Budget Supervision Office of RS
Cohesion Fund Manual
BUDGET SUPERVISION OFFICE
OF THE REPUBLIC OF SLOVENIA
COHESION FUND MANUAL
FOR THE
EXECUTION OF THE FINANCIAL CONTROL
Document No.: 011-14/2004/1
(E-version: CF Audit Manual Ver 1_0.pdf)
JULY 2004
Budget Supervision Office of RS
Cohesion Fund Manual
Approved by the director of Budget Supervision office of the RS
Budget Supervision Office of RS
Cohesion Fund Manual
Table of Contents
1 Purpose and Structure of Manual
2 Background and Regularity Framework
3 Management Framework
4 Audit Responsibilities of the Budget Supervision Office (BSO) and relationships with other auditors
Commission services
Co-operation between the BSO and the Commission services
Audit Strategy for DG REGIO
5 MONITORING AND REPORTING FRAMEWORK
6 Audit Approach and Techniques
Stages of the Audit
Quality Control and Assurance
7 Audit Planning
The Aims of Audit Planning
The Planning Process for the BSO
8 Risk Assessment
The Process for the BSO: What the BSO is auditing
Risk Identification
Assessing Risk Importance
9 AUDIT Approach to COHESION FUND Income and Expenditure
Setting Audit Objectives
Audit Programmes
10 Audit Evidence
Concept of Audit Evidence
Procedures for Obtaining Audit Evidence
11 Documentation and Filing
The Benefits of Effective Documentation
Content of Working Papers
Current and Permanent Files
Confidentiality of Audit Information
Retention of Audit Documentation
12 Audit Reporting
Contents of the Audit Report
Reports to the EC
Evaluation of Errors
Follow-Up Audits
Sys-audit
13 Irregularity, Fraud and Corruption
Appendix 1: Information Systems Audit Guideline
ANNEX 1:
ANNEX 2
ANNEX 3
Appendix 2: Audit of Internal Control
Appendix3: Guidance for performance of 15 per cent checks
Appendix 4: Objectives of substantive tests
Appendix 5: SUGGESTED LIST OF KEY QUESTIONS TO EXAMINE THE MANAGEMENT CONTROL SYSTEMS
APPENDIX 6: Suggested list of key questions for on the spot control of a Cohesion Fund Project
Appendix 7: Preparatory work / GATHERING OF AUDIT INFORMATION
Appendix 8: Procurement Directives
APPENDIX 9: Publicity Requirements
APPENDIX 10: Model report pursuant to Article 12 of Regulation 1386/2002
APPENDIX 11:Guidelines on the principles, criteria and indicative scales to be applied by Commission departments in determining financial corrections under Article H(2) of Annex II to Regulation (EC) No 1164/94 establishing a Cohesion Fund
APPENDIX 12: Guidance on 15% Sample Checks by Member States
Appendix 13: List of abbreviations
1 Purpose and Structure of Manual
1.1This Manual details the management and controls structure in Slovenia in respect of the Cohesion Fund. The Manual also details the general procedures and approach to be adopted by the Budget Supervision Office of the Ministry of Finance (hereinafter: BSO), in line with their responsibilities for the audit of the Cohesion Fund. This covers the procedures, methods and techniques that staff of the BSO should use for the effective review of the management and control of the Fund; whilst the Appendices provide further information and specific guidance on the audit approach to be adopted.
1.2The audit role of BSO is defined throughout this manual as that of a certifyingbody comparable to the work of an external auditor. Reference has been made in this manual to International Auditing Standards.
1.3These guidelines are developed from the principles and rules set out in the regulations of the European Commission (EC) governing Cohesion Fund and are mandatory for all staff of BSO. The manual is structured as follows:
Chapter 2 – Background andRegulatory Framework - details the aims and objectives of the Cohesion Fund and sets out the legislative framework.
Chapter 3 - Management Framework – explains the roles and responsibilities of key organisations in the management and control process and the accounting and financial reporting system.
Chapter 4 - Audit Responsibilities of BSO and Relationships with Other Auditors - defines the role of the BSO and the relationship with both Internal Audit and the Slovenian Court of Audit, the Supreme Audit Institution (SAI); and with auditors of the Commission and the European Court of Audit (ECA)..
