Decision in case 1512/2015/PD on the European Commission’s recovery of funds relating to several EU-funded projects

Background to the complaint

1. The complainant is a subsidiary of an international corporation that specialises in the design of business operations, including software solutions. Between 2009 and 2012, the complainant took over a Czech firm (‘the participating firm’) that had participated in various projects under the European Union’s Sixth and Seventh Framework Programmes for Research and Technological Development (FP6 and FP7). The firm’s participation in these projects was funded by the European Commission through grants. The conditions governing these grants were laid down in different ‘grant agreements’.

2. In 2009, the Commission ordered financial audits of the projects to be carried out. The draft audit reports found that there were  shortcomings in the accounting of the projects and suggested that the Commission should seek to recover from the complainant substantial amounts of the grants it had paid (around 50%). The Commission sent the draft audit reports to the complainant in 2012 and 2013.

3. The complainant took the view that the findings of the draft audit reports were wrong and wanted the Commission to terminate or suspend the audit procedures. In particular, the complainant took issue with the accounting firm that carried out the audits on the Commission’s behalf. According to the complainant, the accounting methods of the firm were not in accordance with the “International Standards of Auditing”. The complainant therefore wanted the accounting firm’s work to be audited by the Chamber of Auditors of the Czech Republic and asked that the Commission consent to this[1]. The complainant also said that it could not comment on the draft audit reports, as it was not in possession of all the documentation that the accounting firm had received from the participating firm. Moreover, the complainant suspected that the Commission had put it in the ‘Early Warning System’[2].

4. In its correspondence with the complainant, the Commission contested this. Finally, it proceeded with a recovery order, in accordance with the audit findings.

5. In September 2015, the complainant submitted a complaint to the Ombudsman.

The inquiry

6. The Ombudsman opened an inquiry into the following aspects of the complaint:

1) The Commission erred by accepting the findings of the audit and seeking to recover the related funds.

2) The Commission wrongly refused to consent to having the work of the accounting firm audited by the Czech Chamber of Auditors.

3) The Commission failed to confirm that it had provided the complainant with all the documentation that its accounting firm had received from the participating firm.

4) The Commission failed to inform the complainant whether it had been put in the Early Warning System.

7. In the course of the inquiry the Ombudsman asked the Commission to inform the complainant whether all documentation had been provided to the complainant and whether the complainant had been put in the Early Warning System. The Commission then informed the complainant that all documentation had been provided to the complainant and that the complainant had not been put in the Early Warning System.

8. The Ombudsman’s decision takes into account the arguments and views put forward by the parties.

Audit findings and recovery

Arguments of the parties

9. The complainant argued, essentially, that the audit findings were wrong. The audit had found the time recording system of the participating firm unreliable but did not indicate what alternative system should have been used. Moreover, the complainant claimed that the auditing procedure had taken a long time and that audit procedures concerning other companies that had participated in the same projects had been concluded more swiftly. As a result, the complainant argued that the participating firm had been discriminated against. The complainant also considered that the recovery of the funds would amount to an “abuse of rights” and that it was in any case “time-barred”.

10. The Commission referred to the audit findings and stated that it had no reason to doubt these findings. In particular, it stated that the audit had found systemic errors which called into question how the participating firm managed and reported staff costs, as well as other evidence that did not support the reported working time[3].

11. The Commission acknowledged that the audit procedures had taken a long time and expressed regret for this. It explained that the time taken was due to the complexity of the cases and was not due to a discriminatory approach to the complainant. The Commission argued that it had not abused its rights, as set out under the grant agreements, as it was entitled to initiate an audit within five years from the end of a project.

The Ombudsman's assessment

12. The Ombudsman finds that the reasons given by the Commission are sound and appropriate.

13. The audit findings are reasoned and understandable. The fact that the audit reports did not recommend a specific alternative time recording system does not alter the finding that the reported working time was not adequately supported by the time recording system used and other evidence.

