6.3 Audit and control

There are 3 levels of control in EUI-IA:

• First Level Control (FLC),
• Second Level Control (hereinafter: SLC),
• Other types of control: Accounting Authority, Entrusted Entity, Permanent Secretariat, European Commission, European Anti-Fraud Office - OLAF, national bodies, etc.

The FLC is an integral part of the overall control system for the EUI-IA. It is the base of the “pyramid structure” of checks and the most important level of the overall project controls. FLC is an independent body responsible for ensuring that all expenditure declared by the Project Partners comply with the EUI, EU, national and Partner rules and is therefore eligible, legal and rational. The main aim of the controls is to provide a guarantee for the Entrusted Entity, the Accounting Authority and, most importantly, for the project itself, that expenditure co-financed under the EUI-IA is accounted for and eligible. For the EUI-IA, FLC is centralised and sub-contracted to a single independent audit company. FLC detects errors and corrects them before they become systemic. FLC guarantees that: 

• The Project Partner has a sound financial management and control system,
• The declared expenditure relates to activities set out in the latest approved version of the Application Form,
• The expenditure is in line with the European, national and Initiative rules.

The controls carried out by the FLC follow the EUI-IA payment scheme, based on both the principle of advance ERDF payments and the principle of reimbursement of costs actually incurred and paid. Project expenses are therefore controlled twice by the FLC: once during the project implementation, prior to the second ERDF payment (advance) and once after the Administrative Closure phase, before the ERDF payment (reimbursement). The first control takes place when the reported expenditure reaches at least 35% of the approved total eligible budget.

6.3.1.1    Ex-ante audit

The ex-ante audit is organised during the Initiation Phase and prior to the first ERDF advance payment. It is compulsory for the MUA and selected Project Partners. The ex-ante audit is an on-the-spot control and carried out at the MUA’s and selected Project Partners’ premises. FLC checks, amongst others, public procurement policies, project management (including structures), planned investment locations, resources allocated to the project, etc.. It should be noted that all Project Partners must attend the audit training session at the very beginning of the Initiation Phase. The ex-ante final report is drafted by the FLC and is sent to the Permanent Secretariat for review. FLC gives its opinion (unqualified, qualified or adverse) regarding the functioning of the management and control system at the MUA/Project Partner level. In case of findings, a corrective action plan is required. In case of adverse opinion, the Entrusted Entity may decide to stop the project or suspend it until corrective measures are undertaken and verified (ex.: by the FLC).

6.3.1.2    Validation of project expenditure: administrative and on-the-spot controls

The administrative or “desk-based checks” are performed by the FLC at its own premise once all project expenditure documents of the Financial Claim are provided by the MUA to the FLC (see Chapter 7.2 “Cost Categories” for audit trail evidence per cost category). The main task of the FLC is to ensure the regularity of declared costs and compliance with all relevant regulations. It must be possible to clearly identify which expenditure has been reported for the project and to exclude the possibility of reporting the same cost twice (e.g. in two different cost categories, reporting periods, or projects/funding schemes). Supporting documentation may include the following:

• Bookkeeping list/General ledger, including cumulative costs,
• Original invoices or copies and other accounting material (digital files are possible),
• Bank statements showing actual payments,
• Explanation of the depreciation method used (for the first depreciation of the item in question),
• Proof that VAT is or is not recoverable,
• Calculation methods, documentation for the value of any equipment or machinery to be used by the project,
• Adequate documentation for payroll costs, such as: pay slips, working contracts, accounting export, annual accounts, and other documentation relevant to local regulation,
• Copies of project related contracts, public procurement documents and related material to verify purchasing processes,
• Specimens of booklets, outputs, deliverables, etc. which are produced by the project,
• Participant lists with signatures of project related activities (seminars, working groups, meetings etc.).

The list is not exhaustive and cannot be applied directly to all financial reports. The task of the FLC is to give a reasonable opinion on at least:

• The correctness of the Financial Claim expenditure,
• The expenditure relates to the eligible period and has been paid out,
• The expenditure relates to an approved project,
• The Financial Claim complies with the approved ERDF rate,
• The expenditure complies with the relevant eligibility rules and community, national and organisational rules on public procurement, state aid, environment, sustainable development, publicity, equal opportunity requirements, non-discrimination, etc.
• The reality of the project, including physical progress of the products/service and compliance with the approved Application Form,
• The separate accounting system or an adequate accounting code for all transactions relating to a project,
• The adequacy of supporting documents and the existence of an adequate audit trail,
• The conditions for payments defined in the agreement have been fulfilled for simplified cost options (flat rate and lump sums),
• The information and publicity requirements of the EU and the EUI have been respected,
• The principles of transparency, equal treatment and effective competition have been complied with.

It is compulsory to carry out on-the-spot controls on the projects. On-the-spot control means that the FLC will actually visit the project and verify that certain activities, purchases of services and products as well as investments have actually taken place in accordance with the approved Application Form during the implementation, and that related regulations have been respected. In general, the following aspects are verified during the on-the-spot checks:

• The reality of the operation,
• The delivery of products and services in full compliance with the approved application,
• Physical progress,
• The accuracy of all information provided by the beneficiary regarding physical and financial implementation of the operation.

