1. Draft Guidance Note on management verifications
Mark Schelfhout
Head of Unit ESF Audit
DG Employment, Social Affairs and Inclusion
TWG
Brussels, 20 March 2014

2. Background
Working group between DG REGIO, EMPL and MARE was set up to update the Guidance document on management verifications to be carried out by MS (…)COCOF 08/0020/04-EN
Objective:
Reflect the changes introduced by Regulation 1303/2013
Reflect the experience gained during recent audits

3. Background Legal provisions:
Regulation (EU) No 1303/2013: Art , and 125.6
Other sources:
ECA 2011 and 2012 annual reports
Experience from recent audits
During its audits ECA indicated weaknesses in the first level checks as sufficient information was available for the MS authorities to have detected and corrected those errors before certifying the expenditure to the EC.
Guidance note is applicable to Structural and Cohesion Funds (incl. ETC) and EMFF.
ETC – European Territorial Cooperation
EMFF - European Maritime and Fisheries Funds

4. Employment and Social affairs (ESF) Regional policy (ERDF and CF)
Background
ECA annual reports
Employment and Social affairs (ESF)
Regional policy (ERDF and CF)
2009
2010
2011
2012
Error frequency (quantifiable and non-quantifiable)
25%
27%
40%
35%
57%
59%
49%
Management verifications' failure ratio
30%*
58%*
76%
67%
62%
Combined impact
7.5%
15.7%
30%
23%
12%
33%
37%
29%
* Common chapter for Employment and Regional policies

5. Background
EMPL - Thematic audit on Management Verifications - results :
Management verifications of a formal nature
Insufficient attention to Public Procurement
Inadequate structure of MA and/or IB
Insufficiently trained staff
Absence of supervision of IB tasks
Verifications carried out after certification

6. Background
EMPL - Thematic audit on Management Verifications – recommendations:
Implement simplified cost options to reduce verification burden
Approve what you can manage – perform resource needs analysis
Create dedicated verification teams and build competence, including public procurement
Control on-the-spot, not only at desk level
Supervise Intermediary Bodies carefully

7. Role of the Managing Authority Art 125.4 a)
As regards financial management the MA shall verify that:
Co-financed products and services have been delivered
Expenditure declared by the beneficiaries has been paid
Expenditure declared complies with applicable law, the operational programme and the conditions for support of the operation
Previous wording:
(…) has actually been incurred (now; paid)
That it complies with Community and national rules (now the wording is more precised)

8. Role of the Managing Authority Art 125.4 b) – e)
As regards financial management the MA shall:
Ensure separate accounting system or an adequate accounting code
Put in place effective and proportionate anti-fraud measures taking into account the risks identified
Ensure appropriate audit trail
Draw up management declaration
put in place effective and proportionate anti-fraud measures taking into account the risks identified – this is a new element compared to the financial perspective

9. Management verifications Art 125.5
Administrative verifications in respect of each application for reimbursement by beneficiaries
On-the-spot verifications of operations
Frequency and coverage of on-the-spot verifications proportionate to public support and to risk identified
Ensure adequate separation of functions when the managing authority is also a beneficiary

10. Guidance note: main updates
Responsibilities and definitions (section 3.2)
Updated list of the managing authority responsibilities
Updated definition of a beneficiary
Need of effective and proportional anti-fraud measures
Section 3.2
MA functions: drawing up management declaration on accounts, drawing up the annual summary of the final audit reports and controls carried out, putting in place anti-fraud measures
New paragraph pointing at the requirement to assess the risk of fraud and accordingly adopt the management verifications' procedures and raise awareness among the managers and staff carrying out management verifications . As example is given the ARACHNE project. Arachne it is a risk scoring IT tool with predefined risk indicators. By combining the internal data on project financed from the Funds provided by the MS with external data (Worldcompliance and Orbis) risk level can be calculated for each operation.

11. Guidance note: main updates
Methodology, timing and scope (sections )
Procedures carried out before the expenditure is certified to the Commission should be sufficient to guarantee that the expenditure is legal and regular
Minimum requirement: administrative verifications are finalised before expenditure is certified to the Commission
Sections
In principle all verifications should be finalised before expenditure is certified to the Commission.
Experience show that sometimes it is not feasible to finalised on-the-spot verifications before the expenditure is certified to the EC. Therefore the minimum requirement is that the administrative verifications are finalised before the certification. However, it has to be underlined, that verification has to be sufficient to guarantee that the expenditure certified is legal and regular.
Therefore it is up to the MA to decide on the procedures to be carried out before the certification to the EC, however their intensity shall be sufficient to certify that the expenditure is legal and regular.

12. Guidance note: main updates
Intensity (section 3.7) – administrative verifications
All expenditure items included in an application for reimbursement should be checked based on sufficient supporting documents
when it is not possible
Verification of sample of expenditure items based on sufficient supporting documents
Section 3.7
sufficient supporting documents (i.a. invoices, timesheets, contracts, presents lists, public procurement documentation).

13. Guidance note: main updates
Intensity (section 3.7) – administrative verifications
Requirements for sampling:
Methodology is established ex ante by the MA
Each item has possibility to be selected
Risk based selection is complemented by a random sample

14. Guidance note: main updates
Intensity (section 3.7) – administrative verifications
Treatment of material errors (above 2% of the application for reimbursement's value):
Extend the testing to see whether the errors have a common feature (i.a. type of transaction, location) THEN
Extend the verifications to 100% of the application for reimbursement OR
Project the sample error to the unchecked population.

