Decision of the European Ombudsman on complaint 2689/2005/BB against the European Commission

Strasbourg, 16 July 2008

Dear Mr A.,

On 5 August 2005, acting on behalf of CINAR Ltd. (hereafter "CINAR"), you submitted a complaint to the European Ombudsman against the European Commission. Your complaint concerned an external audit and its subsequent phases in four research contracts(1), concluded in the framework of the Commission's Fourth and Fifth research and technological development programmes ("RTD"). That audit was carried out at the premises of CINAR on 20-21 August 2002.

On 13 September 2005, I forwarded the complaint to the President of the Commission.

The Commission sent its opinion on 11 January 2006. I forwarded it to you with an invitation to make observations, which you sent on 4 April 2006.

On 29 January 2008, you sent a further submission informing me about the completion of OLAF's investigation, which included the above four contracts.

I am writing now to let you know the results of the inquiries that have been made.

I apologise for the length of time it has taken to complete my inquiry.

THE COMPLAINT

The complainant is a director of a company called CINAR Ltd. (hereafter "CINAR"), which is a small high-tech company with expertise in coal and biomass combustion and emission control. It has been providing technical services and has participated in various research and development projects sponsored by the European Commission. Between June 1998 and May 2000, CINAR, acting as the Contractor, entered into four research contracts(2) with the Commission concerning seven research projects undertaken in the framework of the Fourth Framework Programme ("FP4") and the Fifth Framework Programme ("FP5").

On 20-21 August 2002, a representative of the External Audit Unit of the Commission's Directorate-General for Research ("DG RTD") and two accountants visited the offices of CINAR in order to audit the above four research contracts.

On 15 September 2003, the Commission approved the audit report drafted by the auditors. It rejected the explanations and evidence, including the payslip evidence, subsequently provided by CINAR, because it had not been provided earlier. In addition, it further disallowed the personnel and related overhead costs, which CINAR had claimed as eligible costs.

On 28 February 2005, the complainant met with the representative of the Commission in order to clarify the conclusions of the audit but was not successful.

In his complaint to the Ombudsman, the complainant alleged that the Commission had treated CINAR unfairly with regard to the above external audit of 2002 and its subsequent phases.

The complainant, first, argued that CINAR’s representatives "were made to feel like criminals in front of the auditors, and (...) even a racial comment was uttered during one of the interview session" and that "[t]he aim of the audit seems to border on an obsession to close us down".

Second, the complainant argued non-respect of the right of CINAR’s privacy, as personal and contractual details and information concerning salaries of staff members were requested. According to the complainant, this was "bitterly tolerated".

Third, the complainant argued that CINAR was requested to provide unrelated and unjustifiable information, that is, information on "all pending proposals" although only a fraction of such proposals was financed by the Commission.

Fourth, the complainant argued that, although only part of the payroll information was missing, the external auditors made an unfair statement that "no payroll information was obtained from CINAR".

The fifth argument concerned, in essence, the role of the Commission’s auditor from the completion of the audit report by the external audit firm until the meeting with CINAR representatives on 28 February 2005. In particular, the complainant criticised the decision of the Commission’s auditor to approve the audit report drafted by external auditors and to reject all the complainant's explanations and evidence merely because it had not been provided earlier.

THE INQUIRY

The Commission's opinion
Background

CINAR entered into four research contracts(3) with the Commission.

On 6 June 2002, DG RTD requested a financial audit at CINAR's premises. I n order to obtain an audit report from an independent and professional source, the Commission decided to outsource this audit assignment to an external audit firm, that is, Littlejohn Frasier ("LF")(4). A specific agreement to this end was concluded with LF in July 2002 and the Commission designated its own auditor from the External Audit Unit to work together with LF.

On 6 June 2002, the Commission informed CINAR by registered letter that the audit would start at its premises and described its scope as follows:

1. review of the reasonableness and accountability of the costing and invoice systems operated at CINAR; and
2. checking the expenditure on the research contracts to ascertain whether the Commission has been invoiced in compliance with contractual provisions for the expenditure incurred in carrying out the research project.

In this letter, the Commission also requested CINAR to provide the auditor of the Commission, "within one month from the receipt of the present letter the following documents or information:

(1) A signed and dated copy of all employment contracts of all persons charged to the above mentioned contracts together with an indication if those persons are still employed by Cinar Ltd. at present.

(2) An organisational chart of Cinar Ltd, mentioning the name and function of the management and the board of directors, if any. Further an indication of the total number of employees working for Cinar Ltd.

(3) An answer to the following question: are the accounts of Cinar kept by Cinar employees or by external accountants? If the latter applies, please provide us with full details."

In its reply of 8 July 2002, CINAR explained that its accounts were kept by its accountants, whom the auditor of the Commission should contact in case more information was required.

Following further arrangements between LF and CINAR, an agreed on-the-spot audit was carried out on 20-21 August 2002. The Commission provided copies of detailed minutes of the audit.

On 29 May 2003, the Commission sent CINAR by registered letter the draft audit report made by the external auditors for comments. CINAR first replied in a provisional manner by letter of 19 June 2003. A more definitive response was sent on 30 July 2003. However, the Commission did not modify the audit report in light of CINAR's comments and sent it the unchanged final audit report on 15 September 2003.

