the allocation and delivery of the funds, the justification criteria and the rendering of accounts. Likewise, and in the same terms, it will be done when the General State Administration or their public entities act as collaborating entities regarding subsidies granted by the Autonomous Communities (regions) or the municipalities.

36 TRIBUNAL DE CUENTAS. SPAIN. 36 e) When the collaborating entities are people subject to private law, they will be selected previously by means of a procedure subjected to the principles of publicity, concurrence, equality and non-discrimination and the collaboration will be settle down by means of an agreement, unless due to the object of the collaboration it is of full application the legislation of public procurement. The contract will necessarily include the minimum contents of an agreement of collaboration, as well as what is mandatory according with the regulations of the public procurement and it will mention the rest of the obligations imposed to the collaborating entities by this law.

37 TRIBUNAL DE CUENTAS. SPAIN Classification of subsidies. The most used ones appear below: a) According to their budgetary application. 1. Ordinary subsidies. They are those dedicated to fund operations related to beneficiary's ordinaryoperation. 2. Capital subsidies. They are those dedicated to funding real investments.

38 TRIBUNAL DE CUENTAS. SPAIN. 38 b) According to the awarding procedure. 1. Not subject to concurrence. The specific regulation establishes the concrete addressee of the subsidy, so that an only one interested in the procedure will exist. 2. Subject to concurrence. The regulation doesn't establishes the concrete addressee of the subsidy, so that a plurality will exist of interested ones in the procedure. In turn, they can be:

39 TRIBUNAL DE CUENTAS. SPAIN. 39 I) Of non competitive concurrence. It is not necessary to make a selection among the interested ones. Funding anyone of them is independent of the other ones, either because the budgetary credit is enough for all the possible beneficiaries, or because the beneficiaries are entitled for a subjective right previous to its granting. Both these subsidies and those ones where there is not concurrence (1 and 2.I)) are denominated of direct awarding. II) Of competitive concurrence. When it becomes necessary to establish a selection among the applicants, because the allocation of one of them or to state an amount of the subsidy, excludes or limits the right to the other ones.

40 TRIBUNAL DE CUENTAS. SPAIN. 40 c) According to the moment of the granting. 1. Ex ante. In them, the elements that make up the subsidy are: a statement of commitment of future performance and the approval of a program-commitment. The ex ante subsidies can be, attending to the payment moment, post-payables or pre-payables.

41 TRIBUNAL DE CUENTAS. SPAIN. 41 I) Pre-payables. When the beneficiary receives the funds before justifying its use. Therefore the justification cycle is not closed with the payment, but rather a last justification of the funds will have to be made or of the attainment of the purpose. II) Post-payables. When the beneficiary receives the funds after justification of the expenditure or of the attainment of the purpose.

42 TRIBUNAL DE CUENTAS. SPAIN Ex post. The subsidy is granted for an activity already carried out that the applicant declares certain in the request.

43 TRIBUNAL DE CUENTAS. SPAIN The Spanish legal framework that regulates the audit performance of the Court of Audit as regards control of subsidies is the following one: a) The Spanish Constitution settles down in its article that The Court of Audit is the supreme body charged with auditing the State's accounts and financial management, as well as those of the public sector. b) This exercise is summed up, in the Court of Audit Organic Act 2/1982, in the Court of Audit Functioning Act 7/1988 and in the Act on Subsidies.

44 TRIBUNAL DE CUENTAS. SPAIN The Court of Audit Organic Law, points out in its section 4.2 that The Court of Audit is responsible for auditing subsidies, credits, guarantees or other public sector aids received by natural persons or legal entities. 2.The Court of Audit Functioning Act, 7/1988: I. Establishes that the Court will carry out the exam and confirmation of the accounts that should render the beneficiaries of subsidies. But the current Law on Subsidies has established that each beneficiary will render its accounts before the awarding body (of the public sector) when it justifies the subsidy. Later on, the awarding body integrates this information in the accounts that it renders to the Court of Audit.

