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

Background to the complaint

1. The complainant is a company that took over a firm (the ‘firm’) that participated in an EU-funded project on cross-border e-health services (the ‘project’)^[2]. The complainant thus took over the rights and obligations of the firm under the project.

2. After an external audit at the end of the project, the European Commission concluded that almost all of the staff costs incurred by the firm during the project were ineligible.

3. The complainant contested the Commission’s conclusions. It took the view that the firm complied with the grant agreement. The auditor’s criticism of the staff costs resulted rather from the “Guide to Financial Issues relating to ICT PSP Grant Agreements” (the ‘Guide’), which had never been brought to the firm’s attention, and which, therefore, should not have been used.

4. The Commission maintained its conclusion that, based on the audit, the firm had failed to comply with the grant agreement. The Guide merely helped the consortium partners and the auditor understand the provisions of the grant agreement better. The Commission therefore issued a debit note to the complainant amounting to EUR 861 263 covering the ineligible costs for which the firm had received funding during the project.

5. On 5 December 2018, the complainant turned to the Ombudsman.

The inquiry

6. The Ombudsman opened an inquiry into the complaint. In the course of the inquiry, the Ombudsman received the Commission’s reply to the complaint and, subsequently, the complainant’s comments on the Commission's reply.

The Guide and the firm’s staff costs

Arguments presented to the Ombudsman

7. The Commission reiterated that certain costs were considered ineligible as they did not comply with the grant agreement. Specifically, there was a problem with the firm’s time recording system and the staff costs claimed by the firm included bonuses that were disproportionate to the wage costs (one member of staff, for example, claimed a bonus equivalent to 14 times his gross annual salary).

8. The Guide was used to interpret the provisions of the grant agreement. It was published online on the Commission’s ICT Policy Support Programmes website^[3] and made available at ‘info days’ and on the dedicated website for those receiving such grants^[4]. The first version of the Guide dates from February 2008, when the project started. The current, fifth, version of the Guide dates from 2013.

9. The complainant contended that, as far as staff costs were concerned, the firm had complied with the grant agreement. The auditor deemed the costs in question to be ineligible based on the successive versions of the Guide, which included recommendations on using timesheets and bonuses. The firm was never informed of the Guide and the grant agreement contained no mention to it.

The Ombudsman's assessment

Provisions of the grant agreement on staff costs

10. The grant agreement set out a strict set of requirements for costs to be eligible. Costs had to be reasonable, verifiable in the accounts, and supported by appropriate documentary evidence.^[5] A consortium partner could claim staff costs only when these were properly identified as such in accordance with its internal rules, corresponded to the work actually carried out, and paid as per practices that were deemed acceptable by the Commission.^[6] Partners were required to maintain the accounts and appropriate documentation to justify the costs and the time spent on the project^[7].

The Guide

11.  The Guide contains the Commission’s interpretation of the provisions of the grant agreement. The auditor used the most recent version of the Guide when assessing the costs of the project under the grant agreement. According to the auditor, grant holders were required to follow the Guide^[8].

12. Despite the Guide’s obvious importance, the grant agreement contained no mention of it. Also, there is no evidence to demonstrate that the Commission informed the project partners properly about the Guide. It was not easy to find information on the Guide on the relevant archived website.

13. While it may be concluded that the Commission failed to communicate the Guide to the project partners properly, the Ombudsman is of the view that a specific finding of maladministration in this respect is not justified in this case. The reasons for this conclusion are set out at the end of this solution proposal.

The firm’s timekeeping system

14. In the absence of “individual timesheets, signed by the employees as a true representation of the time worked, and authorised”, the auditor “considered all personnel costs... ineligible” and asked the firm to submit alternative evidence of the time spent on the project. However, the firm failed to provide that evidence^[9]. The auditor then provided a “spreadsheet template” which the complainant could fill in^[10]. While the complainant submitted some additional evidence which resulted in some of the costs being accepted, the auditor refused the returned spreadsheets^[11].