The Commission underlined in its opinion the problems encountered by the auditors in obtaining relevant information from CINAR. According to the Commission, it was apparent from the audit that, contrary to what CINAR had declared in its letter of 8 July 2002, no relevant audit information was available from CINAR's accountants.

The Commission referred to the audit report in which the external auditors stated, in essence, that the CINAR's supporting information to claim costs on the contracts in question were inadequate, given that:

• no payroll information was presented for audit;
• timesheets presented for audit did not correspond to hours claimed in the cost statements;
• invoices to validate costs claimed for travel and consumables for TESSA, ENDASH and VISCON could not be located;
• no calculations were provided to demonstrate the basis on which overhead costs had been claimed; and
• depreciation allowed for ENDASH equipment was incorrectly calculated.

Moreover, the audit report listed problems in the following areas:

• financial management of the project;
• description of key internal controls;
• testing the internal controls over the bookkeeping system;
• timesheets, payroll information, invoices from suppliers and overheads;
• establishing a separate project costing system;
• segregating of costs associated with EC funded projects from costs incurred in performing private client work, as well as the duties between CINAR staff.

According to the Commission, based on the synthesis of the audit report, the financial management of the contracts was not carried out in an acceptable manner and was not in compliance with the requirements of the contract. It appeared that the amounts overcharged were around GBP 300 000 for the four audited contracts.

The Commission maintained that, in CINAR's reply of 25 September 2003, there was no relevant evidence that undermined the overall findings of the audit report. The Commission replied to CINAR on 13 November 2003 and no further reaction from the latter was received until the end of 2004.

The Commission stated that, since officials are obliged under the rules to communicate irregularities and suspicions of fraud to OLAF, DG RTD informed OLAF about CINAR's audit report on 14 April 2004. OLAF decided to open an investigation (OF/2004/0203) and notified CINAR, by letter of 28 June 2005, about the reasons for its investigations.

The Commission noted that most of the facts on which the complaint was based were linked to developments which occurred either during the execution of the audit (20-21 August 2002) or before the communication of the audit report to the complainant (29 May 2003). The Commission argued that, in either case, the time-limit for bringing a complaint before the Ombudsman, based on those facts, was not complied with. However, in a spirit of good co-operation with the Ombudsman, the Commission addressed all of the complainant's remarks.

Argument on the behaviour of the auditors

As regards the behaviour of the auditors during the visit to CINAR's premises on 20-21 August 2002, the Commission commented that, in the audit report which was sent to the complainant on 29 May 2003, it was stated:

"[the auditor of the Commission] asked [the complainant] whether he believed that the audit procedure that has been applied was correct, from his point of view. [The complainant] replied that he believed that the audit procedure has been correctly applied throughout the course of the on-site visit."

According to the Commission, it was only in their letter of 25 September 2003 that, for the first time, CINAR had made the argument in question.

As regards the alleged "racial comment", the Commission underlined that the complainant did not specify what comment had been made that could be classified as "racial" nor had it identified who had made it. Nevertheless, the auditor of the Commission strongly denied that any comment which could be qualified as "racial" was made during the on-the-spot visit.

The Commission maintained that the utterance of any such comment would have been unacceptable but, under the circumstances, it was not possible to deal further with this argument.

As to the alleged "obsession to close CINAR down", the Commission argued that it had simply carried out an audit following the normal procedures used for such audits and as foreseen by the EC contracts. Further, it had carried out the audit with due respect for all potential guarantees for the audited company, such as the presence of independent external auditors to perform the audit and the submission of the provisional audit findings to CINAR for comments. CINAR failed however to deliver the relevant documents justifying costs and the final audit findings were established on that basis.

Argument on non-respect of the right of privacy

The Commission maintained that the contracts audited contained the following provisions:

(a) The two audited contracts governed by the FP4:

Article 24 of Annex II: 24.1: "The Commission, or persons authorised by it shall be entitled to carry out audits up to two years after the completion date or the termination of the contract. They shall have complete on-site access at all reasonable times to personnel engaged on the project and all documents, computer records, and equipment relating to the project, or, when necessary, be entitled to require submission of any such documentary evidence".

Article 22 of Annex II states: "Each contractor shall maintain, on a regular basis and in accordance with the normal accounting conventions of the State in which it is established, proper books of accounts and appropriate documentation to support and justify the costs and the hours reported. These shall be made available for audits".

Furthermore, Annex E, Articles 18-21 and the model cost statement require that the names of the individuals working on the project be given. CINAR failed to provide the necessary information in some cases concerning such names.

(b) The two audited contracts governed by the FP5 contained similar and even stricter provisions as compared to the FP4.

According to the Commission, it followed from the above that, in order for the auditors to check that CINAR had correctly claimed personnel costs, it was not only necessary to check who worked on these projects, but also the time each employee had devoted to the projects, at what salary, and whether those salaries had actually been paid by CINAR to these employees.