Chapter 5 - Monitoring and Reporting Framework - discusses the methodology for reporting during Project Implementation, the Monitoring arrangements; and the Ex-Post Evaluation criteria.
Chapter 6 – Audit Approach and Techniques - describes the general approach to auditing the Cohesion Fund; the BSO audit process; and Quality Control and Assurance.
Chapter 7 - Audit Planning - provides guidance on the approach to planning coverage across the audit area including long term strategic and also annual planning.
Chapter 8 - Risk Assessment - looks at the risk factors to be considered when devising the audit approach, as part of the overall planning strategy.
Chapter 9 - Audit Approach to Cohesion Fund Income and Expenditure- discusses the understanding of the business; the audit trail; audit objectives and test programmes.
Chapter 10 - Audit Evidence - describes the overall concepts and the sources methods and nature of audit evidence.
Chapter 11 - Documentation and Filing - outlines the key principles of effective audit documentation; the contents of Working Papers; Current and Permanent Files; Confidentiality of Information; and Retention of Documentation.
Chapter 12 – Audit Reporting - covers the content of a standard audit report; reports required by the EC; and follow-up audits.
Chapter 13 – Irregularity, Fraud and Corruption - covers the respective responsibilities of audited bodies, management and the auditor; the procedures where fraud or other irregularities are suspected; and the arrangements in Slovenia.
Appendixes from 1 to 12 - the specific items are described in more detail on the audit procedures for information systems (computer) audit, audit of internal controls, guidance for performance of sample checks, gathering audit information ( preparatory work), audit tests for the management and control systems at the programme and audit tests on final beneficiary level, gathering audit information, than about procurement and publicity issues. In appendix 10 there is a model report to the commission and in next appendixes guidance on financial corrections and sample checks. The annexes follow some appendixes.
Appendix 13 – lists the abbreviations used in the manual.
2 Background and Regularity Framework
Objectives of the Cohesion Fund
2.1 The Cohesion Fund was established in 1994 in addition to the other Community development instruments, to provide assistance in the fields of the environment and transport infrastructure of common interest with a view to promoting economic and social cohesion and solidarity between Member States. The Cohesion Fund provides support through the balanced financing of projects and also contributes to preliminary studies relating to such projects and their implementation, as well as technical support measures such as comparative studies, impact studies, monitoring, and since entry into force of Regulation (EC) No 1264/1999, publicity and information campaigns.
2.2 All projects financed must be compatible with the Treaties and instruments adopted under them and with Community policies, especially those concerned with the protection of the environment, transport, trans-European networks, competition and the award of contracts.
European Union Legislation - The Act
2.3 Council Regulation (CR) (EC) No 1164/94 of 16 May 1994 established the Cohesion Fund. It was amended by the following CRs which came into effect on 1 January 2000:
Council Regulation (EC) No 1264/1999 of 21 June 1999, amending Regulation 1164/94; and
Council Regulation (EC) No 1265/1999 of 21 June 1999, amending Article G of Annex II to Regulation 1164/94
CR 1265/99 made significant changes to the use of Cohesion Fund, including:
Clarification of the definitions of "project", "project stages" and groups of projects;
Additional guidance on "ex-ante" evaluations of projects;
Commitments to be made at the start of each financial year;
A single payment, in advance, of up to 20% of the assistance to the Fund; followed by subsequent payments to refund expenditure certified and paid; all transactions to be carried out in Euros; and finally
Various measures to penalize failure to complete projects, including cancellation of the assistance granted.
2.4 There were two Commission regulations issued for implementation of provisions for Cohesion Fund:
Commission Regulation (EC) No 16/2003 of 6 January 2003 laying down special detailed rules for implementing Council Regulation (EC) No 1164/94 as regards eligibility of expenditure in the context of measures part-financed by the Cohesion Fund, and
Commission Regulation (EC) No 621/2004 of 1 April 2004 laying down rules for implementing Council Regulation (EC) No 1164/94 as regards information and publicity measures concerning the activities of the Cohesion Fund.
