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Definitions
Objective
The ECA is [link new-window title="required%20to%20by%20the%20Treaty" link="https%3A%2F%2Feur-lex.europa.eu%2Flegal-content%2FEN%2FTXT%2FPDF%2F%3Furi%3DCELEX%3A12012E%2FTXT%26from%3DEN%23page%3D124" icon="external-link" /]
to provide the European Parliament and the Council with a [link title="Statement%20of%20Assurance" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FReporting%2FStatement-of-Assurance.aspx" /]
as to the reliability of the accounts and the legality and regularity of the underlying transactions.
The ECA shall use a definition for underlying transactions which allows it to arrive at a valid and robust judgement about whether a transaction has been legal and regular.
Transactions underlying the accounts
The transactions underlying the accounts are transfers of funds from the Union’s budget to final recipients of EU spending, and transfers of revenue from member states to the Union’s budget. These transfers may go through different stages of the expenditure cycle (budgetary and legal commitment, validation, authorisation and payment of expenditure) and give rise to several entries in the Commission’s budgetary accounts or financial statements.
Budgetary accounts
In this context, transactions underlying budgetary accounts are commitments and payments.
The Commission’s budgetary accounts capture the payment cycle of expenditure on a cash basis. A transfer of funds generally results in more than one payment, which may take different forms serving different objectives:
- Pre-financing payments (advances) are intended to provide the beneficiary with a float and are provided after the signature of the delegation agreement, the contract or grant agreement or after receipt of the grant decision.
- Interim payments are made as a counterpart of a partial execution of the action.
- Final payments are intended to pay the balance of the amounts due where the action is completely executed.
Financial statements
The Commission’s [link title="financial%20statements" link="%2Faware%2FFA%2FPages%2FConcepts%2FFinancial-reporting-framework.aspx" /]
, in accordance with the principle of accrual-based accounting, reflect economic reality. Entries are booked in the accounts when they occur and not when cash is actually paid or recovered. In this context, underlying transactions are related assets and liabilities registered in the EU’s balance sheet, and expenses and income registered in the EU’s economic outturn account. Payments of funds may be booked as a pre-financing or other asset in the balance sheet or as an expense in the economic outturn account.
Instructions
ECA’s approach in general
The ECA is able to make a valid and robust judgement on the legality and regularity of a transaction when it has passed through the whole transfer cycle (committed, validated, authorised and paid) and there is sufficient evidence about the economic reality underlying the transaction, i.e. it is substantiated by expenditure incurred at the level of the final recipient.
The auditor will follow these transactions from the level of central management of the Union institutions to the level of the final recipients or those providing the Union with own resources. The auditor will assess the compliance of these transactions with every act, procedure, process or document, of a legal, administrative, financial or banking nature, as well as any physical events or factors which underlie them to the extent necessary to form a robust judgement.
Transactions should be part of the [link title="sample" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FPlanning%2FAudit-sampling.aspx" /]
population only if:
- the related projects have reached a certain stage or are even finished, i.e. there is progress made and/or costs incurred at the level of the final recipient; and,
- the Commission has accepted the progress made and/or the related cost.
The focus of the legality and regularity part of the Statement of Assurance will take into consideration the underlying progress, i.e. the validation and reimbursement of expenditure at the level of final recipients of EU funds who implement activities which are directly related to the objectives of EU policies.
Following Brexit payments to UK-based beneficiaries and revenue received from UK continue to be part of the population of underlying transactions for [link title="Statement%20of%20Assurance" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FReporting%2FStatement-of-Assurance.aspx" /]
on legality and regularity.
Expenditure
While payments of the entire amount due, and the related accruals-based elements of the EU’s financial statements, will always be included in the population to be audited, the different forms of multistage payments (advances, interim payments and final payments) will be treated according to their underlying progress.
Advances
Advances paid by the Commission to public authorities managing EU funds (which represent pre-financing in the EU’s balance sheet and therefore have the character of pure balance-sheet operations) are not included in the population to be audited.
Advances paid by the Commission to final recipients should not be part of the audit population.
Interim payments
Interim payments by the Commission (partly) reimbursing expenditure incurred at the level of final recipients, as well as the related pre-financing registered in the EU’s balance sheet or expenses registered in the EU’s economic outturn account, are included in the population to be audited.
Interim payments by the Commission reimbursing advances establishing or contributing to funds, e.g. financial engineering instruments (which in substance represent pre-financing in the EU’s balance sheet and therefore have the character of pure balance-sheet operations) or reimbursing advances paid to final recipients should not be included in the population to be audited.
Final payments
In the context of closures leading to clearings or final payments by the Commission (which in extreme cases can take the form of “0-payments" or recoveries), the focus will be on expenses in the EU’s economic outturn account which are based on the final validation of expenditure incurred at the level of final recipients (and clear pre-financing in the EU’s balance sheet as well as previous interim payments and/or advances).
Due to the different management and payment cycles applied in the specific policy areas, Chamber V will provide further guidance on [link title="sampling" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FPlanning%2FAudit-sampling.aspx" /]
and .
Revenue
The overriding objective is, to define underlying transactions taking into account economic reality so as to include transactions for which:
- the underlying activity has reached a final stage and the revenue is due for collection, and
- the Commission has established the amount receivable and applied recovery procedures.
Most of revenue is represented by own resources which are generally cashed before the corresponding recovery orders are issued.
For fines and penalties (Title 7), when an action is brought before the Court of Justice, the cashed recovery orders may remain open until the definitive amount to recover is finally set. Therefore, the more appropriate population of underlying transactions to be used will be the recovery orders issued in the audited financial year.
In respect of recovery orders which are directly linked to expenditure (i.e. Titles 4, 5, and 6), as they are issued in the context of programme or project closures when there is a final validation of the residual expenditure incurred at the level of final recipients (e.g., in the Cohesion and Competitiveness MFF headings, the audit of closures should cover at the same time the underlying expenditure and the recovery order (i.e. in the cases where the expenditure declared is insufficient for the recipient to keep advances received).
As a consequence, these recovery orders should be excluded from the revenue population and included in the population of the corresponding expenditure.
The population of underlying transactions obtained as explained above should be used as a basis for the selection of the [link title="sample" link="%2Faware%2FGAP%2FPages%2FCA-FA%2FPlanning%2FAudit-sampling.aspx" /]
drawn by Chamber V for the work of substantive testing for legality and regularity of revenue.
Any findings related to recovery orders linked to these programme or project closures should be reported in the specific assessments relating to the corresponding expenditure.
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