Argument regarding unrelated and unjustified information

The Commission underlined that the Commission had verbally requested, during the on-the-spot visit of 20-21 August 2002, two documents and had given CINAR two weeks to provide this information. This request was recorded as part of the operational conclusions in the minutes of the meeting with the complainant dated 20 August 2002. They read as follows:

"[the auditor of the Commission] asked [the complainant] to provide the two following documents:

1) An explanation (up to two pages long) as to why CINAR had used different average rates for personnel costs, for the same times [ sic] periods, between different contract proposals,

2) The schedule detailed above showing all EC funded projects on which CINAR have participated from 1 January 1997, along with a description of which CINAR staff worked on each project.

[The complainant] agreed to provide these documents,

[The auditor of the Commission] then requested that the audit team be allowed to interview CINAR employees who had been charged to and worked on the audited contracts. [The complainant] had no objection to this request."

Although the complainant had agreed without making any reservations to provide these documents, the Commission confirmed that it had received neither of them.

The external auditors had reiterated their request for the above-mentioned documents (1) and (2) in their e-mail of 5 September 2002. In addition, they asked for a yearly indication of the percentage turnover that arose from EC contributions; copies of certain employment contracts, diploma certificates, timesheets and invoices; as well as a statement explaining the differences in the average rates used on different contracts being performed at the same time.

On 19 September 2002, the Commission’s auditor sent an e-mail in which he requested declarations regarding two CINAR employees, in order to confirm the existence of their employment contracts, which could not be located in the course of the on-the-stop audit.

As none of the above requested information had been received, a further e-mail was sent to the complainant on 24 September 2002 concerning this matter.

On 25 September 2002, the external auditors received some information from the complainant by post. However, the payroll information for all researchers involved in the projects was not provided.

On 8 October 2002, the external auditors sent again an e-mail to the complainant asking when the remaining items would be addressed, and confirmed that all such information was required in order fully to substantiate costs claimed from the Commission.

On 9 October 2002, the complainant replied by e-mail stating that "[i]t has been very busy after a quiet Summer, and still, it’s going to be until the end of the month and I struggle to find time to reply to your requests. I will be in Italy next week where we are organising a combustion course." He provided the requested percentage information about EC contributions.

On 14 October 2002, the auditor of the Commission re-sent his e-mail of 19 September 2002.

On 30 October 2002, the external auditors sent an e-mail to the complainant requesting the items of information that they had already requested in their e-mail of 5 September 2002 but had not yet received. The auditors also explained that the payroll information showing the actual remuneration paid to the researchers involved in the projects was the most important piece of outstanding information.

On 8 November 2002, the external auditors sent an e-mail to the complainant imposing a deadline of 30 November 2002 for the provision of all outstanding information.

On 11 November 2002, the complainant responded apologising for the delay informing them that he would not be at his office during two weeks and that he would try to send more information after that period.

On 27 November 2002, the external auditors sent a formal letter to the complainant confirming that the deadline of 30 November 2002 for the provision of outstanding information still applied. The auditors also explained that, in the event that this information was not provided, the audit report would be based on information that had actually been provided, and costs disallowed accordingly. This letter reiterated which information was still outstanding.

On 27 November 2002, the Commission’s auditor sent an e-mail to the complainant reiterating the deadline set by the external auditors’ above letter.

On 4 December 2002, the complainant sent an e-mail to the external auditors, in response to the above letter, basically refusing to provide the remaining pieces of information as it was "currently beyond our manpower resources". As regards the missing payroll information, the complainant stated that this was in the hands of his "(...) previous accountant, unfortunately who [was] not contactable."

On 13 January 2003, as the deadline had passed, the external audit company requested whether it would be possible for a member of their staff to visit CINAR's accountants in order to obtain the required payroll information.

On 14 January 2003, the complainant stated that he authorised the external audit company to contact CINAR's accountants.

On 30 January 2003, the external auditors sent a letter to CINAR's accountants requesting payroll information in advance of any visit to their premises.

As no response was received regarding the provision of payroll information, the external auditors telephoned the accountants on two separate occasions, each time to be told that the accountant in question was out of the office.

On 4 March 2003, due to the lack of a response, a second letter was posted to CINAR's accountants. The external auditors sent an e-mail to the complainant requesting him to ensure that a response from CINAR's accountants would be received in order to complete the audit report. The external auditors stressed that "[i]f this information is not received, we will be forced to conclude accordingly."

On 5 March 2003, CINAR's accountants replied stating that the payroll was prepared by CINAR and that they did not keep copies of the payroll records.

Between 5 March and 28 May 2003, no additional information was provided by the complainant. Thus, the auditors had no choice, but to complete the report on the basis of the information available.

On 29 May 2003, a copy of the report was sent by registered mail to CINAR to obtain their comments.

On 19 June 2003, the complainant sent a provisional reply to the report.

On 24 July 2003, the auditors sent an e-mail to the complainant acknowledging receipt of his provisional reply and stating that CINAR had until 28 August 2003 to provide either a more detailed response to the report, or the required documentation.

On 30 July 2003, the complainant responded by a short letter stressing that the audit remained contested and that CINAR could not accept the version sent by the auditors. The complainant attached 34 copies of payslip information concerning the payments made to the researchers involved in four contracts. He stated that the auditors had been given copies of these payslips.

