Guidance On MCS Assessment - European Commission
EGESIF 14-0010-final18/12/2014EUROPEAN COMMISSIONEuropean Structural and Investment FundsGuidance for the Commission and Member States on acommon methodology for the assessment ofmanagement and control systemsin the Member StatesDISCLAIMER“This is a working document prepared by the Commission services. On the basis of applicable EU law, itprovides technical guidance for colleagues and bodies involved in the monitoring, control or implementationof the European Structural and Investment Funds on how to interpret and apply the EU rules in this area.The aim of this document is to provide Commission services' explanations and interpretations of the saidrules in order to facilitate the programme implementation and to encourage good practice(s). This guidanceis without prejudice to the interpretation of the Court of Justice and the General Court or decisions of theCommission.”1
EGESIF 14-0010-final18/12/2014Table of ContentsLIST OF ACRONYMS AND ABBREVIATIONS . 41. Background . 51.1.Regulatory references . 51.2.Purpose of the guidance. 52. Guidance. 62.1.Key requirements and assessment criteria . 62.2.Steps for the assessment. 6Annex I – Key requirements and assessment criteria . 111. Key requirements in relation to the MA and its IB(s) . 11Key requirement 1: Adequate separation of functions and adequate systems for reporting andmonitoring where the responsible authority entrusts execution of tasks to another body . 11Key requirement 2: Appropriate selection of operations. 11Key requirement 3: Adequate information to beneficiaries . 12Key requirement 4: Adequate management verifications . 13Key requirement 5: Effective system in place to ensure that all documents regardingexpenditure and audits are held to ensure an adequate audit trail . 14Key requirement 6: Reliable system for collecting, recording and storing data for monitoring,evaluation, financial management, verification and audit purposes, including links withelectronic data exchange systems with beneficiaries . 14Key requirement 7: Effective implementation of proportionate anti-fraud measures . 15Key requirement 8: Appropriate procedures for drawing up the management declaration andannual summary of the final audit reports and of controls carried out . 152. Key requirements in relation to the CA and its IBs . 16Key requirement 9: Adequate separation of functions and adequate system for reporting andmonitoring where the responsible authority entrust execution of tasks to another authority . 16Key requirement 10: Adequate procedures for drawing-up and submitting paymentapplications. 17Key requirement 11: Appropriate computerised records of expenditure declared and of thecorresponding public contribution are maintained . 172
EGESIF 14-0010-final18/12/2014Key requirement 12: Appropriate and complete account of amounts recoverable, recoveredand withdrawn . 18Key requirement 13: Appropriate procedures for drawing up and certifying the completeness,accuracy and veracity of the accounts . 183. Key requirements in relation to the AA . 19Key requirement 14: Adequate separation of functions and adequate systems for ensuring thatany other body that carries out audits in accordance with the programme audit strategy has thenecessary functional independence and takes account of internationally accepted auditstandards . 19Key requirement 15: Adequate system audits . 19Key requirement 16: Adequate audits of operations . 20Key requirement 17: Adequate audits of accounts . 21Key requirement 18: Adequate procedures for providing a reliable audit opinion and forpreparing the ACR. 21Annex II: Evaluation of key requirement by the assessment criteria and by authority . 23Annex III: Overall conclusion by Management and control system . 29Annex IV: Table linking the key requirements with the designation criteria . 303
EGESIF 14-0010-final18/12/2014LIST OF ACRONYMS AND ABBREVIATIONSAAACRAudit BodyAudit AuthorityAnnual Control ReportBody carrying out audits under AA's remit, as foreseen in Article127(2) CPRCACertifying AuthorityCCICode Commun d'Identification (reference number of eachprogramme, attributed by the Commission)CDRCommission Delegated Regulation (EU) No 480/2014 of3.3.2014 supplementing Regulation (EU) No 1303/2013 of theEuropean Parliament and of the Council1CPRCommon Provisions Regulation (Regulation (EU) No 1303/2013of the European Parliament and of the Council of 17.12.2013)2ESIF“ESIF” corresponds to all European Structural and InvestmentFunds. This guidance applies to all except for the EuropeanAgricultural Fund for Rural Development (EAFRD)ETCEuropean Territorial CooperationFinancial Regulation Financial Regulation (Regulation (EU, EURATOM) No966/20123IBIntermediate BodyMAManaging AuthorityMCSManagement and Control XT/?uri uriserv:OJ.L egal-content/EN/TXT/?uri ntent/EN/TXT/?qid 1416480945454&uri CELEX:32012R096624
EGESIF 14-0010-final18/12/20141. BACKGROUND1.1. Regulatory referencesRegulationReg. (EU) N 1303/2013ArticlesPart Four Title I – Management and controlsCommon Provisions Regulation(hereafter CPR)1.2. Purpose of the guidanceThe objective of this guidance is to provide practical tool to help auditors assess thefunctioning of MCS set up by the Member States for the ESIF (except for the EAFRD)programmes.It draws upon the guidance in force for 2007-2013 period and the conclusions of aworking group involving staff drawn from the audit services of DG Regional and UrbanPolicy, DG Employment, Social Affairs and Inclusion and DG Maritime Affairs andFisheries in the Commission, in order to establish a reference framework in terms of: explaining key requirements to be used (see the CPR and the CDR); explaining the assessment criteria to be used for each key requirement; providing guidelines for drawing conclusions for each key requirement and byauthority; providing guidelines for reaching an overall conclusion on the MCS (or part ofsystem) of a programme or group