Analysis of errors in Cohesion Policy and Legislative proposals for Management and Control systems F. Nikolian Deputy Head of Unit C1 Audit Directorate DG Regional and Urban Policy

Commission staff working paper SEC (2011) presents an analysis of errors in Cohesion Policy definitions and concepts where the errors lie, both by type and geography what actions are being taken to prevent and correct them how the proposed legal framework will further help to reduce errors … based on the results of audits by the Court of Auditors, the Commission and the MS Audit Authorities

Methodology ECA’s audits give a snapshot of errors in interim payments in any given year. It cannot take account of the fact that programmes are subject to various levels of controls throughout the multi-annual cycle ECA classifies errors into quantifiable and non- quantifiable and on the basis of quantifiable errors it estimates an error rate ECA also calculates the frequency of errors indicating how many transactions are affected by errors of any kind For cohesion, on average, the sample consisted of 70% ERDF/CF and 30% ESF transanctions

Methodology In principle, the Commission follows the audit methodology of ECA. However, when it comes to the quantification of errors, the approach can be different For instance, concerning public procurement, ECA quantifies errors either at 100% or 0%, while the Commission and MS apply a proportional approach when they impose flat rate corrections

Analysis of errors Based on the ECA estimated error rate for cohesion policy since 2007 Takes into account quantified errors Presents outcomes by types of errors and geographic concentration Cross-checks ECA results with COM own audit work Presents actions taken in the period and proposals for improvement in

Evolution of lower error limit and frequency DAS

Eligibility 39% Audit trail 9% Revenue generating projects 8% Public procurement 40% State aid 2% Miscellaneous 2% Types of quantifiable errors in DAS audits ERDF/CF

ESF Eligibility 59% Accuracy 7% Audit trail 34%

Geographical spread Each year, programmes in 2-3 MS make up about two thirds or more of the quantifiable errors about 55% of errors were identified in programmes in 3 MS (ERDF/CF: ES, IT and UK; ESF: ES, PT, UK) In ES and IT errors are concentrated in certain regional programmes while others are performing well NB! Not all Member States have been audited by the Court in this period.

DAS , geographical spread ERDF/CF

DAS , geographical spread ESF

Commission’s and MS audit work For 2011, in the Annual Activity Reports for period DG REGIO classified 187 (59%) out of 317 ERDF/CF programmes as providing reasonable assurance. DG EMPL classified 93 (79%) of 117 ESF programmes as providing reasonable assurance. The AAR sets out specific actions concerning the programmes/projects which are under reservation:

Preventive actions taken COM participates in programmes monitoring committees Organises bilateral and multi-lateral meetings with Managing and Audit Authorities Provides guidance to Managing and Audit Authorities (i.e.: Public procurement, best practices using simplified costs, Annual Control Reports, audit of Financial Instruments, etc.)

Corrective actions New methodology for Commission's reservations in 2011 AAR Error rate <2% - no reservation in the Commission's Annual Activity Report Error rate >=5% - reservations in the Commission's Annual Activity Report Error rate 2-5%: New approach as from 2011 Cumulative approach of risk exposure If cumulative residual risk of error >2%, reservations by the Commission Reservations can be avoided if MS apply self-corrections to reduce risk below 2% - By deducting financial corrections in payment claims - By sending a formal letter indicating that the correction is already booked in the accounts - And by proposing a suitable action plan Impact for the AAR 2011: EMPL – 13 OPs; REGIO: 26 OPs; Reputational reservation: for OPs where there are special qualitative factors in relation to the system

Corrective actions Interruptions/suspensions of payments

Actions concerning specific errors Public procurement: COM prepares to simplify the rules for the future. Revision of the guidance note COCOF 07/0037/03 on flat rates corrections (Commission decision) Meanwhile, many capacity building actions; seminars, thematic training courses Eligibility: introduction and widening of the possibilities to use simplified costs, eligibility rules set at national level, Commission assists in simplifying (16 MS in ESF + 7 in ERDF/CF use them)

Actions concerning specific errors Retrospective projects: common and targeted guidelines COCOF , awareness raising on-going Revenue generating projects: simplification / clarification of legal requirements / guidance note COCOF 07/0074/09 Audit trail: partial closure introduced ( ) Guidance note COCOF 08/0043/03 Financial instruments: Detailed guidance COCOF and proposed common audit framework to AAs

Conclusions Cohesion policy delivery system is providing increased assurance, but weaknesses can be still found. In the last three years, the contribution of the ESF to the error rate in cohesion policy has decreased significantly. Specific types of errors persist throughout several years in eligibility and public procurement. Errors stem from breaches of Structural Funds rules but are also related to breaches of wider EU rules (public procurement).