On 3 September 2003, the external auditors replied that the attached payslip information concerned only the VISCON project. They denied that they had received any copies of payslips either during the visit or following several requests for this information. Indeed, when payslips were requested, the auditors were told that it was not possible to access this information from the payroll system, and that it would be necessary to approach the complainant's accountants. They also explained that considerable amount of additional work on-site at CINAR would be required and that given (a) the protracted nature of the correspondence to obtain the required evidence; (b) the fact that LF had completed its report up to a final stage; and (c) that any additional evidence gathered would lead to the redrafting of the report, the cost of this additional audit work, and report drafting would have to be borne by CINAR at the estimated cost of approximately £2 900, excluding VAT.

The Commission argued in its opinion that, for the following reasons, the requested documents and information were not unrelated or disproportionate, as the complaint suggested:

(i) CINAR had used, in its contract proposals, different average rates for "senior engineers" and "engineers" in the same year and the variation in overhead percentages for the FP4 contracts was very high (from 40% up to 100%);

(ii) CINAR had, in some cases not mentioned the names of key personnel working for the projects. Instead, only grades of personnel were sometimes indicated. Since 55% of CINAR's income comes from private consultancy, it was impossible to reconcile the work carried out by CINAR personnel on EC funded projects with that carried out on other work. The auditors wanted to obtain a clear view of how a rather small company such as CINAR managed to work so many hours for EC projects in addition to non-EC consultancy or other work. The audit report states: "[t]hus, if was not possible to test how effectively the contractor is able to segregate costs associated with EC funded projects from costs incurred in performing private client work"(5);

(iii) As CINAR also had contracts with Commission DGs other than DG RTD, it was justified to obtain a complete picture of those contracts. The number of EU projects funded by DG RTD, under FP4 and FP 5, was less than 20;

(iv) In the overall picture of what had been really asked for during the on-the-spot visit, CINAR focused on an item of minor importance, that is, the proposals that were pending at the time of the audit visit. The Commission recognised that it had failed to note that Mr W., one of the external auditors, had included this item in his letter dated 29 November 2002 and apologised for this. However, it maintained the view that this particular request was justified in the context of obtaining a global picture as to how and which CINAR employees would be involved in which EU projects, given that almost all CINAR employees seemed to be already involved in other EU funded projects.

Argument that only part of the payroll information was missing

As regards CINAR's argument that "summary payroll information was presented", this was clearly contradicted by the audit report. The Commission saw no reason why auditors would state that they had not received certain information if the opposite were true. Indeed, if the information had been received, it would have been referred to in the audit report - either positively or negatively. The Commission’s auditor confirmed that no payroll information was received during the on-the-spot visit and that the auditors were referred by CINAR itself directly to CINAR’s accountants.

However, it finally emerged that the accountants did not keep payroll information. The CINAR accountant stated in a letter of 5 March 2003:

"Thank you for your letters and we apologise for the delay in replying. The payroll was prepared by CINAR Limited and not by ourselves and we did not take copies of the payroll records when we visited the company's offices to prepare the accounts (...)".

Argument related to the role of the Commission’s auditor

The fifth argument concerned, in essence, the role of the Commission’s auditor from the completion of the audit report by the external audit firm until the meeting with CINAR representatives on 28 February 2005.

It became apparent to the Commission in March 2003 that the auditors would not obtain the required information from CINAR's accountants. The fact that the Commission was not able to obtain it from CINAR was already clear from the on-the-spot audit at CINAR's premises in August 2002. The Commission further recalled that CINAR had given no information concerning its overhead calculations. In these circumstances, the Commission’s auditor asked the external auditors to submit their draft audit report to CINAR, bearing in mind that the audit procedure had been clearly explained to CINAR during the on-the-spot visit, and described in the audit report as follows:

"Finally, [the Commission’s auditor] advised [the complainant] of the procedures to be followed with regards to the audit report prepared, quoting from Article 26, paragraph 3 of the Fifth Framework contract: 'On the basis of the findings made during the financial audit a provisional report shall be drawn up. It shall he sent by the Commission to the contractor concerned, who may make observations thereon within one month of receiving it.'

The final report shall be sent to the contractor concerned. The latter may communicate his observations to the Commission within a month of receiving it. The Commission may decide not to take into account the observations conveyed after that deadline.

On the basis of the conclusions of the audit, the Commission shall take all appropriate measures which it considers necessary, including the issuing of a recovery order regarding all or part of the payments made by it."

Thus the draft audit report was submitted by registered letter of 29 May 2003, so that CINAR was fully informed about the facts and findings contained in it shortly after 29 May 2003. CINAR replied by letter dated 19 June 2003, the last paragraph of which reads as follows: "In these circumstances, we fell [sic] obliged to consult our accountant as well as a legal firm in order to prepare a more definitive response to your report, which mil [sic] be forwarded to you as soon as possible".

By letter of 30 July 2003, CINAR provided some information. The external auditors analysed it and forwarded his comments to CINAR in a letter dated 3 September 2003. In that letter, they contested the complainant's statement that, during their visit to the premises, they were "given copies of the pays slips for the researchers involved in all four audited projects".