of programmes, taking into account any existingmitigating factors or compensatory controlsThe guidance is thus addressed in the first place to the audit directorates of the abovementioned Commission services and AAs, in order to ensure objectivity, consistency andtransparency in assessing compliance of the management and control systems with the keyregulatory requirements. The "steps for assessment" described in this guidance note set outthe methodology to be used when carrying out system audits. The AAs are requested touse this guidance note in their system audits on MAs, CAs and IBs or when supervisingthe work of other involved audit bodies in order to ensure the harmonisation of auditresults and that auditors in different parts of the control chain can rely on each other'swork.The section of the guidance note on the evaluation of the functioning of AAs is addressedin the first instance to the audit services of the Commission but can also be used by AAswhen assessing/supervising the work of other audit bodies in the MCS or as a selfassessment tool to ensure compliance of their own audit procedures against theCommission’s expectations.The MAs, CAs and their IBs are however strongly recommended to also consider andmake use of this guidance document when needed, as a self-assessment tool.It is not possible in the present guidance to cover all situations which might be identified.The quality review of each audit must ensure that the overall conclusion on the system issubstantiated and that the audit opinion proposed is both consistent with the audit findingsand properly justified and documented.5
EGESIF 14-0010-final18/12/2014The guidance is accompanied by four annexes: Annex I presents the key requirements andthe relevant assessment criteria for each key requirement; Annexes II and III presentsummary tables which should be used by the auditors and which provide the frameworkfor reaching an overall opinion, by system, on the compliance with the regulatory keyrequirements for the 2014-2020 period; Annex IV presents a table linking the designationcriteria and the key requirements.2. GUIDANCE2.1. Key requirements and assessment criteriaThe 18 key requirements of the MCSs and the criteria for the assessment of theirfunctioning are listed in Annex I.They concern:1. The MA and any IBs to which functions have been delegated (8 key requirementscontaining 36 assessment criteria);2. The CA and any IBs to which functions have been delegated (5 key requirementscontaining 18 assessment criteria);3. The AA and any audit bodies that carry out audit work on its behalf (5 keyrequirements containing 27 assessment criteria).The assessment criteria are described for each key requirement. Non-compliance withthese criteria implies system deficiencies and thus a risk of irregular expenditure beingcertified to the Commission and of over-reimbursement made to Member States.2.2. Steps for the assessmentThe assessment of the MCS follows the schema presented below:4Overall conclusionIt must be stressed that in all steps of the assessment process, the auditor's professionaljudgement and effective quality control are essential to ensure consistency of audit results.In order to obtain a high level of assurance and to express an opinion on the functioning ofthe MCS, system audits should be carried out, including compliance testing of key controlsat key bodies. Such compliance testing should be carried out for a number of projects,transactions at the level of the MA, the CA, their IBs and the AA.6
EGESIF 14-0010-final18/12/2014Tests of controls at the level of the CA and its IB(s) can also contribute to audits ofaccounts (see Article 29(3) CDR).The methodology used for the sample selection for tests of controls (such as attributesampling or judgmental selection) should be decided upon by the AA (in the case ofMember States) or the Commission. Where a large number of IBs operate under the sameprogramme, an appropriate sample of these can be selected for tests of key controls. Thesample of IBs should be selected based on an appropriate risk assessment, having in mindelements like risk profile of operations under the IB, volume of funds, complexity and/ornovelty of operations, modifications of the organisational structure, staff expertise, etc. Inany event, in accordance with auditing standards, the auditor defines in its audit report theaudit scope and whether its conclusion covers the system in its entirety or part of it.The methodology used for determining the sample size for tests of controls should be inline with internationally accepted audit standards (INTOSAI, IFAC or IIA).The results of these tests combined with other qualitative elements and audit proceduresform the basis for the assessment.The auditors should then, for each step (i.e. first for each assessment criterion, then foreach key requirement, then for each authority and then for the overall conclusion on theMCS), draw their conclusions, on the basis of the following categories:Category 1. Works well. No or only minor improvement(s) needed. There are nodeficiencies or only minor deficiencies found. These deficiencies have no, orminor impact on the functioning of the assessed key requirements /authorities / system.Category 2. Works, but some improvement(s) are needed. Some deficiencies werefound. These deficiencies have a moderate impact on the functioning of theassessed key requirements / authorities / system. Recommendations havebeen formulated for implementation by the audited body.Category 3. Works partially; substantial improvement(s) are needed. Seriousdeficiencies were found that expose the Funds to irregularities. The impact onthe effective functioning of the key requirements / authorities / system issignificant.Category 4. Essentially does not work. Numerous serious and/or wide-rangingdeficiencies were found which expose the Funds to irregularities. The impacton the effective functioning of the assessed key