15. Guidance note: main updates
Intensity (section 3.7) – on the spot verifications
Their intensity, frequency and coverage is dependent upon:
the complexity of an operation
the amount of public support to an operation
the level of risk identified by management verifications and audits of the AA for the MCS system as a whole
the extent of detailed checks during the administrative verifications

16. Guidance note: specific areas
Section 4
Public procurement
Environment
State Aid
Financial instruments
Revenue generating operations
Simplified costs options (new)
Performance indicators (new)

17. Guidance note: specific areas
Public procurement (section 4.1) Objective of the verifications is to ensure that Union and national law is complied with and that principles of equal treatment, competition, transparency and non-discrimination have been respected during all stages of the procurement process.

18. Guidance note: specific areas
Public procurement (section 4.1)
What should be covered (i.a.):
Planning (design and accuracy of costing, appropriateness of procurement method used)
Tendering (quality of tender documents, selection and award criteria, advertising, tender evaluation reports)
Contract implementation (supplementary works, amendments to the contract).

19. Guidance note: specific areas
Public procurement (section 4.1)- Recurring audit findings (i.a.):
Additional works – award in absence of unforeseen circumstances
Unlawful selection and/or award criteria
Artificial splitting of projects
Restrictive time limits for tendering
Non-compliance with advertising requirements
Tender clarification – weaknesses
Audit trail
Direct Award
Unjustified use of negotiated or accelerated procedure
Deficiencies in case of contract value calculation
Respect of delivery deadline
Works started prior to completion of tender procedure

20. Guidance note: specific areas
State Aid (section 4.3)
Legal basis has been updated
Overview of tests to be performed during the management verifications
Need for specific checklist for each type of State aid measure
Ensure compliance with de minimis and block exemption rules or conditions laid down for notified aid

21. Guidance note: specific areas
Financial instruments (section 4.4) – administrative verifications
What should be covered (i.a.):
Set up to be checked for the first application for payment (ex-ante assessment, design, funding agreement, selection of HF and/or financial intermediaries, national co-financing, State aid)
Implementation (compliance with funding agreement: implementation investment strategy -products, final recipients, combination with grants-, business plan, calculation and payment of management costs, information on amount of investments, eligibility)
Set up can be verified once with the first application for reimbursement by beneficiary
Implementation of the financial instrument should be verified continuously with each application for reimbursement
FoF – Fund of funds
HF – Holding Fund

22. Guidance note: specific areas
Financial instruments (section 4.4) – on the spot verifications
Focus on FI set up at national, regional or cross-border level managed by or under responsibility of MA
No on the spot checks by Managing Authority for FI set up at Union level managed directly or indirectly by the EC
Checks should be in principle carried out at the level of MA and the bodies implementing financial instruments (funds of funds, financial intermediaries)
Only in specific circumstances they should be carried out at the level of final recipients.
For financial instruments set up at national, regional, transnational or cross-border level managed by or under the responsibility of the MA – there are on the spot checks by MA

23. Guidance note: specific areas
Financial instruments (section 4.4) – risk areas
Overlap loans/guarantees
Loans financing exclusively working capital
Management costs
Audit trail
Missing compulsory elements of funding agreement
No audits of operations
Funding used other than for establishment, early stages or expansion
Checks should be in principle carried out at the level of MA and the bodies implementing financial instruments (funds of funds, financial intermediaries)
Only in specific circumstances they should be carried out at the level of final recipients.
For financial instruments set up at national, regional, transnational or cross-border level managed by or under the responsibility of the MA – there are on the spot checks by MA

24. Guidance note: specific areas
Revenue-generating operations (section 4.4) The note has been updated to reflect the managing authority obligations resulting from Art. 61 and 65.8 of the Regulation (EU) 1303/2013

25. Guidance note: specific areas
Simplified costs options (section 4.10)
What should be checked:
The calculation method for each type of SCO
The correct application of the method through examination of outputs/outcomes (unit costs and lump sums)
Verification on the basis of the "real cost" principle of categories of costs to which the rate is applied (flat rate financing)
Management verifications will have to focus more on outputs than on inputs and costs of projects, the real costs will not verified

26. Guidance note: specific areas
Simplified costs options (section 4.10)
The SCO do not waive the obligation to observe applicable Union and national rules i.a. publicity, public procurement, equal opportunities, sustainable environment, state aid
SCO are discussed in detailed in the Working Document on grants and repayable assistance calculated on the basis of simplified costs
Upon endorsement of the final version of the Working Document on grants and repayable assistance calculated on the basis of simplified costs the present guideline might be updated to ensure coherence between those two documents, it concerns mainly the issue of public procurement checks during the management verifications of the SCO

27. Guidance note: specific areas
Performance indicators (section 4.11) Management verifications should ensure, on the basis of data reported by beneficiaries, that the aggregated data, including micro-data, on indicators and targets at priority or programme level are timely, complete and reliable
In the new financial perspective the focus is on results and outputs.
In order to measure the progress toward achievement of the objective we need to have reliable data.
Therefore the monitoring of progress in the implementation of operation should be incorporated in the administrative verification of each application for reimbursement.
The MA should adjust the beneficiary's payment claim template to enable timely and correct reporting on indicators. Also MA verification checklist should include appropriate section.
On-the-spot verifications should verify the correctness of the data communicated by the beneficiaries in relation to the indicators. The correct understanding of the indicator by the beneficiary and the values reported should be checked. If the beneficiary was responsible for inputting information about indicators into the IT system, the correctness of this process should be subject to verifications at least on the spot.

28. Thank you for your attention Mark Schelfhout Head of Unit ESF Audit DG Employment, Social Affairs and Inclusion