According to the Commission, the External Audit Unit considered that CINAR had had enough time and sufficient opportunities to present relevant information (also concerning the calculation of overheads, about which CINAR had been totally silent) and decided that, at that stage, it was time for the Commission to take a position. The Commission did so by registered letter of 15 September 2003, recalling the overall history and addressing the CINAR comments contained in the latter’s letters of 19 June and 30 July 2003. The last paragraph of the above Commission's letter to CINAR reads as follows:

"However, in order to fully respect the right of defence and the right to be heard, you may (cfr [sic] article 26.3 of annex II of the Viscon and Corrosion contracts) communicate any observations on the attached final report within one month from the date of receipt of the present letter. You should be aware that the Commission is not obliged to take into consideration any observations received after this deadline. Subject to this, we will consider this audit as closed and the relevant services of the Commission will implement the audit results."

CINAR replied by letter dated 25 September 2003 and the Commission replied on 13 November 2003 stating in the last paragraph:

"In conclusion, we find that your letter of 25 September 2003 does not contain any new element or any relevant argument that would put the finding of the audit report into doubt. Accordingly, we are unable to review or modify any pan [sic] of the audit report or our position as contained in our letter of 15 September 2003. As CINAR has had sufficient time to provide the requested information and has had appropriate opportunities to communicate observations, we now consider this audit as definitively closed."

Subsequent meeting of 28 February 2005

The Commission underlined that CINAR remained silent between November 2003 and December 2004. After some exchanges of e-mails, the Commission accepted to meet CINAR representatives on 28 February 2005, notwithstanding the fact the CINAR had failed to indicate the precise subject of the meeting and that it had been clearly informed (already in the Commission's letter of 15 September 2003) that other RTD services than the External Audit Unit were in charge of the implementation of the audit findings which were now final. Further, in its e-mail dated 3 February 2005, CINAR had mentioned the following allegation (denied on the next day by the Commission):

"I have a question. The British auditors were, in our opinion, draconian in every respect. Rumour has it that they are paid a commission on funds recovered. This seems to me rather unbelievable. Are you able to deny this rumour, please?"

The internal minutes of the meeting, drafted by a representative of the External Audit Unit’s auditors, clearly contradict the issues raised in paragraph 2 of page 3 of CINAR's complaint to the Ombudsman regarding the approval of the audit report and the rejection of the complainant's explanations and evidence, on the grounds that they had not been sent earlier. Those minutes state inter alia:

"1. [The auditor of the Commission] reminded both [the auditor of DG RTD] and [the complainant] of the history of the audit, where:

• The letter announcing the audit (to be carried out by the audit firm [LF]) clearly stated what documentation would be required to be seen as evidence for the costs claimed; it also asked the specific question as to where the accounts of CINAR were kept. The answer given to this was that [CINAR's accountant firm] kept the books for CINAR.
• On contacting CINAR's accountant, the auditors were told that the accountant did not in fact have anything. Therefore no payroll information could be evidenced.
• CINAR could not produce most of the payslips of the personnel being charged to the EC contracts.
• Could not prove that they had been paid.
• The payslip forms could not he [sic] shown.
• The invoices from sub-contractors did not appear to be legitimate due to [the] absence of VAT number and besides that, CINAR could not prove that they had been paid.
• The results of the audit were communicated to CINAR via the letter of conclusion [15 September 2003]. The responses received from CINAR were very vague that [sic] did not answer any of the issues.
• it should he recognised that the contract signed by CINAR with the EC required CINAR to prove the costs spent on the contract and CINAR had failed to do so. Hence, the audit was therefore closed and the results transmitted to the Directorates concerned for implementation.

2. [The complainant] and LF acknowledged that there were some issues related to their administration as they were all technical people and not financial [personnel]. They had therefore outsourced the accounting but there were problems with communication; [the complainant] maintains however that the pay-roll information was sent to the EC for all personnel except one. [The auditor of the Commission] is not in possession of such and has never seen this information. [The complainant] and FL both maintain that the invoices of the sub-contractors were legitimate and met the requirements of UK law.

3. [The Commission’s auditor] informed them of the very strict segregation of duties that operates at the EC/DG RTD. The audit unit does the audit and transmits the conclusion of the result to the Directorate concerned for implementation. The audit unit is in no way allowed to influence the implementation of the results. It is only the authorising officer in the Directorate who is allowed to make decisions relative to the non-implementation or partial implementation of the audit results. CINAR would need to approach the Directorates concerned and convince them of their arguments [related, for example, to technical work carried out]. [The auditor of the Commission] is willing to provide CINAR with the contact details.

4. [The Commission’s auditor] also informed CINAR that if the Directorates concerned so requested, the external audit unit was willing to carry out another audit but stated that if such an audit took place, then CINAR must assure that all the costs are properly recorded and substantiated together with proof of payment and that no exceptions would be accepted. [The complainant] agreed with this."

In addition, the Commission could not negotiate with an audited company in order to reach a certain audit finding concerning it. It is only on the basis of clear, substantial and reciprocal information and documentation that any audit finding can be taken into consideration.

Around June 2005, the External Audit Unit became aware of an e-mail sent by the complainant to a financial officer of Directorate J of DG RTD, stating that "[the Commission’s auditor] agreed to reconsider the result of the audit and promised us a response to our case at the close of the meeting". On 10 June 2005, the Commission’s auditor replied as follows:

"During this meeting [28 February 2005] I clearly explained that the role of the external audits unit (DG RTD R4) was 'exhausted', the Commission's audit of CINAR having been closed in 2003. In addition, I pointed out that I was unable (in the sense of 'not having the competence', given the segregation of duties in place within the Commission) to review the audit findings and to get involved with the implementation thereof as this was the sole responsibility of authorising officers of DG RTD's relevant operational directorates."

