REPLIES OF THE COMMISSION TO CHAPTER 5 OF THE ANNUAL REPORT 2009 "RESEARCH, ENERGY AND TRANSPORT"
Date: 2010-09-09
Institutions: European Commission
Subjects: EU action, EU programme, EU research policy, Framework Programme for Research and Development, State aid, audit, financial aid, implementation of the budget, joint venture, research budget

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EUROPEAN COMMISSION 

Brussels, 9.9.2010 
SEC(2010) 1009 final 

REPLIES OF THE COMMISSION TO CHAPTER 5 OF THE ANNUAL REPORT 2009  

"RESEARCH, ENERGY AND TRANSPORT" 

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REPLIES OF THE COMMISSION TO CHAPTER 5 OF THE ANNUAL REPORT 2009  

"RESEARCH, ENERGY AND TRANSPORT"  

INTRODUCTION 

5.7. Research Framework Programmes involve technically and financially 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  Commission,  simplification  measures  have  been 
taken by the Commission for the implementation of FP7.  

5.10. Most of the expenditure is managed directly 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 Executive Agencies, Joint Undertakings 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 the Court. Indeed the complexity of the rules is a major 
source of errors and ineligible cost claims. The Commission's Communication on simplifying 
the implementation of the research framework programmes1 proposes actions to address this 
risk. As these proposals will only be implemented within the next framework programme, and 
as  it  needs  to  address  the  problems  caused  by  complex  eligibility  requirements  for  grant 
beneficiaries,  on  26  May  2010  the  Commission  adopted  a  Communication2  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  and  an  acceptable  level  of  residual  error  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 recovery 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  concern  of  the  Court  on  the  correctness  of  the  FP6  audit 
certificates, which did not fully provide the additional assurance initially expected. However, 
the  Commission  maintains  that  this  instrument  made  a  substantial  contribution  to  the 
prevention  of  errors,  resulting  in  a  significant  decrease  of  the  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  based  on  "agreed  upon  procedures",  which 
require the certifying auditor to perform pre-defined procedures and report factual findings on 

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COM(2010) 187 of 29.4.2010. 
COM(2010) 261 of 26.5.2010. 

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that basis. This approach should lead to a reduction in errors of interpretation of the eligibility 
rules by the auditors which occurred in FP6.  

The  Commission  will  continue  assessing  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  beneficiaries’  costing  methodologies  is  only 
compulsory for those who wish to apply average personnel costing to their cost claims. It is 
optional for other beneficiaries. 

In  addition,  beneficiaries  are  still  required  to  provide  a  certificate  for  the  final  payment 
covering  all  periods  if  the  cumulative  requested  contribution  exceeds  375.000  euro.  In 
practical  terms,  ex-ante  certification  does  reduce  the  administrative  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  simplification,  the  Commission  proposes  to  take  into 
account any average personnel cost methodology applied as usual accounting practices of the 
beneficiaries,  including  a  cost  centre  based  approach,  as  long  as  they  are  based  on  actual 
personnel  costs  registered  in  the  accounts  and  any  double  funding  of  costs  under  other  cost 
categories is excluded. 

The  FP7  Rules  for  Participation  authorise  average  personnel  costs  as  an  exception  to  the 
general rule of actual costs, providing this is the usual accounting practice 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 assurance that the application of a beneficiary's 
methodology will not lead to any significant deviation of the average costs reported vis-à-vis 
the  actual  costs.  In  the  view  of  the  Commission,  these  criteria  represent  the  best  possible 
balance  between  simplification  and  accountability  concerns  within  the  prevailing  regulatory 
framework.  

5.36. The intensity of audit certificate submissions under FP7 has been reduced to lower the 
administrative burden on participants. However, a Certificate on Financial Statements (CFS) 
is  still  required  for  beneficiaries  who  have  received  certification  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.  Following  the  intensive  FP6  audit  campaigns, 
many  beneficiaries  have  undergone  a  learning  effect  and  the  Commission  expects  that 
beneficiaries are likely to apply improved project cost accounting 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 undertaken in order to improve the timely implementation of 
audit results. 

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The  recovery  process  in  the  framework  of  the implementation of the audit 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 process has progressed significantly in 2009.  

Most  financial  corrections  are  implemented  by  deducting  the  amount  due  from  the  next 
payment,  which  is  the  most  cost-effective  method  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  creation  in  mid-February  2010,  DGs  MOVE  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  assessment  of  the  Court  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  error  rate  is  in  line 
with  the  past  year  and  that  the  most  likely  error  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 error 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,  additional  action  would  be  taken  to  reduce  the 
error  rate  through  increased  controls  addressing  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  control  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 noted 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 success 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 control of the related budget implementation. 

(a) The Commission pursues a policy of actively feeding back findings of ex-post audits to the 
beneficiaries in order to ensure - where necessary - improvements in the work of the auditors 
delivering audit certificates. To this effect every beneficiary is requested in the course of the 
audit procedure to inform the certifying auditor on material audit findings. The Commission 
observes, however, that the main cause of the Court's observations is not so much the design 

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SEC(2009)1720 of 15.12.2009. 
COM(2010) 261 of 26.5.2010.  

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or concept of the audit certificate but rather the 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 mandated by beneficiaries to deliver audit certificates. For FP7 it is 
expected that with the reliance on agreed upon procedures, the degree 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 November 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 Commission expressed its views in 
this respect in its Communication on simplification of 24 April 2010 as well as in its proposal 
for triennial revision of the financial regulation and its implementing rules adopted on 28 May 
2010.  Genuine  simplification  could  be  yielded  by  allowing  methodologies  applied  as  usual 
accounting  practice  as  long  as  they  are  based  on  actual  personnel  costs  registered  in  the 
accounts. 

(c)  The  Commission  will  further  pursue  its  efforts  to  improve  the  timely  implementation  of 
audit  results  and  continue  to  apply  its  guidelines  on  the  application  of  liquidated  damages. 
Furthermore the communication on the simplification of the recovery process adopted on 15 
December 2009 provides measures to improve the performance of the recovery process. 

5.50.  The  Commission  fully  agrees  and  refers  to  the  orientations  developed  in  its  recent 
Communications  on  "Simplifying 
the  Research  Framework 
Programmes"  and  "More  or  less  controls?  Striking  the  right  balance  between  the 
administrative costs of control and the risk of error". 

the  Implementation  of 

5.51.  The  full  impact  of  these  simplification  measures  will  be  felt  mainly  in  the  next 
Framework  Programme.  Until  such  proposals  are  implemented,  the  Commission  needs  to 
address the problems caused by complex eligibility rules for grant beneficiaries. On 26 May 
2010  the  Commission  adopted  a  Communication  proposing  a  tolerable  risk  of  error  in  this 
area  of  between  2%  and  5%5.  The  tolerable  risk  level  is  established  taking  into  account  the 
cost-effectiveness of controls and an acceptable level of residual error that is justified in the 
light of these costs. 

EU JOINT UNDERTAKINGS 

5.56. The Commission monitors the implementation of the action plans devised by the Joint 
Undertakings to fully deploy their internal control systems. 

5.57.  The  Commission  shares  the  Court's  opinion  that  the  IAS  of  the  Commission  should 
exercise  the  same  powers  over  the  bodies  set  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 exercises 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 efforts to further improve its performance.  

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