EN    EN EN 
EN    EN  EUROPEAN COMMISSION 
Brussels, 9.9.2010 
SEC(2010) 1009 final 
REPLIES OF THE COMMISSION TO CH APTER 5 OF THE ANNUAL REPORT 2009   
"RESEARCH, ENERGY AND TRANSPORT" 
EN 2   EN REPLIES OF THE COMMISSION TO CHAPTER 5 OF THE ANNUAL REPORT  2009  
"RESEARCH, ENERGY AND TRANSPORT"   
INTRODUCTION 
5.7. Research Framework Programmes involve tec hnically and financiall y complex projects. 
The control environment is characterised by a large number of beneficiaries, each operating 
their own control systems. 
Because the current legislative and contractual environment makes the management of project 
complex both for the beneficiaries and the Co mmission, simplification measures have been 
taken by the Commission for the implementation of FP7.  
5.10. Most of the expenditure is managed direct ly by the Commission but FP7 also allows for 
the implementation of the budget in indirect  centralised management mode; i.e. the 
Commission entrusts implementing tasks to Execu tive Agencies, Joint Unde rtakings set up by 
the EU and ‘Article 185 Initiatives’, which are structures created for the execution of research 
programmes undertaken jointly by several Member States. 
5.16. The Commission agrees with th e Court. Indeed the complex ity of the rules is a major 
source of errors and ineligible cost clai ms. The Commission's Co mmunication on simplifying 
the implementation of the research framework programmes1 proposes actions to address this 
risk. As these proposals will only be implemen ted within the next fr amework programme, and 
as it needs to address the problems caused by complex eligibility requirements for grant beneficiaries, on 26 May 2010 the Co mmission adopted a Communication
2 to the other 
Institutions proposing a level for the tolerable risk of error in this area of between 2% and 5%. 
The proposed level of tolerable risk of error is established taking into account the cost-effectiveness of the controls a nd an acceptable level of residual e rror that is justified in the 
light of these costs. 
REGULARITY OF TRANSACTIONS 
5.19 Example 1 
The Commission agrees with the findings of the Court and the recove ry process is on-going. 
5.20. At this stage of the programme cycle, and given the small number of FP7 interim 
payments included in the Court's sample, it is too early to draw conclusions on the frequency 
and the value of errors in FP7 by comparison with FP6. 
EFFECTIVENESS OF SYSTEMS 
5.31. The Commission shares the c oncern of the Court on the co rrectness of the FP6 audit 
certificates, which did not fully provide the add itional assurance initially expected. However, 
the Commission maintains that this instrume nt made a substantia l contribution to the 
prevention of errors, resulting in a significant decrease of th e error rates in FP6 audits 
compared with FP5. 
The Commission has taken remedial action in order to improve the quality of the audit 
certificates in FP7. FP7 audit certification is ba sed on "agreed upon procedures", which 
require the certifying auditor to perform pre-defi ned procedures and report factual findings on 
                                                 
1 COM(2010) 187 of 29.4.2010. 
2 COM(2010) 261 of 26.5.2010. 
EN 3   EN that basis. This approach should lead to a reducti on in errors of interpre tation of the eligibility 
rules by the auditors which occurred in FP6.  
The Commission will continue as sessing the reliability of audit certificates during its own 
financial audits. 
See also reply to paragraph 5.49. 5.32-5.33. The ex-ante certification of benefi ciaries’ costing methodologies is only 
compulsory for those who wish to apply average personnel costing to thei r cost claims. It is 
optional for other beneficiaries. 
In addition, beneficiaries are still required to provide a cert ificate for the final payment 
covering all periods if the cumulative requested contribution exceeds 375.000 euro. In 
practical terms, ex-ante certifi cation does reduce the administrati ve burden for beneficiaries 
and contributes to substantial costs savings on audit fees.  
See also reply to paragraph 5.36. 5.34-5.35. In its Communication on simplificati on, the Commission proposes to take into 
account any average personnel cost methodology a pplied as usual accounting practices of the 
beneficiaries, including a cost centre based ap proach, as long as they  are based on actual 
personnel costs registered in the accounts a nd any double funding of costs under other cost 
categories is excluded. 
The FP7 Rules for Participation authorise aver age personnel costs as an exception to the 
general rule of actual costs, providing this is  the usual accounting pract ice of the beneficiary 
and that the average costs do not differ significantly  from the actual costs. The criteria defined 
by the Commission aim to provide reasonable assura nce that the application of a beneficiary's 
methodology will not lead to any significant deviat ion of the average costs reported vis-à-vis 
the actual costs. In the view of the Commi ssion, these criteria represent the best possible 
balance between simplification and accountability  concerns within the prevailing regulatory 
framework.  
5.36. The intensity of audit cert ificate submissions under FP7 ha s been reduced to lower the 
administrative burden on participants. However,  a Certificate on Financial Statements (CFS) 
is still required for beneficiaries who ha ve received certificatio n of their costing 
methodologies, since this only  removes the obligation for a beneficiary to submit an 
intermediate CFS. A CFS must be submitted for the last reporting period if the cumulative requested contribution exceeds 375.000 euro. Fo llowing the intensive FP6 audit campaigns, 
many beneficiaries have undergone a learning  effect and the Commission expects that 
beneficiaries are likely to a pply improved project cost account ing practices as  a result.  
At the present juncture, it is not possible to conclude that the overall error rate will increase, 
as the risks identified may be offset by other measures. 
5.40. The Commission welcomes the positive assessment of the progress made. It is fully 
aware of the required levels of co-ordination and is proceeding accordingly. 
5.41. Additional efforts will be unde rtaken in order to improve the timely implementation of 
audit results. 
EN 4   EN The recovery process in the framework of the implementation of the au dit strategy has also 
been subject to simplification measures3 in order to reduce the burden both for the 
Commission and the beneficiaries. 
The performance of the recovery proce ss has progressed significantly in 2009.  
Most financial corrections are implemented by deducting th e amount due from the next 
payment, which is the most cost-effective me thod of recovery. Since payments are usually 
made annually, this leads to a time  lag in the recovery process.  
The increased number of audits has multiplied the number of projects requiring corrections 
and adjustments. 
5.42. From their creatio n in mid-February 2010, DGs MO VE and ENER apply liquidated 
damages in the same way as other research DGs. 
RELIABILITY OF COMMISSION MANAGEMENT REPRESENTATIONS 
5.44. The Commission welcomes the positive a ssessment of the Cour t for all the Annual 
Activity Reports covered by this chapter. 
CONCLUSIONS AND RECOMMENDATIONS 
5.45. The Commission underlines that the Court's finding regarding the e rror rate is in line 
with the past year and that the most likely er ror rate for the policy areas covered in this 
chapter lies between 2% and 5%. 
This result is in line with the Commission' s own findings. On 26  May, the Commission 
adopted a Communication4 proposing a tolerable risk of erro r level in this range (2%-5%). A 
DAS error rate around the middle of this range  would, in the view of the Commission, be 
acceptable and justified. Beyond this level, ad ditional action would be taken to reduce the 
error rate through increased controls addressi ng the major causes of error and taking into 
account the multi-annual nature of the expenditure. This rate should cover all Research Framework Programmes. 
This level could be revised in  the light of major changes in the contro l environment that 
would have an effect on the DAS error rate, in  particular simplification actions taking effect 
in the next framework programme. 
5.48. The Commission welcomes the positive trend not ed by the Court. It underlines that the 
changes in audit certification requirements have been introduced to simplify and facilitate the participation of the beneficiaries 
Furthermore, whilst recognizing the limited su ccess of the ex-ante methodology certification, 
the full array of internal controls in place, including the FP7 audit strategy, will ensure the 
right conditions for sound financial management.  
5.49. The Commission's primary objective is to efficiently achieve the research policy 
objective, whilst ensuring sound contro l of the related budget implementation. 
(a) The Commission pursues a policy of actively f eeding back findings of ex-post audits to the 
beneficiaries in order to ensure - where necessa ry - improvements in the work of the auditors 
delivering audit certificates. To this effect ever y beneficiary is requeste d in the course of the 
audit procedure to inform the certifying audito r on material audit findings. The Commission 
observes, however, that the main cause of the Court's observations is not so much the design 
                                                