Commission's conclusions

The Commission concluded from all the above that (i) it had correctly exercised its contractual rights to carry out an audit on four of its contracts with CINAR; (ii) it considers that the auditors behaved correctly at all time; (iii) CINAR was kept informed about the findings, was offered sufficient time and opportunities to defend itself and to provide the requested information; (iv) the nature of the requests for that information was clear; and (v) there had been no maladministration and no unfair treatment.

The complainant's observations

The complainant maintained his complaint and argued that he provided the Commission and LF with the missing information when their report was still only at the draft stage. However, the Commission's conclusions were purely based on the draft report even though it had, by that time, seen the payroll and time sheet information related to personnel and overhead costs.

Since CINAR had been visited by three members of the European Anti-Fraud Office (OLAF) who, at the time, were thoroughly investigating all CINAR's projects from 1996-2006, including those which had already been audited, it was beyond CINAR's limited resources to provide an extensive and line-by-line reply to the Commission's opinion.

Referring to the inconclusive findings of the draft report on the four audited contracts that were, at the time, being considered by OLAF, the complainant suggested that the Ombudsman suspend any further action regarding the present complaint.

On 29 January 2008, the complainant sent a further submission informing the Ombudsman about the completion of OLAF's investigation, which included the above four contracts.

THE DECISION

1 Preliminary remarks

1.1 The European Ombudsman notes that the European Commission expressed its concerns in the course of the inquiry as regards the admissibility of the present complaint dated 5 August 2005. It argued that the admissibility condition of the two-year time-limit for bringing a complaint before the Ombudsman had not been complied with, given that the facts on which the complaint was based occurred on 20-21 August 2002 (the date of the audit) and on 29 May 2003 (the date the draft audit report was sent).

1.2 The Ombudsman does not understand from the above statements that the Commission wished to challenge the Ombudsman's competence to deal with the present case. He points out in this respect that the complaint covered not only the audit, which indeed took place more than two years before the complaint was submitted to him, but also the events that resulted from the audit and thus took place after it. Those events included the Commission's request of 15 September 2003 for the complainant to submit observations within one month on the draft audit report in order to fully respect the complainant's right of defence and the right to be heard.

Nevertheless, the Ombudsman welcomes the Commission's statement that, in a spirit of good co-operation with the Ombudsman, it decided to address all of the complainant's remarks.

1.3 Further, the Ombudsman notes that the complainant mentioned in his observations the OLAF's investigation. He points out however that the present complaint was originally submitted against the Commission and the issues related to the OLAF's investigations are therefore not dealt with in the Ombudsman's present decision.

1.4 Finally, the Ombudsman notes that, in his observations, the complainant asked him to apply interim measures and suspend the execution of the audit's conclusions. The Ombudsman clarifies therefore that, unlike courts, he has no power to order interim measures.

2 Alleged unfair treatment

2.1 The complainant, a small consulting enterprise with expertise in coal and biomass combustion and emission control, concluded with the Commission four research contracts within the framework of the Fourth Framework Programme ("FP4") and the Fifth Framework Programme ("FP5") on research and technological development programme ("RTD"). These contracts concerned research in the fields of biomass, toxic metals and selected chlorinated compound emissions, as well as corrosion and optimised control of burner bank performance and enhanced plant lifetime (Projects/contracts VISCON, TESSA, CORROSION and ENDASH).

On the basis of the relevant provisions of these contracts, the Commission decided to carry out an audit of the complainant's accounts related to the execution of the said contracts. The Commission assigned the audit to an external auditing firm but its own audit unit was also involved.

On 20-21 August 2002, the external auditors checked documents at the complainant's premises and interviewed the complainant's employees.

Subsequently, in addition to meetings between the complainant and the Commission, an exchange of correspondence took place between (i) the complainant and the external auditors; (ii) the external auditors and the complainant's accountants; and (iii) the complainant and the Commission.

The complainant alleged, in essence, unfair treatment by the Commission with regard to an external audit and its subsequent phases. The complainant has presented five specific arguments in support of his allegation ("arguments (i)-(v)").

2.2 The Commission took a position on each of the complainant's specific arguments separately. In summary, it took the overall view that it had correctly exercised its contractual rights to carry out an audit on four of its contracts with CINAR. It considered that the auditors behaved correctly at all times. CINAR was kept informed about the auditors' findings and offered sufficient time and opportunities to defend itself and to provide the requested information. The nature of the requests for that information was clear. The Commission concluded that its external auditors and itself treated the complainant fairly. The Commission also maintained that the complainant had stated during the on-the-spot visit to CINAR's premises "that he believed that the audit procedure has been correctly applied throughout the course of the on-site visit."

2.3 The Ombudsman will deal with the present allegation by referring to each of the specific arguments (i)-(v), which the complainant submitted in support of such allegation.

Argument (i) on the behaviour of the auditors

2.4 The complainant argued that CINAR representatives "were made to feel like criminals in front of the auditors, and (...) even a racial comment was uttered during one of the interview session". Further, the complainant argued that "[t]he aim of the audit seems to border on an obsession to close us down".

