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Proposal of the European Ombudsman for a solution in case 1311/2014/NF on the European Commission’s rejection of certain costs under EU funded projects

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  • Case: 1311/2014/NF
    Opened on 24 Jul 2014 - Decision on 01 Jun 2017

Made in accordance with Article 3(5) of the Statute of the European Ombudsman[1]

The European Commission decided not to grant EU funding to cover the staff costs of an NGO that had successfully carried out three EU projects for Research and Technological Development. The European Commission considered the complainant’s time-recording system to be unreliable. The NGO disagreed strongly and complained to the Ombudsman.

The Ombudsman found that, throughout and after the auditing of the projects, the complainant had made serious efforts to explain its time-recording system to the Commission. Given that the Commission could see that the sample timesheet provided by the complainant complied with the requirements for time recording, the Ombudsman is of the view that the Commission should have proactively asked the complainant to provide the full set of timesheets before deciding whether the staff costs could be covered by EU funding.

The Ombudsman therefore proposes that the Commission consider the detailed timesheets provided by the complainant in the context of her inquiry and that it review its decision not to grant EU funding for the staff costs.

The background to the complaint

1. The complainant is an NGO which was involved in carrying out three projects under the EU's Seventh Framework Programme for Research and Technological Development 2007-2013 ('FP7'). The projects were funded by the European Commission. The complainant carried out its tasks in a satisfactory way. However, as will be explained in more detail below, the Commission decided to reject the funding of the complainant’s personnel costs following a financial audit.

2. The aim of the FP7 was to strengthen the scientific and technological base of European industry and to encourage its international competitiveness. Funding under the FP7 was cost-based rather than result-based.

3. In 2011, the Commission asked an external audit company to audit, on its behalf, the complainant’s implementation of the three FP7 projects and to check the eligibility of the costs claimed for EU funding.[2]

4. The relevant grant agreements obliged the complainant to make available precise, complete and effective information and data so that the Commission could check that the complainant had declared costs in accordance with the relevant rules. Among other things, the Commission asked the complainant to provide it with its "certified time records (or any other control document directly attributing personnel costs to the audit project) for all project personnel involved in the RTD [research and technological development] action".

5. The draft audit report found systemic errors in the complainant's financial statements. In particular, the complainant's time recording system was found not to be reliable. The draft audit report therefore recommended that 100% of the complainant's personnel costs should be declared ineligible for EU funding. The complainant objected strongly to these preliminary findings and sought to explain that its time-recording system was not unreliable. However, the Commission's final audit report maintained that all the complainant's personnel costs were ineligible for EU funding.

6. The complainant objected to the findings of the final audit report and to any extension of these findings to the non-audit periods of the projects. During a meeting on 2 July 2013, the Commission gave the complainant a chance to provide additional evidence to influence the audit findings. The Commission, however, subsequently confirmed its audit findings.

7. In 2014, the Commission started to recover money from the complainant.

8. The complainant then turned to the Ombudsman with the present complaint.

The inquiry

9. The first step in the Ombudsman's inquiry was to obtain further clarifications from the Commission on the audit findings. Following such clarifications, the complainant nevertheless maintained its view that the Commission had failed to carry out a substantive review of the audit findings on the basis of the information that the complainant had provided to explain the set-up of its time-recording system.

10. The Ombudsman therefore continued her inquiry into the following allegation and claim:

The Commission failed properly to take into consideration the information provided by the complainant on the set-up of its time-recording system on the occasion of finalising the audit report and when deciding what measures to take in light of the audit findings.

The Commission should properly take into consideration the information provided by the complainant on the set-up of its time-recording system and reconsider its decision to recover the personnel costs declared ineligible in the audit report.

11. The Commission provided its opinion on the complaint and the complainant submitted comments on the position expressed by the Commission. The Ombudsman also inspected the Commission's audit file. The Ombudsman's solution proposal takes into account the arguments and opinions put forward by the parties.

Allegation that the Commission failed properly to take into consideration the information provided by the complainant

Arguments presented to the Ombudsman

12. The complainant’s main argument is that the audit was based, incorrectly, on just two of the three types of timesheets that constitute its time-recording system. According to the complainant, the audit and its finding that the complainant's time-recording system was unreliable did not take into account the complainant’s main type of timesheet: the detailed “1a timesheet”. The audit finding is thus based on the incorrect assumption that the complainant has not kept a detailed and reliable enough record of the time spent by its staff on the projects.