requirements / authorities /system is significant – the assessed key requirements / authorities / systemfunction poorly or do not function at all.Annexes II and III are designed to facilitate this assessment process for each step.2.2.1 Assessment CriteriaThe first step consists of evaluating the assessment criteria for each key requirement bydetermining which of the four above-mentioned categories corresponds best to eachassessment criterion for the programme being audited.To ensure a transparent and objective assessment of each criterion Annex II should beused.It is important to emphasise that when categorising each assessment criterion, auditorsshould apply their professional judgement taking into account any other audit evidenceavailable which should also be analysed. This audit evidence may include all cumulativeaudit knowledge including information gained from the review of the system descriptions,designation audit opinion and report, procedures manuals, functioning of the MCS,7
EGESIF 14-0010-final18/12/2014enquiries, or interviews at bodies involved in the MCS.2.2.2 Conclusion by key requirementThe second step consists of drawing a conclusion by key requirement on the basis of theassessment criteria previously evaluated under step 1. As a matter of principle, whenevaluating the key requirements, the overall impact on the assurance level is a decisivefactor. In this context, questions to be asked are: What is the impact of the non-respect or partial respect of a particular assessmentcriterion or key requirement on the identification of errors, irregularities and on themanagement and control system? Does its absence increase the likelihood of irregular or illegal expenditure notbeing prevented, detected and/or adequately corrected?The following guidance is provided as examples of possible outcomes for this step (afterthe combination of tests of key controls with other qualitative elements): Where one or more assessment criteria are in category 3 or category 4, the auditormay reasonably conclude that this would not allow for categorising the keyrequirement as category 1 and most probably as category 2; Where a majority of the assessment criteria are in the same category, the auditormay reasonably conclude that this provides a sound basis for also classifying thekey requirement in this same category; As a general rule, the key requirement cannot be classified more favourably thanthe worst of the assessment criteria with the possible exception of the followingassessment criteria:Managing Authority2.3 All applications received are recorded. Applications are registered on receipt, evidenceof receipt delivered to each applicant and records kept of the approval status of eachapplication.2.5 Decisions taken on the acceptance or rejection of applications and projects should betaken by an appropriate person or body, results notified in writing and the reasons foracceptance or rejection of applications clearly set out. The appeal procedure and relateddecisions should be published.5.3 Procedures are in place to ensure that all documents required to ensure an adequateaudit trail are held in accordance with the requirements of Article 140 CPR, i.e. regardingavailability of documents.Certifying Authority11.3 Ensure an adequate audit trail by recording and storing in computerised form,accounting records for each operation and which supports all the data required for drawingup payment applications and accounts. The audit trail within the CA should allowreconciliation of the expenditure declared to the Commission with the expenditurestatements received from the MA or the IB.13.5 Adequate procedures to ensure timely reporting to the Commission on the executionof the EU budget in line with Article 59(5)(a) of the Financial Regulation.Audit Authority18.5 The ACR for the accounting year and audit opinion should cover all Member Statesconcerned in programmes under the ETC objective.For drawing the conclusions, the auditors will use their professional judgement, and any8
EGESIF 14-0010-final18/12/2014possible mitigating factors. Adequate audit evidence needs to be provided and recorded inthe audit file.2.2.3 Conclusion by authorityThe third step involves reaching a conclusion by authority, based upon the results of thecategorisation of each key requirement under step 2. Annexes II and III should be used.Annex II combines the assessment by key requirement in order to reach a conclusion byauthority, while Annex III which is the "connection table", links the conclusion byauthority to the overall conclusion for the system (link with step 4).It is not possible to foresee all combinations of assessments of key requirements byauthority that might arise. Nevertheless, the following guidance can be given:1. Each of the key requirements has to be assessed independently from the otherswithin the same authority. This means that a weakness in one of the keyrequirements in one authority cannot be compensated by another key requirementthat is functioning well in the same authority. Compensating controls areconsidered only at the level of the overall assessment of the system (step 4).2. Some key requirements are essential with regard to the legality and regularity ofexpenditure and the proper functioning of the relevant authority. Criteria fordetermining serious deficiencies as defined in Article 2(39) CPR are set out inArticle 30 CDR and concern: MA: key requirements 2 (selection of operations), 4 (management verifications)and 5 (audit trail of documents regarding expenditure and audits). CA: key requirement 13 (d
EUROPEAN COMMISSION European Structural and Investment Funds Guidance for the Commission and Member States on a common methodology for the assessment of management and control systems in the Member States DISCLAIMER “This is a working document prepared by the Commission services. On the basis of applicable EU law, it
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