45 TRIBUNAL DE CUENTAS. SPAIN. 45 II. This Act also regulates the procedure for auditing the subsidies. It is necessary to highlight that the content of the exam shall cover both a check as to the correct application of the sums to the purpose for which they were intended as well as the accounting results (article 38). 3. The General Act 38/2003, on Subsidies, regulates this control function, both regarding the beneficiaries and the collaborating entities.

46 TRIBUNAL DE CUENTAS. SPAIN. 46 c) To be able to develop this function, it should be highlighted the duty of collaborating with the Court of natural persons or legal entities beneficiaries of subsidies settled down in article 7 of the Court of Audit Organic Law 2/1982, and in the Court of Audit Functioning Act 7/1988.

47 TRIBUNAL DE CUENTAS. SPAIN. 47 d) The audit of subsidies by the Court has generally been carried out on the accounts rendered by the public awarding body and not on the performance of the recipients of the aid. But, this traditional modality of performing the audit function as regards the control of subsidies has experienced in the last few years a radical turn because, besides the control of the accounts rendered, the Court has passed to analyze:

48 TRIBUNAL DE CUENTAS. SPAIN. 48 –The management of the subsidies by the awarding body –The justification presented by the beneficiaries, and –The achievement of the purposes for which those subsidies were granted.

49 TRIBUNAL DE CUENTAS. SPAIN. 49 e) Lastly, the INTOSAI audit standards settle down that: The Supreme Audit Institution should have the widest possible authorization to control the use of subsidies carried out with public funds. If the purpose or the control demands it, this should extend to the whole of the operations of the subsidized institution, especially if the subsidy itself or in proportion to the revenues or the institution beneficiary's financial situation is considerably high. The unfair employment of the subsidy funds should mean the refund obligation.

50 TRIBUNAL DE CUENTAS. SPAIN The audit of subsidies. a) It varies significantly if it is auditing subsidies granted in regime of competitive concurrence or not. b) In the first ones it is more diffuse the perception of the control on the part of the beneficiary and, therefore, the fraud can be higher.

51 TRIBUNAL DE CUENTAS. SPAIN. 51 c) Phases and characteristics of the audit: 1) In the control of subsidies it can be distinguished the three typical phases of all audit procedures: planning, execution of field work and report. 2) There are not different characteristics as for the form with regard to other audit works, unless for the specificity of the object of the control.

52 TRIBUNAL DE CUENTAS. SPAIN. 52 3) In fact in the object of the control it is where, in my opinion, the auditor should be more ambitious. This way, without stopping to verify the financial aspects and the legal aspects, the auditor should express an opinion on whether the objectives have been reached according with the principles of efficiency and economy.

53 TRIBUNAL DE CUENTAS. SPAIN An example. Audit of subsidies granted for the development of Plans related to training actions to improve the professional capacity of workers.

54 TRIBUNAL DE CUENTAS. SPAIN. 54 a) It is important to keep in mind that. 1. In this concrete case, the administration of subsidies (not included the granting) was made through a collaborating entity. 2. The subsidized actions were co-financed by the ESF. 3. The moment when the Report was approved and it was sent to the Parliament was previous to the procedure and approval of the current Act on Subsidies of But the results to that I will refer continue being of full interest.

55 TRIBUNAL DE CUENTAS. SPAIN. 55 b) Main results: 1. Results related with the performance of the Collaborating Entity (C.E.). I. The funds received to be managed produced yields that the C.E. considered, improperly, own revenues and it even paid for them Company tax. II. Due to the voluntary resignation of some of the managers, the C.E. paid compensations that were not foreseen in their contracts, and were charged to the funds of the subsidies, as operating costs.

56 TRIBUNAL DE CUENTAS. SPAIN. 56 III. The members of the C.E. (a Foundation) that participated in the process of assessment of the applications, in turn, they also received subsidies. They also participated in their justification and in their control. IV. The C.E. only revised justifying receipts for a value similar to the amount of each subsidy granted, without analyzing, in each case, all the receipts of the whole subsidized activity (performance). This would have allowed them: To validate the conditions in which the subsidy was granted.To check the % of the subsidized activity (performance), since they were co-financed by the E.U. (ESF).