2.5 As regards the statement on the "obsession to close CINAR down", the Commission counter-argued that it had simply carried out an audit following the normal procedures foreseen by the EC contracts and respecting all potential guarantees for the audited company. As to the "racial" comment, the Commission underlined that the complainant had not specified what comment had been made that could be classified as "racial" nor had he identified who had made any such comment.

2.6 The Ombudsman points out in this respect that, according to the Commission, it was entitled, on the basis of the relevant provisions in Article 24 paragraph 1 of Annex II of the contracts in question, to carry out the audit up to two years after the completion of the contract. Moreover, the procedure related to the audit was prescribed in Article 26 ("Auditing") of Annex II of the contracts.

2.7 On the basis of the evidence available, it appears that the external auditors of the Commission and the Commission's auditor requested information from the complainant on several occasions by letters and e-mails (5 September, 19 September, 24 September, 8 October, 14 October, 30 October, 8 November, and 27 November 2002, as well as on 13 January and 4 March 2003), in order to complete the documentation in question. In addition, they met the complainant on 28 February 2005 to hear his arguments.

2.8 In light of the above, the Ombudsman considers that the complainant did not submit any substantiated evidence to support his argument that the audit was designed to, or "was the expression of an obsessive effort" to, close CINAR down.

2.9 Moreover, the Ombudsman notes that (i) the Commission strongly denied in its opinion that its officials or external auditors made "racial" or any other comments that led the staff of the audited company to feel as though they were criminals and (ii) the complainant did not elaborate on this particular argument in his subsequent observations. Therefore, the Ombudsman does not consider it useful to carry out further inquiries with respect to these two arguments concerning the behaviour of the auditors.

Argument (ii) on non-respect of the right of privacy

2.10 The complainant argued that the right of privacy of CINAR had not been respected as personal and contractual details, including the amount of salaries paid to individual researchers, were requested.

2.11 The Commission relied on provisions contained in the audited Contracts, providing in summary that the complainant was required to (i) keep books and make them available during an audit with all detailed information included therein according to the national law applicable to accountancy. In accordance with these provisions the complainant was also requested to (ii) provide the names of the individuals working under the four contracts and additionally, as regards two of the contracts; the time devoted by specific individuals to the projects; for what salary; and whether that salary had actually been paid by CINAR. The Commission also explained that such information was necessary in order to check whether the amount claimed by CINAR for its personnel costs was correct.

2.12 The Ombudsman takes the view that the Commissions explanation is reasonable and he finds no maladministration regarding the complainant's argument (ii).

Argument (iii) regarding unrelated and unjustified information

2.13 The complainant argued that the Commission had requested unrelated and unjustifiable information, such as "a complete list of all proposals as well as projects, which (...) must be outside the scope of an audit, since only a fraction of [CINAR's] proposals were accepted and financed by the Commission."

2.14 In its opinion, the Commission justified its need to consult these documents because, in summary, CINAR had, at the time of the audit, already been involved in a number of other pending EU funded projects, on which almost all of CINAR's employees had been working. Therefore, the auditors found it justified to assess whether there were still human resources available whose work could be separated from other projects being conducted by CINAR, allowing them to be employed to carry out the contracts in question. The Commission also stated that CINAR used very high variations in overhead percentages for FP4 contracts (from 40% up to 100 %) and failed to mention the names of key personnel working for the projects.

2.15 In light of the above explanation, the Commission's request for a complete list of all proposals as well as projects appears to be reasonable. In addition, as the Commission has put forward and the complainant did not contest, the complainant agreed to provide information concerning all proposals during the on-the-spot visit of 20-21 August 2002 and this agreement was recorded in the minutes of the visit. Therefore, the Ombudsman finds no maladministration by the Commission regarding the complainant's argument (iii).

Argument (iv) that only part of the payroll information was missing and argument (v), concerning the role of the Commission’s auditor

2.16 The complainant argued that, in the audit report (draft and final), the external auditors made a false statement that "no payroll information was obtained from CINAR". He argued that he had provided part of the payroll information.

2.17 The Commission maintained that its auditor confirmed that no payroll information was received during the on-the-spot visit and that the auditors were referred to CINAR’s accountants who, in turn, denied that they had such documents in their possession.

2.18 The Ombudsman points out however that, in his understanding of the complainant's argument, the latter referred to the partial payroll information concerning the VISCON project which was attached to his letter to the external auditors dated 30 July 2003, that is, dated after (a) the on-the-spot visit took place, (b) the complainant's accountants had been consulted and (c) the draft audit report submitted to him on 29 May 2003.

In this respect, the complainant has also submitted his argument (v) that, even though he actually provided that information (regardless of the date), the Commission's auditor acted unfairly because he did not change the audit report as drafted by the external auditors but accepted it as final.

The complainant focused therefore on the role of the Commission’s auditor from the time of the completion of the audit report by the external audit firm until the meeting with CINAR representatives on 28 February 2005. In particular, the complainant criticised the decision of the Commission’s auditor to approve the audit report drafted by the external auditors and to reject all of the complainant's explanations and evidence merely because it had not been provided earlier.