2.5 The Regulations lay down a minimum project value of 10 million Euros, which is aimed at ensuring that projects will have a significant impact on the infrastructure within Member States. Commission Regulation 1386/2002 laid down detailed rules for the implementation of CR 1164/94, as regards the management and control systems for assistance granted from the Cohesion Fund and the procedures for making financial corrections for projects first approved after 1 January 2000.
Eligibility
2.6 Eligibility is restricted to Member States whose per capita gross national product (GNP) is less than 90% of the Community average and which have a programme designed to achieve the conditions of economic convergence as set out in Article 104 of the Treaty establishing the European Community. If the GNP rises above the 90% threshold it may no longer receive funding for new projects or new project stages.
Commission Regulation (EC) No 16/2003 of 6 January 2003 lays down special detailed rules for implementing Council Regulation (EC) No 1164/94 as regards eligibility of expenditure in the context of measures part-financed by the Cohesion Fund.
Commission Regulation (EC) No 1831/94 of 26 July 1994 concerning irregularities and the recovery of sums wrongly paid in connection with the financing of the Cohesion Fund and the organization of an information system in this field.
Commission Regulation (EC) No 621/2004 of 1 April 2004 lays down rules for implementing Council Regulation (EC) No 1164/94 as regards information and publicity measures concerning the activities of the Cohesion Fund.
Project Application and Approval
2.7 Applications for assistance from Member States to the Commission must contain the information specified in the Regulation, that is: the body responsible for implementing the project, project description, cost, location, investment timetable, assessment of the impact on employment and the environment, and information on public contracts.
2.8The Commission will normally decide whether or not to approve a project within three months of the application and publish the decision in the Official Journal of the European Union.
Financial Control and Provisions
2.9CR 1264/1999 states that the financial control of projects is primarily the responsibility of Member States. They must check that projects are managed correctly, prevent and detect irregularities and recover any amounts lost as a result. They must provide the Commission with details of the methods they take and of the internal management and audit arrangements that they establish. In turn, the Commission may carry out on the spot checks, in accordance with Annex II to the Regulation, and may ask Member States to verify the correctness of transactions.
2.10The Cohesion Fund routinely contributes between 80% and 85% of public or equivalent project expenditure. (Since 1 January 2000 it has been possible to reduce this rate to take account of any revenue generated by the project and any application of the "polluter pays" principle). The full cost of preliminary studies and technical support measures may be financed up to 0.5% of the total resources of the Fund. To qualify for re-imbursement, all expenditure must have been incurred after the date the Commission receives the project application. Payments made after the initial advance must be linked to implementation of the project and no item of expenditure may receive assistance from both the Cohesion and Structural Funds at the same time. Finally, assistance from the Cohesion Fund, the Structural Funds and other Community aid may not exceed 90% of the total project expenditure.
Appraisal, Monitoring and Evaluation
2.11Before project approval, the Commission and the MemberState must make an appraisal to assess whether it complies with the Regulations. During implementation they must make any necessary adjustments and after completion they must evaluate to what extent the original project objectives were achieved.
3 Management Framework
Regulatory Requirements
3.1 The regulatory framework for the management and control systems of the Member States must comply with Commission Regulation 1386/2002 (in particular Article 2) and CR 1164/94 (in particular Article 12, and Article G of Annex II). CR 1386/2002 requires that Member States must comply with:
- Article 2 - verify that management and control arrangements have been set up and are being implemented in such a way as to ensure that Community funds are being used efficiently and correctly
- Article 5 - provide the Commission with a description of these arrangements.
- Article 7 - prevent and detect irregularities, notify these to the Commission in accordance with the rules, and keep the Commission informed of the progress of administrative and legal proceedings. Information exchanged should be kept confidential
- Article 8 - certify that the declarations of the expenditure presented to the Commission are accurate and guarantee that they result from accounting systems based on verifiable supporting documents. The certification of expenditure shall be drawn up by a person or department within the paying authority which is functionally independent of any services that approve the claims.
- Articles 9 and 10 - organise checks on projects on an appropriate sampling basis, to ensure that projects are managed in accordance with all the applicable Community rules and that the funds placed at their disposal are used in accordance with the principles of sound financial management. The checks carried out shall cover at least 15% of eligible expenditure on projects first approved after 1 January 2000. The selection of the sample of transactions to be checked is dealt with in detail in Appendix 3.