57 TRIBUNAL DE CUENTAS. SPAIN. 57 V. The C.E. didn't carry out confirmations on whether the workers were registered in the Social Security System, neither if they were really employed in the companies that appeared in the justifying documentation. VI. In the call for funding it didn't appear the indication that subsidies would be granted in regime of competitive concurrence. However they were granted this way.

58 TRIBUNAL DE CUENTAS. SPAIN. 58 VII. In the cases that a refund was demanded to a beneficiary, the C.E. did not demanded him the delay interests, what has supposed a damage for the public funds. VIII. In the accounting of the C.E. the figured subsidies were recorded for the granted amounts. In the cases in that there was difference between this amount and the really committed, the differences were not annulled. This way, idle resources were generated.

59 TRIBUNAL DE CUENTAS. SPAIN Results related with the performances of the beneficiaries of subsidies. I. The Foundation (C.E.) accepted, as a justification of the application of the awarded subsidies, what they called notice of charge that were the beneficiary's mere declaration of the costs in that it had incurred, without providing the corresponding vouchers. This prevented the C.E. from carrying out verifications to demonstrate whether the presented justification was true and correct.

60 TRIBUNAL DE CUENTAS. SPAIN. 60 II. In some cases of beneficiaries that had received more than a subsidy, the Court detected that some invoices were presented more than once, that is to say that served to justify more than a subsidy. This fact was reported to the Prosecutors Office, for the possible offence existence. III. The Spanish Court checked cases of beneficiaries that had received several public subsidies and that the total amount of all of them was higher than the cost of the subsidized activity.

61 TRIBUNAL DE CUENTAS. SPAIN. 61 IV. In some cases, the beneficiaries assigned costs of their operation structure, higher than the real ones or in an excessive amount, keeping in mind the proportion between the subsidized activity and the beneficiary's total activity. V. Some groups of expenses had percentage limits on the total cost and it was proven that, in occasions, the incurred costs had been not well classified in order to justify a higher cost of the subsidized activity.

62 TRIBUNAL DE CUENTAS. SPAIN. 62 VI. In general, in the justifying documentation there were no justifying vouchers proving that the workers had attended the subsidized training actions (courses). This way the C.E. paid subsidies without checking if it was according to the number of students (workers) that the beneficiary stated. In some cases the final amount of the subsidy had to be calculated in accordance with the number of assisting workers. VII. The subsidized courses were free. However, the Court found cases in which the beneficiaries charged different amounts to the students (workers).

63 TRIBUNAL DE CUENTAS. SPAIN. 63 VIII. The Court found that the risk of collection of undue quantities to the workers attending to the training actions was higher when the beneficiaries of subsidies contracted with private training centers the performance of the subsidized training activities, because the beneficiaries had not established appropriate controls on the free character of the actions.

64 TRIBUNAL DE CUENTAS. SPAIN Results related with the efficiency, effectiveness and economy of the performances of the C.E. and of the beneficiaries. I. Neither the C.E. neither the beneficiaries of subsidies defined indicators to establish the degree of execution of the different training plans.

65 TRIBUNAL DE CUENTAS. SPAIN. 65 II. Neither the C.E. neither the beneficiaries could determine, through the follow up and the evaluation that they carried out, the global efficiency of the training Plans since they could not quantify the generated benefits, neither to detect faults neither the measures that could be applied in future training actions to be organized. III. Neither the C.E. neither the beneficiaries have concrete data on the results obtained through the training of the workers such as: increase of competitiveness of their company or their professional promotion in their company, or outside it.

66 TRIBUNAL DE CUENTAS. SPAIN. 66 IV. Although it was obligatory, the Court checked that only less than 20% of the Plans (of training courses) were preceded of an assessment about the training needs of the sector in which that training was provided. V. The system followed by the C.E. has permitted that the same type of training action had been subsidized with very different costs to different beneficiaries. This makes us think that in the cases of higher costs an overvaluation might have taken place.

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