2.19 At the outset, the Ombudsman notes that, in their reply of 3 September 2003 to the complainant's letter dated 30 June 2003 and containing the partial payroll information, the external auditors explained that the audit report had already been completed by 29 May 2003. They also explained that, if they were, on the basis of the partial payroll information now provided, to modify the audit report, this would require a considerable amount of additional work and the cost of this additional work would have to be borne by CINAR. The amount of this additional work was approximately £2 900, excluding VAT. It appears that the complainant did not make such a payment.

2.20 Without taking a position on the external auditors' request for such a payment, the question arises therefore as to whether the Commission's auditor could take measures to change the final audit report of 15 September 2003 and to deviate from the draft report of 29 May 2003, in order to take into account the partial payroll information which had, in the meantime, been provided.

2.21 In light of the information provided by both parties, the Ombudsman notes, therefore, that, through correspondence(6) from the Commission addressed both to the complainant and to CINAR's accountants, the complainant had been given several opportunities, subsequent to the on-the-spot visit of 20-21 August 2002, to provide adequate supporting evidence, in particular, the full payroll information after the audit.

The Ombudsman also notes that the Commission had on many occasions, including in its e-mail of 5 September 2002, stressed the importance of providing full payroll information, by underlining that it was the most important piece of outstanding information.

Moreover, the Commission had made clear to the complainant that in the event that this information were not received, the auditors would be forced to conclude their report without it. It gave the complainant a final deadline of 30 November 2002 by which to provide the full payroll information.

It appears however that the complainant did not provide the full but only partial payroll information and did so only eight months after the above final deadline expired. In addition, it failed to explain why it could not comply with the deadline.

2.22 In light of the above it does not appear that the Commission's auditor acted unfairly towards the complainant by not changing the final report on the basis of the partial payroll information. Nevertheless, the Ombudsman notes that the Commission has included in the audit report copies of both the complainant's letter of 30 July 2003 and the external auditors' reply of 3 September 2003 thanking the complainant for the partial payslip information(7). Thus, the Commission appears to have accurately referred in its audit report to the partial provision of payroll information. The Ombudsman does not, therefore, find an instance of maladministration by the Commission regarding the complainant's argument (iv).

2.23 As regards the role of the Commission's auditor in general, the Ombudsman takes note of (i) the information submitted to him in the context of the present inquiry; (ii) in particular, the relevant provisions governing audited Contracts JOR3-CT98-0285, ENV4-CT97-0597, ENK5-CT99-0002 and ENK5-CT99-0025; (iii) the pertinent findings of the audit report to the effect that the financial management of these contracts were not carried out in an acceptable manner and that the report was not in compliance with the requirements of the contract; and (iv) the elaborate explanations given by the Commission in its opinion. In light of the above, the Ombudsman takes the view that it has not been established that either the Commission’s auditor or the Commission unfairly treated the complainant with regard to the external audit and its subsequent phases.

The Commission's explanation provided in its opinion indicates instead that its auditor applied the provisions of the relevant contracts. Moreover, it appears that the complainant had been given the possibility to defend his rights before the final audit was approved.

The Ombudsman finds therefore no maladministration as regards the complainant's argument (v).

3 Conclusion

On the basis of the Ombudsman's inquiries into this complaint, there appears to have been no maladministration by the Commission as regards the complainant's arguments in support of his allegation of unfairness. As regards the argument concerning the utterance of alleged "racial" or any other comments that led the staff of the audited company to feel as though they were criminals or that the audit was the expression of an obsessive effort to close down CINAR, for the reasons explained in point 2.9 above, the Ombudsman considers that no further inquiries are justified.

The Ombudsman therefore closes the case.

The President of the Commission will also be informed of this decision.

Yours sincerely,

 

P. Nikiforos DIAMANDOUROS

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(1) The audit concerned the following research contracts concluded between the Commission and CINAR as the Contractor: (i) JOR3-CT98-0285 on the Application of Utilisation and Emissions of Biomass Residues from Industrial Combustors - ENDASH; (ii) ENV4-CT97-0597 on Quantification and Control of Toxic Metals Enriched Sub-Micron Particles and Selected Chlorinated Compound Emissions from Alternative Fuel-Fired Cement Kilns - TESSA; (iii) ENK5-CT99-0002 on Fireside Corrosion in Coal-Fired Utility Boilers - CORROSION; and (iv) ENK5-CT99-0025 on V isual Sensing for Optimised Control of Burner Bank Performance and Enhanced Plant Lifetime - VISCON.

(2) The periods of contracts were the following: ENDASH from 1 January 1999 until 31 December 2001; TESSA from 1 June 1998 until 30 November 2000; CORROSION from 1 May 2000 until 30 April 2003; and VISCON from 1 April until 31 March 2003.

(3) See footnote 1.

(4) LF was a member of the I/A international audit network with which the Commission had a framework contract at the time. A specific agreement to this end was concluded with that firm in July 2002.

(5) Audit report, p. 7 (section 4.1).

(6) In particular, e-mails of 5 September, 24 September, 8 October and 27 November 2002 as well as letters of 27 November 2002, and 13 January, 30 January and 4 March 2003.

(7) See Audit report, page 71-73 (the complainant's letter of 30 July 2003) and page 74 (Littlejohn Frasier's reply of 3 September 2003).