13. During the audit fieldwork, in response to the draft and final audit report, the complainant repeatedly pointed out that its time-recording system consists of three types of timesheets, including the 1a timesheets. The complainant's main timesheet is the detailed monthly 1a timesheet. The 1a timesheet contains the name of the employee, start and end date of the activity, description and nature of the tasks, duration in hours, duration in days, the name of each project and the work package. The complainant has based its time-recording system on the 1a timesheet since its establishment in 2001. The second type of timesheet (the '1b timesheet') is a consolidated, annual timesheet per project, which relies on the information contained in the 1a timesheets. At the end of 2009, the complainant decided to introduce a third type of timesheet ('1c timesheets/ extended forms 76') for EU-funded projects under FP7, strictly adhering to the template provided in the "Guide to Financial Issues relating to FP7". The information in the 1c timesheets is also based on the times recorded in the 1a timesheets. According to the complainant, the auditors and the Commission failed to take into account the information about the setup of its time-recording system which it brought to their attention repeatedly. In particular, the Commission failed to reconsider the final audit findings after the complainant had provided it with a full set of 1a timesheets at the meeting of 2 July 2013.  

14. According to the complainant, given that the actual set-up of the complainant's time-recording system is in full compliance with the time-recording requirements for FP7 projects, the Commission’s decision to disallow and to recover all the personnel costs under the projects is incorrect and unfair. The Commission had previously audited the complainant's implementation of a project carried out under the Leonardo Da Vinci Programme[3]. From that audit, the Commission should be able to tell that the complainant has consistently and primarily used 1a timesheets for time recording under EU-funded projects.

15. The Commission argued that it based its audit conclusions on a through and in-depth analysis of all evidence provided by the complainant during the audit fieldwork, the ensuing period of comments ("contradictory procedure"[4]) and the meeting with the Commission services held on 2 July 2013. The Commission acknowledged that the complainant had argued, during the "contradictory procedure", that it records the time spent by its staff in a detailed manner and on a monthly basis. However, the complainant had never provided the auditors with any documents having the content or format of the 1a timesheets, neither during the audit fieldwork nor during the "contradictory procedure". The only timesheets provided to the auditors were the 1b and 1c timesheets. These timesheets could not sufficiently justify the personnel costs because they were either not detailed enough (1b timesheets) or considered backdated (1c timesheets). In the Commission’s view, the complainant thus had failed to comply with its contractual obligation[5] to make information readily available during an audit. The Commission believes that it took into account “all the elements” in determining the audit conclusions.

16. The Commission acknowledged that the complainant had, on several occasions but only well after the end of the "contradictory procedure", provided it with an explanatory note on the set-up of its time-recording system, including an example of a 1a timesheet. The Commission confirmed that the example of the 1a timesheet complied with the requirements for time recording as set out in the relevant grant agreements. However, the complainant had never provided a full set of 1a timesheets, neither to the auditors nor directly to the Commission. According to the Commission, the complainant had not provided a full set of 1a timesheets at the meeting of 2 July 2013, despite the fact that those timesheets are referred to in the annex to the meeting minutes.

17. According to the grant agreements[6], the Commission may decide not to take into account observations put forward, or documents sent, after the deadline of one month that was given to the complainant to comment on the draft audit report. As the complainant never provided a full set of the 1a timesheets, but merely an example of such a timesheet and “beyond any given deadline”, the Commission could not believe “– in a credible manner – in the existence of any reliable timesheets”. Even if reliable timesheets had existed, the Commission is of the view that it would not have been obliged to consider them, absent the submission by the complainant of the full set of 1a timesheets.

The Ombudsman's preliminary assessment leading to the solution proposal

18. The main question in the present case is that of the reliability of the complainant's time-recording system. There is an obvious discrepancy between the time-recording system described in the Commission's audit report and the time-recording system that the complainant argues it uses for EU-funded projects. While the Commission's audit report is based on just two types of timesheets, 1b and 1c timesheets, the complainant argues that its time-recording system is based mainly on a third type of timesheet, the detailed 1a timesheet. When opening the inquiry, the Ombudsman expressed her preliminary view that the complainant’s time-recording system, with the 1a timesheets, appeared to comply fully with the requirements for time recording under FP7 projects[7]. The complainant's time-recording system also appeared to be fully in line with the auditors' recommendations in the final audit report, set out with a view to addressing the systematic errors detected in the complainant's time recording. The Ombudsman welcomes the fact that the Commission has confirmed that the “example of a type 1a) timesheet that has been provided to the Commission does comply with the requirements of Article II.15 of the FP7 Grant Agreement.