15. The evidence available was thus deemed insufficient by the auditor to verify the time claimed by the firm as spent on the project. The auditor recommended that daily timesheets, duly signed and dated, be used instead^[12].

16. The complainant replied that neither the grant agreement nor the Guide imposed the use of signed daily timesheets (the complainant argued that the Guide, of which the firm had not been made aware, provided only for the possibility of using timesheets, which meant that other timekeeping systems could be equally accepted)^[13]. The auditor then, whilst referring to the grant agreement^[14], replied that it did not claim that signed timesheets were a requirement of the grant agreement or that they were the only evidence acceptable to consider the costs eligible. It had recommended using timesheets as best practice “to show that the individuals record themselves the time and certify that the time claimed is a true representation of the time worked”^[15].

17. The Commission followed the auditor’s recommendation^[16] and, notwithstanding the complainant’s arguments that timesheets are not even a standard practice^[17] and that, in any event, the auditor should have accepted the spreadsheets the complainant compiled on the basis of the auditor’s template^[18], upheld the view that these spreadsheets were not reliable^[19].

18. All of the above shows that the firm could only have had a chance of claiming its costs with some degree of success if, at the time of the project, its staff used daily, signed and dated timesheets. This, however, has been sufficiently acknowledged by the auditor as not required by the grant agreement but rather simply recommended as best practice.

19. It can be concluded therefore that the auditor imposed on the firm a standard of proof in relation to its staff costs which was much more demanding than that provided for in the applicable rules. This casts serious doubts on the extent to which the auditor’s and the Commission’s conclusion was well-founded, namely that those staff costs were ineligible under the grant agreement. Logically, this also has an impact on the Commission’s claim for reimbursement.

20. Additionally, it is worth noting that it was the auditor itself who had provided the template spreadsheet to the complainant. It was therefore inconsistent, to say the least, to refuse the returned spreadsheets on the basis that they had been drawn up a significant amount of time after the relevant events and were thus unreliable.

21. The Ombudsman has consistently held that while the Commission has a duty to enforce grant agreements with a view to protecting the financial interests of the EU, , it must examine what is just in the circumstances of an individual agreement^[20]. Principles of good administration must be observed with a view to reconciling strict contractual stipulations and the need to act in a manner which is fair and proportionate in the given circumstances.

22. The Ombudsman thus refers the Commission to the possibility offered by the financial rules applied by the EU institutions to waive reimbursement claims in certain cases^[21]. She emphasises that the costs that have been refused represent almost all of the firm’s staff costs. She also notes the undisputed fact that the firm’s overall achievements in the project were satisfactory. The claim for reimbursement is, therefore, in the Ombudsman’s view, not only unfair for the reasons set out above but also manifestly disproportionate. The Ombudsman therefore makes a proposal for a solution that the Commission consider waiving its reimbursement claim in respect of the firm’s staff costs, which was based on the finding that the firm’s timekeeping system did not comply with the grant agreement.

The firm’s bonuses

23. The auditor noted that the firm had explained during the audit that it had no specific internal rules on bonuses and that it paid bonuses at the discretion of its management^[22]. When the complainant subsequently stated that the firm had had such rules in place^[23], the auditor replied that it would have reviewed the rules had they been provided at the time. It found the firm’s bonuses unreasonable, in any event^[24].

24. The Ombudsman finds it understandable that the Commission considered that paying 14 times a gross annual salary in the form of bonuses was incompatible with the grant agreement. The fact that the auditor may have considered some of the costs ineligible does not demonstrate that it did not review the evidence submitted or that the Commission disregarded that review. The Commission’s position, that the bonuses were ineligible because they did not comply with the provisions of the grant agreement, is thus reasonable.