14. The Commission agreed with the complainant’s view that the auditing procedures took too long. The complainant is understandably annoyed by this. However, it is hard to see that the long duration entailed discrimination towards the complainant or an abuse of rights by the Commission. The fact that there were no delays with other audit procedures does not prove that the complainant has been discriminated in this procedure. By their nature, each audit procedure has different problems and challenges. In absence of clear indications of discrimination, it must be accepted that some procedures may take longer than others. Under the grant agreements, the Commission was entitled to perform audits up to five years after the end of a project. It cannot be an abuse of rights that the Commission makes use of the right that the grant agreement confers upon it. Moreover, there is no indication that the Commission is time-barred from seeking recovery of funds paid under a grant, which was subsequently the result of adverse findings in an audit.

15. Against this background, the Ombudsman finds that there is no maladministration.

Audit by the Chamber of Auditors

Arguments of the parties

16. The complainant considered that there were methodological shortcomings in the work of the accounting firm, which call into question the audit findings. Therefore, it wanted the Czech Chamber of Auditors to conduct an audit of the work done. To that end, it needed the Commission’s consent.

17. The Commission contended that the work of the accounting firm was in accordance with the grant agreement and therefore it would not give consent to an audit by the Chamber of Auditors.  

The Ombudsman's assessment

18. The Ombudsman considers that in the circumstances of the present case, it is understandable that the Commission did not consent to an audit of the accounting firm.

19. Asking a party to consent to an audit of its own accounting firm is not a usual measure. It is therefore warranted to require that the party that makes such a request has a particularly good foundation for making the request. It cannot be sufficient for a party just to claim that the findings of the accounting firm are wrong. The party must at least show that there are grounds for holding that there is a violation of the rules governing good auditing.

20. The complainant has not made a case that on face value is convincing for its claim that an audit by the Czech Chamber of Auditors is called for. The complainant has referred just to its disagreements with the findings of the Commission’s accounting firm. In those circumstances, the Commission’s stand is justified.

Documentation and Early Warning System

Arguments of the parties

21. The complainant wanted the Commission to confirm that the Commission had provided the complainant with all the documentation that the accounting firm had obtained from the participating firm. When the Commission confirmed that it had provided the complainant with all the documentation (approximately 3000 documents), the complainant claimed that documents were missing. The Commission stated that it had provided the complainant with all the documentation the accounting firm had received, but that the accounting firm could have also reviewed documents on site with the participating firm, without making a copy of these documents. The Commission noted that, under the grant agreements, it was the responsibility of the participating firm (or its successor, the complainant in this case) to keep all documentation.

22. The complainant did not make any comments on the Commission’s information that the complainant had not been put in the Early Warning System.

The Ombudsman's assessment

23. The Ombudsman understands that the complainant may be in a difficult situation concerning the documentation required for the auditing process as the participating firm has ceased to exist. However, as the Commission has rightly stated, it was the responsibility of the participating firm to keep all documentation. The Commission showed its willingness to assist the complainant by providing it with all the documentation that the Commission’s accounting firm had received. There is nothing to suggest that the Commission has not provided the complainant with all the documentation it has.

24. The Ombudsman notes that the Commission has settled the question as to whether the complainant was put in the Early Warning System.

Conclusion

Based on the inquiry, the Ombudsman closes this case with the following conclusion[4] :

There was no maladministration by the European Commission.

The complainant and the Commission will be informed of this decision.

 

Marta Hirsch-Ziembińska

Head of Inquiries and ICT - Unit 1

Strasbourg, 03/04/2018

 

[1] According to the complainant, it follows from the rules of the Chamber of Auditors that both parties who are in dispute about the work of an accounting firm must consent to the Chamber making an audit of that work.

[2] The Early Warning System was at the time governed by Commission Decision 2008/969 of 16 December 2008. The purpose of the system is to alert all EU bodies about companies which, in the view of one EU body, have been involved in serious administrative errors or fraud, especially when they have benefitted from EU funding.

[3] For instance: According to the audit findings, EU funding  represented less than 2 % of the participating firm’s annual income and participation in the projects was  by staff of the participating firm considered a ‘marginal activity’ while time reported by senior management was in the range of 9 to 25 % of annual working time.

[4] This complaint has been dealt with under delegated case handling, in accordance with Article 11 of the Decision of the European Ombudsman adopting Implementing Provisions