19. It remains unclear why the external auditors based the draft audit conclusions on the 1b and 1c timesheets only, without considering the complainant’s detailed 1a timesheets. The complainant argues that it made all necessary information available to the auditors during the audit fieldwork. According to the Commission, however, the external auditors maintain that they did not receive the 1a timesheets. In any event, it is for the Commission itself (not for the external auditors who prepared the draft audit report only) to take into account information provided by the complainant following the audit report - both in draft and final form - and to take all appropriate measures necessary on the basis of the findings of the audit. The Ombudsman’s role in this case is thus to examine whether the Commission's actions on the basis of the audit report, in draft and final form, were reasonable and fair.

20. The Ombudsman notes that, in response to the draft audit report, the complainant objected to the finding that its time-recording system was unreliable. The complainant provided information on the set-up of its time-recording system by describing the 1a type of timesheet.

21. The Ombudsman is of the view that the complainant’s objections and detailed explanations should have prompted the Commission to seek clarifications. The right to good administration[8] includes the right to be heard before any measure that may affect a person adversely is taken and it also entails the right to have one’s affairs handled fairly. In order for these rights to be effective, reasonable objections put forward by the person concerned by a particular measure need to be followed up. The Ombudsman therefore considers that, before finalising the audit report, the Commission should have clarified with the complainant any potential discrepancy between the time-recording system referred to by the auditors and the time-recording system described by the complainant. It would thus have been appropriate for the Commission to have asked the complainant to clarify what type of timesheet it referred to in its observations and to request that it submit these timesheets for the Commission’s consideration. However, as far as the Ombudsman has been able to determine, the Commission did not ask the complainant for clarifications before drawing up the final audit report in which it endorsed the auditors’ finding that the complainant’s time-recording system was unreliable and that all personnel costs must be excluded from EU funding.

22. The Ombudsman cannot accept the Commission’s argument that the complainant informed it of the existence of another type of timesheet only after the audit closure. The complainant clearly referred to another type of timesheet during the "contradictory procedure". The complainant’s comments in this regard are, in fact, included in the Commission’s final audit report[9]. The fact that the complainant did not expressly refer to “1a timesheets” in its comments cannot have any bearing on the fact that the Commission was, before the audit closure, provided with information on the existence of a type of timesheets that the auditors had not considered in their draft audit report. When finalising the audit report, the Commission thus failed to take effective note of the complainant’s comments.

23. The Ombudsman acknowledges that the Commission exceptionally met with the complainant on 2 July 2013, that is, after the audit closure. In its letter to the complainant offering to organise a meeting, the Commission explicitly stated that the purpose of the meeting was to allow the complainant to provide the Commission with additional and new evidence that could possibly affect the audit conclusions. According to the Commission’s meeting minutes, the complainant gave the Commission documents in electronic form, together with printouts of some of the documents. Enclosed with the meeting minutes is a list of the documents provided. The first two items on the list, called “list of proofs submitted on 02.07.2013”, are “Annex I.1. Monthly detailed individual timesheets used for calculation of monthly remuneration of [the complainant’s] employees and accrual of [the complainant’s] staff costs under each funded project" and “I. Explanatory note on time-recording”. The explanatory note makes it clear that the monthly detailed individual timesheets referred to in Annex I.1 are the 1a timesheets.

24. The meeting minutes show that the complainant made serious efforts to explain the actual set-up of its time-recording system to the Commission, with emphasis on the 1a timesheets, in order to dispel any doubts as to its alleged unreliability. The minutes also show that the complainant tried to understand what additional documentation was needed to prove the reliability of its time-recording system. The complainant expressly asked the Commission for advice on this point. It is also obvious from the minutes, and from the annex to the minutes, that the complainant was of the view that it had provided the full set of 1a timesheets to the Commission at the meeting.