25. The Ombudsman thus finds no maladministration by the Commission regarding this aspect of the complaint.

The conclusion in respect of the Commission’s failure to communicate properly the Guide

26. The fact that the auditor acknowledged that the timesheets were not the only acceptable means of justifying the costs and that the provisions of the grant agreement were sufficient to deem the bonuses ineligible makes the possibility of the firm not having been aware of the Guide at the relevant time, ultimately, irrelevant. The Ombudsman, therefore, will not make a finding of maladministration on the Commission’s failure to communicate the Guide properly but a suggestion for improvement instead.

The proposal for a solution

The Commission should consider waiving its reimbursement claim in respect of the firm’s staff costs which was based on the finding that its timekeeping system did not comply with the grant agreement.

Suggestion for improvement

The Commission should refer to the Guide to the grant holders in the grant agreement itself, where it should also make clear that the Guide may be updated.

The Commission is invited to inform the Ombudsman by 30 September 2020 of any action it has taken in relation to the above solution proposal and suggestion for improvement.

 

Emily O'Reilly
European Ombudsman

Strasbourg, 14/05/2020

 

^[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] The ‘Smart Open Services - Open eHealth Initiative for a European Large Scale Pilot of Patient Summary and Electronic Prescription‘ project (Grant Agreement 224991), co-funded under EU ICT Policy Support Programme, which was part of the Competitiveness and Innovation Framework Programme: https://www.esens.eu/node/361. Cross-border e-health services are “an infrastructure ensuring the continuity of care for European citizens while they are travelling abroad in the EU. This gives EU countries the possibility to exchange health data in a secure, efficient and interoperable way”: https://ec.europa.eu/health/ehealth/electronic_crossborder_healthservices_en

[3] The Commission provided the following link: http://ec.europa.eu/information_society/activities/ict_psp/index_en.htm

[4] The website was for all grant beneficiaries under the ICT Policy Support Programme, which was part of the Competitiveness and Innovation Framework Programme.

[5] Article II.20(1) of the grant agreement: “[-] be necessary for the implementation of the project; - be actually incurred by the beneficiary; - be identifiable and verifiable, be recorded in the beneficiary’s accounts and determined in accordance with the applicable accounting standards of the country where the beneficiary is established and with the usual cost accounting practices of the beneficiary. The beneficiary’s internal accounting and auditing procedures must permit the direct reconciliation of the costs and receipts declared in respect of the project with the corresponding financial statements and supporting documents; comply with the requirements of the applicable tax and social legislation; [and] - be reasonable and justified and comply with the requirements of sound financial management...”

[6] Article II.21(1) and (2)(a) of the grant agreement: “[d]irect costs are those eligible costs that can be attributed directly to the project and are identified by the beneficiary as such, in accordance with its accounting principles and its usual internal rules... Only the costs of the actual hours worked by the persons directly carrying out work under the project may be charged to the grant agreement. Such persons must:... - be remunerated in accordance with the normal practices of the beneficiary, provided that these are regarded as acceptable by the Commission...”

[7] Article II.23 of the grant agreement: “[t]he Beneficiary shall maintain on a regular basis and in accordance with the normal accounting conventions of the State in which it is established, the accounts for the project and appropriate documentation to support and justify in particular the costs and time reported in its financial statements... [A]ll the working time charged to the agreement shall be recorded throughout the duration of the project...”

[8] According to the auditor’s final report: “[r]egarding... Financial Guidelines, we would note that Beneficiaries are required to follow the latest version available during the project.”

[9] According to the auditor’s final report: “[w]e noted that the Beneficiary did not have a robust time recording system in place to allow us to verify the hours claimed. The Beneficiary claims that members notified the project manager of time worked, the project manager then maintained a master spreadsheet of all time worked by all staff. Therefore, individual timesheets, signed by the employees as a true representation of time worked, and authorised are not available. We have considered all personnel costs... ineligible. We note that we have requested further alternative evidence from the Beneficiary, including detailed descriptions and evidence of the work performed in order to perform alternative procedures and obtain additional assurance on the time claimed. This was not provided to us until the time of drafting this report or during the contradictory procedure with the Beneficiary.”