The SLC system aims at ensuring that the overall management, control procedures and documents set up at EUI level are correctly applied and ensure the prevention and correction of potential weaknesses and errors. SLC is in charge of carrying out system audits and yearly audits on operations (projects). During the audit on operations at least 10% of projects are selected to verify that they have declared their expenditure correctly. The purpose of these checks is to ensure that no mistakes are made in the accounting records at the level of projects and that FLC worked properly. SLC system is centralised and externalised to an independent audit company, directly managed by Permanent Secretariat.

Besides the sample checks explained above, other responsible EU bodies such as the European Commission’s audit services, the European Court of Auditors, or the Entrusted Entity and Permanent Secretariat themselves may carry out audits to check the quality of the implementation of the project (in particular, the financial management in relation to compliance with EU and national rules). Projects may be checked even after the project has ended. It is therefore important to ensure not only good documentation but also safe archiving of all project documents at the very least until the date indicated in the project closure notification (see Chapter 7.6 “Retention of documents”).

In accordance with Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council on the financial rules applicable to the general budget of the Union, applicants may be excluded from the grant award procedure if the MUA or persons having powers of representation, decision-making or control within the MUA, or persons who are essential for the implementation of the project are in one or more of the following exclusion situations:

• bankruptcy, insolvency or winding-up procedures,
• breach of obligations relating to the payment of taxes or social security contributions,
• grave professional misconduct, including misrepresentation,
• fraud,
• corruption,
• conduct related to a criminal organisation,
• money laundering or terrorist financing,
• terrorist offences or offences linked to terrorist activities,
• child labour and other trafficking in human beings,
• irregularity,
• creating or being a shell company.

The Permanent Secretariat performs annual checks on the MUAs through the Early Detection and Exclusion System (EDES), the database established by the Commission to reinforce the protection of the Union's financial interests and to ensure sound financial management[1]. If necessary, the FLC may assist the Permanent Secretariat on exclusion criteria checks. If a MUA or Project Partner is detected in the EDES, the Permanent Secretariat notifies the Project Partner, who then can present a defence to EUI Authorities. The final decision of EUI Authorities on the exclusion is made in compliance with the principle of proportionality. If a Project Partner is excluded from the project, the MUA has the responsibility of either replacing the Partner or redistribute the excluded Partner’s activities among the Partnership to ensure the ongoing implementation of the project. If a MUA is excluded, EUI Authorities may suspend the project and ask for the recovery of the ERDF advance payments.

It is furthermore the responsibility of the MUA to ensure that Project Partners do not fall under the exclusion criteria mentioned above. If the MUA detects any case for exclusion of a Project Partner, it must notify the Permanent Secretariat immediately and take the appropriate measures to exclude the Partner from the project. The Subsidy Contract signed between the MUA and the Entrusted Entity contains a clause mentioning the MUA’s responsibility in ensuring that Project Partners do not fall into one of the exclusion criteria.

The Région Hauts-de-France is the Entrusted Entity of the European Urban Initiative. As the EUI finances projects through EU and public funding, it is committed to protect the EU and public funds that have been entrusted to it. Therefore, it wishes to be clearly perceived as opposed to fraud and corruption.

The term fraud is commonly used to describe a wide range of misconducts including theft, corruption, embezzlement, bribery, forgery, misrepresentation, collusion, money laundering and concealment of material facts. It often involves the use of deception to make a personal gain for oneself, a connected person or a third party, or a loss for another – intention is the key element that distinguishes fraud from irregularity.

• Fraud does not just have a potential financial impact, but it can cause damage to the reputation of an organisation responsible for effectively and efficiently managing funds. This is of particular importance for a public organisation responsible for the management of public funding in general and EU funding in particular.
• Corruption is the abuse of power for private gain.
• Conflict of interests exists where the impartial and objective exercise of the official functions of a person are compromised for reasons involving family, emotional life, political or national affinity, economic interest or any other shared interest with for instance an applicant for or a recipient of EU funds.

The Entrusted Entity has a zero-tolerance policy to fraud and corruption. It has identified the most likely areas for fraud in the EUI-IA and its projects, and has set up robust control systems, measures and procedures in order to follow up on all suspected cases that will be highlighted to the Permanent Secretariat. The Entrusted Entity expects all employees and representatives of the EUI to be an example in ensuring adherence to legal requirements, regulations, codes of conduct, procedures and practices. Through this anti-fraud policy, the Entrusted Entity clearly puts forward its intentions to:

• promote a culture which deters fraudulent activity,
• facilitate the prevention and detection of fraud,
• develop procedures which will aid in the investigation of fraud and related offences, and which will ensure that such cases are dealt in a timely and appropriate manner.

The responsibility for an anti-fraud culture is the joint work of all those involved in the EUI and EUI-IA projects.