25. During the course of the present inquiry, the Commission informed the Ombudsman that the 1a timesheets were not actually among the documents provided to it by the complainant at the meeting. This was confirmed to be the case at the Ombudsman’s inspection of the Commission’s files.

26. However, as with the complainant’s comments on the draft audit report, the Ombudsman considers that this obvious discrepancy between the listed supporting documents and those actually provided by the complainant should have prompted the Commission to seek clarifications. Given the crucial role of the 1a timesheets in determining the eligibility of the complainant’s personnel costs - which was also the whole purpose of the exceptional meeting - and given the complainant’s clear efforts to prove its personnel costs, the Commission should have pointed out to the complainant that the detailed timesheets were missing. This conclusion is supported by the fact that the Commission assured the complainant that the documents provided at the meeting would receive “full attention” and that it informed the complainant that other documents mentioned in the annex to the meeting minutes were missing. It can be noted in this regard that the complainant had already provided the Commission with samples of the 1a timesheet, on the basis of which the Commission would have been able to see that these timesheets did fulfil the criteria for a reliable time-recording system. Being provided with the full set of these timesheets would therefore have been even more relevant. 

27. The Ombudsman is not in a position to verify whether the complainant ever provided the external auditors or the Commission with the full set of 1a timesheets and, if not, what went wrong during the audit procedure. However, the timesheets that the complainant at least intended to give to the Commission on 2 July 2013, and which the complainant has also given to the Ombudsman, appear to be the complete set of relevant 1a timesheets.

28. The Ombudsman is fully aware that the complainant was obliged to make available precise, complete and effective information and data for the Commission to be able to verify that it had properly managed the grant agreements and that it had charged costs in compliance with the rules. The Ombudsman also acknowledges that the Commission is under no legal obligation to take into account information or documents provided by the complainant after the expiration of the deadline for submitting comments on the draft audit report. At the same time, the Commission is fully entitled to take into account such information.[10] Given that the Commission clearly failed to take effective note of the complainant’s persistent efforts to explain its time-recording system, efforts made as early as at the stage of the draft audit report, the Ombudsman considers that it would only be fair for the Commission to review its audits findings on the basis of the complainant’s 1a timesheets. The Commission’s opinion suggests that it would have been ready to consider the 1a timesheets, had the complainant provided the full set. The Ombudsman will therefore forward copies of the full set of 1a timesheets to the Commission, making the following proposal for a solution in this case:

The proposal for a solution

The Ombudsman proposes that the Commission should now review its position on the basis of the 1a timesheets now provided and, if it is satisfied that these timesheets meet its requirements, that it reverse its audit conclusion to disallow 100% of the complainant’s personnel costs in the implementation of the three FP7 projects.

Strasbourg, 03/08/2016

European Ombudsman

 

[1] Decision of the European Parliament of 9 March 1994 on the regulations and general conditions governing the performance of the Ombudsman's duties (94/262/ECSC, EC, Euratom), OJ 1994 L 113, p. 15.

[2] According to the grant agreements, the Commission was entitled, at any time during the implementation of the projects and up to five years after their end, to carry out financial audits itself or with the help of external auditors. A financial audit could cover financial, systemic and other aspects, such as accounting and management principles, relating to the proper implementation of the grant agreements.

[3] Leonardo Da Vinci Programme, call for proposals 2005-2006, selection round 2005 – procedure C, project reference: BG/05/C/F/TH-83300, project title:  "Development of a Validation Framework for Mentoring: Evaluating the Achievements of Disabled and Disadvantaged People".

[4] During the contradictory procedure, the complainant had the possibility of commenting on the preliminary findings of the draft audit report. The procedure ended with the Commission issuing its final audit report, which, in its “Part 5 - Beneficiary comments" sets out the comments made by the complainant.

[5] Article II.22(2) and (3) of the grant agreements.

[6] Article II.22(5) of the grant agreements.

[7] See the Commission’s Guide to Financial Issues relating to FP7 Indirect Actions, subheading "(a.1) Time recording system: general conditions".

[8] Article 41 of the Charter of Fundamental Rights of the European Union.

[9] "Part 5 - Beneficiary comments" of the Commission’s final audit report.

[10] Article II.22.5 of the general conditions of the grant agreements.