[10] According to the auditor’s final report: “[w]e would also note that no other supporting evidence was provided, and there must be some adequate method for capturing and demonstrating time claimed, so if the Beneficiary is not going to use timesheets they must have some other process in place. In order to assist, we sent a spreadsheet template which clearly asked for time to be broken down by person, by work package, and included a space for a reference to evidence of work done...”

[11] According to the auditor’s final report: “[s]ubsequent to the initial contradictory procedure, the new owners... have provided additional information... From a review of meeting minutes provided... a number of days have now been accepted. However, whilst [the complainant] did provide spreadsheets detailing work completed by personnel this was compiled a substantial time after the actual work was carried out and no supporting evidence was provided of the work completed (save for the meeting minutes noted above).”

[12] According to the auditor’s final report: “[w]e recommended that timesheets are maintained on a daily basis for each person, with all hours worked referenced to a specific project or non-project activities, totalling total working hours per day/week. These timesheets should then be retained alongside all other project documentation. The time sheets should be signed and dated by the persons performing the work, in addition to the evidence of the review by the project responsible.”

[13] According to the complainant’s comments, included in the auditor’s final report: “[t]he Grant Agreement only requires that the costs and time recorded in the financial statements are supported and justified by relevant documents and that the time spent working is recorded. The Grant Agreement does not order a specific way of fulfilling these obligations and it definitively does not require that the Beneficiary maintained individual timesheets as requested by the Auditor from the Beneficiary. [T]he obligations of the Beneficiary in relation to the Project are only specified by the Grant Agreement. The Financial Guidelines may be used to interpret these obligations, yet they cannot widen them... [T]he Auditor’s requirement is not even based on the Financial Guidelines. According to Article II.21(2) of the Financial Guidelines 2008 (and identically also the Financial Guidelines 2009), it is provided that “[w]orking time to be charged must be recorded throughout the duration of the project by any reasonable means (e.g. timesheets). Employees have to record their time on a daily, weekly or monthly basis using a paper or computer-based system... [T]imesheets can be used to record working hours. If held, timesheets must meet the basic requirements...” The above... clearly provide that the timesheets do not represent a mandatory form for recording the time spent working on the Project, but only one of the options which may have been used by the Beneficiary, yet the Beneficiary was not obliged to do so... Moreover the Auditor’s requirement further exceed the requirements which are stipulated in the Financial Guidelines for the case when the Beneficiary chooses the option of maintaining timesheets voluntarily...: a) The Auditor requires that the timesheets were signed... even though such a requirement is stipulated neither in the Grant Agreement nor the Financial Guidelines... b) The Auditor recommends that the timesheets are maintained on a daily basis... even though the Financial Guidelines in Article II.21(2) require that the employees record their time on a daily, weekly, or monthly basis, and... maintained for instance on daily, weekly, monthly basis, according to the Beneficiary’s normal practice... The Auditor... approach is in direct conflict with the Grant Agreement and Financial Guidelines.”

[14] According to the auditor’s final report: “[w]e checked whether, as requested by Article II.21(2), the time sheets were duly recorded throughout the duration of the project and certified at least on a monthly basis by the person in charge of the work as per Article II.23 of the grant agreement.”

[15] This too is from the auditor’s final report.

[16] The Commission said in its letter of 31 July 2017 that: “[i]t is recommended that the beneficiary: maintain timesheets on a daily basis for each person, with all hours worked referenced to a specific project or non-project activities, totalling total working hours per day/week. These timesheets should then be retained alongside all project documentation. The time sheets should be signed and dated by the persons performing the work, in addition to the evidence of the review by the project responsible...”

[17] “[T]he system claimed by the auditor of individual timesheets, signed by the employees and formally authorised by a supervisor is not only non-standard but also non-existent in real business life. For example there are no time recording systems in the consulting business run like that. Even in advocacy, where the timesheets are the evidence for billing and also a proof of the time spent on the matter for court proceedings, the law firms use simple electronic systems of timekeeping where no signatures and no formalised verifications are made.”

