1 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Risk of Error on Closure Ljubljana, October 2009 Graeme Waterhouse ESF Audit Authority for England & Gibraltar Risk Assurance Division Department for Work & Pensions Graeme Waterhouse ESF Audit Authority for England & Gibraltar Risk Assurance Division Department for Work & Pensions

2 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Introduction Our experience of trying to shut the programmes. How we will communicate to the Commission: Frequency of error Materiality Whether there is a high/low frequency of error Financial impact

3 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Background 12 programmes to shut in England & Gibraltar by 31 March 2010 ESF is delivered by the Department for Work & Pensions De-centralised system – delivery and A10 checks through 9 regional Government Offices Central coordinating bodies: Managing Authority in ESF Division Paying Authority in ESF Division Risk Assurance Division (for A10 & A15)

4 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Approach Apply the Commission’s Guidelines on the Closure of Assistance for Apply professional standards Explore options Minimise any potential financial damage Keep it simple

5 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Guidance Low frequency = “financial implications fall below a level of materiality considered appropriate by the independent body” High frequency = “confidence in entire management system is seriously affected and therefore no opinion can be given. To determine frequency a distinction must be drawn between the different categories of error”. Materiality = “The materiality level should generally not exceed 2% in order to be consistent with the methodology of the ECA. Specific justification should be provided in case a higher level is applied”. If high we must estimate the financial impact

6 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Frequency of Error Article 10 Purpose: To provide an independent assessment of the effectiveness of the management and control systems operated by the Managing Authority & Implementing Bodies for European Structural Funds

7 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Frequency of Error CALCULATE TWO ERROR RATES Programme Error Rate: Error that exists in the Managing Authority’s control environment Before any audit intervention Includes results of random & risk-based Article 10 checks & other Community & national controls. Cannot be used for extrapolation Representative Error Rate: Based on randomly selected Article 10 controls Can be used for extrapolation

8 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Programme Error Rate Population/ Sample (£/Є) Error RateWeightingWeighted Error Rate A10 – Risk Sample4010%40 0.8% Other Community & National Controls 1010%10 0.2% A10 – Random Sample502.5% = % PROGRAMME ERROR RATE % Representative of the unchecked population 10% x (40/500)

9 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Programme Error Rate Conclusion. The programme error rate is 3.25%

10 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Representative Error Rate Based on randomly selected Article 10 checks only. Representative: Geographic spread Time (annual coverage) Type/size Measure Randomly selected Can be used for extrapolation as it reflects the error that exists in the unchecked population

11 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Representative Error Rate Population/ Sample Error Rate WeightingWeighted Error Rate A10 – Risk Sample4010%40 0.8% Other Community & National Controls 1010%10 0.2% A10 – Random Sample 502.5% = % PROGRAMME ERROR RATE %

12 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Representative Error Rate Conclusion. The representative error rate is 2.5%

13 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Materiality Materiality = “The materiality level should generally not exceed 2% in order to be consistent with the methodology of the ECA. Specific justification should be provided in case a higher level is applied”. Conclusion: The level of error in the programme is material if the value of errors remaining in the claim exceeds 2% of the final claim value (total population)

14 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Financial Impact A Population (final claim value)£500 B Less A10, national & Community controls -£100 C Unchecked population£400 D Representative Error Rate2.5% E Financial impact (CXD)£10 F Materiality Level (AX2%)£10 G Material Impact (E-F)£0 The checked population has already been corrected so no error remains The value of error in the Final Claim Are the errors in the final claim material?

15 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Conclusions The programme error rate is 3.25% The representative error rate is 2.5% The value of the errors that remain in the final claim is within the Commission’s 2% materiality level Conclusion – there is a low frequency of error

16 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Another Example A Population (final claim value)£500 B Less A10, national & Community controls -£100 C Unchecked population£400 D Representative Error Rate3.5% E Financial impact (CXD)£14 F Materiality Level (AX2%)£10 G Material Impact (E-F)£4 The checked population has already been corrected so no error remains The value of error in the Final Claim Are the errors in the final claim material?

17 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Conclusions The representative error rate is 3.5% The value of the errors that remain in the final claim exceeds the Commission’s 2% materiality level Conclusion – there is a high frequency of error

18 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Other Considerations Stratifying the population? Unrepresentative Samples Off-Setting

19 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Stratifying Basis of stratification must be set from the start of the programme Different strata types give different overall results Consistency across programmes Sample sizes often too small

20 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Unrepresentative Samples Our definition: An Article 10 check where the audit trail is completely lost (100% error) as a result of insolvency or natural disaster (fire/flood). Implication: These can be removed from error rate and financial impact calculations Assumptions: These are circumstances beyond the Managing Authority’s control The audit trail did exist at the time the project operated and the likely level of error is in line with the representative error rate.

21 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Off-Setting Off –setting of positive and negative financial impacts Argument: 1)Commission may make corrections based on the Article 15 body’s estimated financial impact 2)The corrections should take account of the Managing Authority's control environment as a whole (i.e. across all programmes)

22 Homologues Group Meeting Slovenia, October 2009 Republika SlovenijaEuropean Union Ljubljana, October 2009 Thank you for your attention! Tel: (0044)