Conclusions The main errors found are concentrated in a small number of programmes in a few Member States. Tackling these errors requires close co-operation between Commission and responsible national/regional authorities. Both preventive and corrective action is needed. Strict interruption/suspension policy is in place. The Commission's proposal for the legislative framework puts in place new tools and strengthens simplification to further decrease errors.

Legislative proposals for Management and Control systems

Provisions of the revised FR Member State obligations – Art 56 (2) Designation of bodies – Art 56 (3) Accounts – Art 56 (5) Commission's supervision – Art 56 (6) Financial corrections – Art 77

Designation of authorities: alignment of the CPR

Procedure for the designation Changes required to Commission proposal of Oct 2011: Designation / No accreditation Designation of the MA /CA (Art 113 bis): By formal act/decision by Member State at an appropriate level (no 'accrediting body' required) Based on a report & an opinion of an independent audit body (option of AA) which assesses compliance of MA/CA with criteria MS may take into account whether the MCS is the same as in the previous period and has functioned effectively Probation/End of designation

Designation criteria Criteria for designation of MA/CA: (i) Control environment  Organizational structure  Separation of functions  Delegation of tasks  Recovery procedures  Human resources: staffing, training, recruitment  Sensitive functions policy (ii) Risk management (iii) Control activities  Selection procedures  Management verifications  Payments  IT systems, etc (iv) Information and communication (iv) Monitoring

The role of the Commission MS submits the formal act to the Commission as soon as possible after the adoption of the OP and before the submission of the first payment claim; If Union funds > €250m Commission may request, within 2 months, the formal act, the audit report & opinion and the MCS description and make observations within 2 months. Commission will take into account whether MCS is similar, the effective functioning of the current MCS, and if the MA also has CA functions

Preparation and submission of accounts and accompanying documents alignment of the CPR

Tasks and deadlines CA responsible for : (Article 115 (b)(c)): Accounts for the preceding accounting year MA responsible for : (Article 114 (4) (e)): The management declaration accompanying the accounts An annual summary of final audits and controls AA responsible for : (Article 116 (5) (i),(ii)): The audit opinion accompanying the documents set out above An annual control report supporting the audit opinion Timing: Designated body (CA/MA) will submit these documents annually by the deadline set out in FR Article 56 (5) – 15 February (exceptionally, 1 March).

Timeline for the submission, examination and acceptance of accounts July N-1 Dec N-1 Jun N Dec N 15 Feb N+1 31 May N+1 Accounting year Preparation of the accounts, summary report on audit results, management declaration, audit opinion 30 Jun N+1 acceptance of accounts

Audit and control arrangements

Audit Authority AA needs to prepare Audit strategy within 8 months of the adoption of the OP, setting out: Audit methodology Sampling method: -Appropriate sample of operations -COM to adopt implementing act laying down modalities of sampling methods Planning of the audits for the current accounting year and for the two subsequent accounting years Audit Strategy to be submitted to COM upon request Annual update of audit strategy from 2016 to 2022

Audit Authority The Audit Authority will need to: Carry out audits on systems; Carry out audits on operations that contributed to the expenditure declared in the accounting year; Desk review of accounts Respect the audit strategy for the audits mentioned above Combine results of audits on systems and on operations to determine the level of assurance; Select expenditure from the reference period, i.e. the accounting year

Audit Authority Timing and organisation of the audits on operations: 12+ Months (1/1/N until 15/2/N+1) to audit operations and establish the audit opinion Consider techniques to reduce workload and spread over available time (stratification, grouping, confidence levels, sub- sampling) Consider potential impact of technique(s) chosen (e.g.: grouping)

Audit Authority Audit work on the accounts: Completeness, accuracy and veracity of the accounts AA analyses the results from systems audits on the CA – tasks related to the accounts and the debtor's ledger; AA examines the audit trail when auditing the sample of operations in order to verify reliability of the accounting systems; AA performs desk review of an appropriate sample of underlying registered data. CA can further adjust the accounts, if necessary, before certification to the Commission National deadlines needed for submission of draft accounts to AA

Proportional control arrangements Single audit concept Operations <€100k, only 1 audit by AA or COM prior to submission of the accounts for accounting year when operation is completed Operations >€100k, 1 audit per accounting year by AA or COM prior to submission of accounts for accounting year when operation is completed Possible reliance on AA's audit work Commission's operations audit work based on risk assessment, serious deficiencies identified in MCS, during 3 year period in Art 132, and for assessment/re-performance of AA.

NEXT (possible) STEPS End of September: revised Presidency text 3 October: COREPER 16 October: GAC Meeting Oct/Nov/Dec: Trilateral meetings EU Parliament /Council /Commission

Thank you for your attention!