- Articles 13, 14 and 15 - present to the Commission, when each project is wound up, a declaration drawn up by a person or department independent of the designated authority. This declaration shall, be based on an examination of the management and control system, summarise the conclusions of the checks carried out during previous years and shall assess the validity of the application for payment of the final balance and the legality and regularity of the expenditure covered by the final certificate. The person or department issuing the declaration shall make all necessary enquiries to obtain reasonable assurance that the certified statement of expenditure is correct, that the underlying transactions are legal and regular and that the project has been carried out in accordance with the terms of the granting Decision and the objectives assigned to the project.
- co-operate with the Commission to ensure that Community funds are used in accordance with the principles of sound financial management
- Article 20.4 - recover any amounts lost as a result of an irregularity detected and where appropriate charge interest on late payments.
Management Framework
3.2 The Decree of the Government of Slovenia (implementing Decree) based on the Execution of the State Budget Act, will define in detail the programming and implementing, arrangements between the bodies detailed below in respect of the Cohesion Fund, including financial management and control. The authorities and bodies responsible for the implementation of the Cohesion Fund are as follows.
Government Office for Structural Policies and Regional Development (GOSP)
The GOSP act as the Managing Authority (MA), withoverall responsibility for the general management of the Fund, in terms of programming implementation, monitoring and evaluation, financial management and control and information and publicity. The GOSP provide guidance to Intermediate bodies, by way of the production of a Cohesion Fund Manual, and set up, operate and maintain a single computer based system for management of the Fund.
Ministries of Environment, Spatial Planning and Energy (MESP) and Transport (MoT)
These two Ministries will act as the Intermediate Bodies, under the overall responsibility of the MA. They will have responsibility for the preparation and implementation of strategic programmes and action plans, and for monitoring and reporting on the progress of funded projects. The Intermediate Bodies will also be responsible for:
- Reviewing the tendering documentation submitted by Implementing Bodies;
- Checking and assessing the project applications and submitting them to the MA;
- Implementation of projects in accordance with signed contracts;
- Checking and verifying claims for payment;
- Monitoring and reporting to the MA;
- Reporting to the Commission on the implementation of EU funded projects;
- Co-ordination and assistance to Municipalities in preparing project applications.
Municipalities and Transport Sectors
The Municipalities will act as the Implementing Body (Final Beneficiary) within the environment sector; whilst for Transportthat responsibility will rest with the Public Agency for Rail Transport and the Motorway Company of the Republic of Slovenia (DARS). The Implementing Bodieswill be responsible for:
- Preparation of project proposals;
- Tendering and contracting;
- Supervising contract implementation;
- Providing relevant information to the Intermediate Body;
- Guaranteeing the project publicity.
Ministry of Finance - National Fund (NF)
The Ministry of Finance (NF) will act as the Paying Authority (PA), with responsibility for the overall financial management of the Fund; and is authorized to issue certificates of expenditure under Article 12 of CR 1164/94 and Article 8 of CR 1386/2002.
Budget Supervision Office (BSO)
The BSO, which is part of the Ministry of Finance, will act as the Independent Financial Control Body; a separate function that is totally independent of that of the MA, IB and PA. The responsibilities of BSO as the certifyingbody for Cohesion and ISPA Funds are the same for both funds. Also, many of the audit approach and methodologies defined in this manual in respect of the Cohesion Fund are equally appropriate to ISPA funded projects. Users of the manual should therefore be confident that, in following the processes defined in the following chapters, the certification requirements of the EC are met.
4 Audit Responsibilities of the Budget Supervision Office (BSO) and relationships with other auditors
4.1 The BSO isanindependentofficewithintheMinistryofFinancechargedwith the centralcoordinationroleforpublicinternalfinancialcontrol(PIFCsystem)andindependentcontrolofallEUfundsandAFCOSfunction.The BSO reports directly to the Minister and to the State Secretary. From 1 January 2004, following a Slovenian governmental decree, the BSO has taken on an enhanced status and will increase its independence as an Office within the Ministry of Finance.