[18] “[T]he auditor rejected to take the recompiled time sheets into account for the only reason that there were “compiled a substantial time after the actual work was carried out and no supporting evidence was provided of the work completed”... The reference to the establishment of the time sheets a substantial time after the project is not fair and cannot be opposed to our client. The fact that our client was only in a position to submit subsequently recompiled time sheets was obvious already when the auditor sent out the sample time sheet. If the auditor was not ready to take the completed sample into account anyway, he should not have provided our client with the sample... It is also not true that our client did not provide a link between the work done and the deliverables of the project... [W]ithin a deadline fixed by the auditor our client provided the latter with the final version of the recompiled time sheets... establishing a clear assignment of the hours spent to precise tasks...”

[19] According to the Commission’s letter of 4 December 2018: “[t]he time was estimated. Therefore, there is no reasonable assurance that the time recorded on the timesheets is reliable and reflects actual time worked on the project. Moreover, producing and authorising timesheets several years after the end of the periods cast doubts on their validity.”

[20] See, for example, paragraph 13 of the Ombudsman’s Decision in case 1064/2015/JAP on the European Commission’s rejection and recovery of costs claimed under an FP6 grant agreement: https://www.ombudsman.europa.eu/en/decision/en/80591

[21] See Article 101 of the Financial Regulation applicable to the general budget of the Union (available here https://ec.europa.eu/budget/library/biblio/publications/2018/financialregulation_en.pdf): “2. The authorising officer responsible may waive recovery of all or part of an established amount receivable only in the following cases:... (c) where recovery is inconsistent with the principle of proportionality. Where the authorising officer responsible plans to waive or partially waive recovery of an established amount receivable, he or she shall ensure that the waiver is in order and is in accordance with the principles of sound financial management and proportionality. The decision to waive recovery shall be substantiated... 3. In the case referred to in point (c) of the first subparagraph of paragraph 2, the authorising officer responsible shall act in accordance with predetermined procedures established within his or her Union institution and shall apply the following criteria which are compulsory and applicable in all circumstances: (a) the facts, having regard to the gravity of the irregularity giving rise to the establishment of the amount receivable (fraud, repeated offence, intent, diligence, good faith, manifest error); (b) the impact that waiving recovery would have on the operation of the Union and its financial interests (amount involved, risk of setting a precedent, undermining of the authority of the law). 4. Depending on the circumstances of the case, the authorising officer responsible shall, where appropriate, take the following additional criteria into account: (a) any distortion of competition that would be caused by the waiving of recovery; (b) the economic and social damage that would be caused were the debt to be recovered in full... 6. The authorising officer responsible may cancel an established amount receivable in full or in part. The partial cancellation of an established amount receivable does not imply the waiver of the remaining established Union entitlement. In the event of a mistake, the authorising officer responsible shall cancel totally or partially the established amount receivable and include adequate reasons. Each Union institution shall in its internal rules lay down the conditions and procedure for delegating the power to cancel an established amount receivable...”

[22] According to the auditor’s final report: “The Beneficiary explained that bonuses were payable at the management discretion and no specific internal regulations/contractual obligations were in place...”

[23] According to the complainant’s comments, included in the auditor’s final report: “a) the bonuses were disbursed to the employees in accordance with the internal regulation of the Beneficiary regarding the remuneration of employees... based on their achieved results; b) the bonuses (the maximum amount) of managing employees were based on agreements of individual conditions of remuneration which were usually concluded on a yearly basis and amended employment contracts... All the above mentioned employment-related documents were provided to the Auditor by the Beneficiary together with their written description in November 2014. The Auditor completely omitted these documents and the Beneficiary’s explanation in its Report...”

[24] According to the auditor’s final report: “The auditors who carried out on-site work did not receive the contract amendments or the internal regulations relating to bonuses... had these been provided during the contradictory procedure, the auditors would have reviewed them. In addition, we would need evidence that show that the bonuses are in line with market conditions. In addition... the bonuses... do not meet the general criteria of reasonableness for all the persons...”