 
3 SEC(2009)1720 of 15.12.2009. 
4 COM(2010) 261 of 26.5.2010.  
EN 5   EN or concept of the audit certificate but rather th e relative complexity of the rules, duly referred 
to by the Court under paragraph 5.16. This inherent complexity  impacts the work performed 
by the external auditors mandate d by beneficiaries to deliver a udit certificates. For FP7 it is 
expected that with the relian ce on agreed upon procedures, the de gree of errors due to such 
misinterpretation will significantly decrease. 
(b) The certification on the methodology (CoM) is intended only for beneficiaries of multiple 
grants. The eligibility criteria for the CoM were  reviewed in Novemb er 2008 and published in 
the FP7 Guide to Financial Issues.  
The Commission recently took action in order to reinforce the attractiveness of the ex-ante 
certification of beneficiaries costing methodologies. The Commi ssion expressed its views in 
this respect in its Communicati on on simplification of 24 April 2010 as well as in its proposal 
for triennial revision of the financial regula tion and its implementing rules adopted on 28 May 
2010. Genuine simplification coul d be yielded by allowing me thodologies applied as usual 
accounting practice as long as th ey are based on actual personnel costs registered in the 
accounts. 
(c) The Commission will further pursue its effo rts to improve the timely implementation of 
audit results and continue to apply its guideli nes on the application of  liquidated damages. 
Furthermore the communication on the simplifica tion of the recovery process adopted on 15 
December 2009 provides measures to improve th e performance of the recovery process. 
5.50. The Commission fully agrees and refers to  the orientations developed in its recent 
Communications on " Simplifying the Implementation of the Research Framework 
Programmes " and " More or less controls? Striki ng the right balance between the 
administrative costs of control and the risk of error ". 
5.51. The full impact of these simplification m easures will be felt mainly in the next 
Framework Programme. Until such proposals are implemented, the Commission needs to 
address the problems caused by co mplex eligibility rules for grant beneficiaries. On 26 May 
2010 the Commission adopted a Communication propos ing a tolerable risk of error in this 
area of between 2% and 5%5. The tolerable risk level is es tablished taking into account the 
cost-effectiveness of controls and an acceptable le vel of residual error that  is justified in the 
light of these costs. 
EU JOINT UNDERTAKINGS 
5.56. The Commission monitors the implementati on of the action plans devised by the Joint 
Undertakings to fully deploy th eir internal control systems. 
5.57. The Commission shares the Court's opini on that the IAS of the Commission should 
exercise the same powers over the bodies se t up by the EU having a legal personality and 
receiving contributions from  the budget under Article 185 (3 ) of the general Financial 
Regulation as those which it exerci ses over Commission departments.  
ANNEX 5.4. – 2. LATE PAYMENTS BY THE COMMISSION  
The Commission welcomes the recognition by the Court of the progress made so far. The 
Commission is committed to pursuing these e fforts to further improve its performance.   
 
                                                 
5 COM(2010)261.