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Definitions
Fraud
Fraud, in the EU context, is defined in [link new-window title="Art%203%20of%20Directive%20(EU)%202017%2F1371" link="https%3A%2F%2Feur-lex.europa.eu%2Flegal-content%2FEN%2FTXT%2F%3Furi%3DCELEX%3A32017L1371%23d1e581-29-1" icon="external-link" /]
.
Whenever reference is made to "fraud" and "corruption" it includes both “suspected fraud and corruption" and "proven fraud and corruption". The auditor should apply the term "suspected fraud and corruption" for the reason that it is the responsibility of the national authorities to confirm the existence of fraud or corruption.
Corruption
Corruption is defined in [link new-window title="Articles%202%20and%203%20of%2C%20the%20Convention%20drawn%20up%20on%20the%20basis%20of%20Article%20K.3(2)(c)%20of%20the%20Treaty%20on%20the%20European%20Union%20on%20the%20fight%20against%20corruption%20involving%20officials%20of%20the%20European%20Communities%20or%20officials%20of%20member%20states%20of%20the%20European%20Union" link="https%3A%2F%2Feur-lex.europa.eu%2Flegal-content%2FEN%2FALL%2F%3Furi%3DCELEX%3A41997A0625(01)" icon="external-link" /]
) as:
Passive corruption
“Deliberate action of an official, who, directly or through an intermediary, requests or receives advantages of any kind whatsoever, for himself or for a third party, or accepts a promise of such an advantage, to act or refrain from acting in accordance with his duty or in the exercise of his functions in breach of his official duties shall constitute passive corruption."
Active corruption
“Deliberate action of whosoever promises or gives, directly or through an intermediary, an advantage of any kind whatsoever to an official for himself or for a third party for him to act or refrain from acting in accordance with his duty or in the exercise of his functions in breach of his official duties shall constitute active corruption."
Neither active nor passive corruption necessarily has an immediate and direct financial impact (e.g. on the Communities’ general budget) although it is likely to have a financial impact in the long run.
Illegal Activity
While the term “illegal activity" is used in the [link new-window title="legislation%20establishing%20the%20European%20Anti-Fraud%20Office%20(OLAF)" link="https%3A%2F%2Fec.europa.eu%2Fanti-fraud%2Fabout-us%2Flegal-framework_en" icon="external-link" /]
, no legal definition exists. It follows from the ordinary meaning that illegal activity means an activity forbidden by law.
Principles
The ECA’s policy on and approach towards irregularities, fraud, corruption and other illegal activities is based upon the EU legislative framework and International Standards of Supreme Audit Institutions (ISSAIs).
EU legislative framework
In accordance with [link new-window title="Article%20287%20(2)%20of%20the%20TFEU" 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" /]
, “The Court of Auditors shall examine whether all revenue has been received and all expenditure incurred in a lawful and regular manner and whether the financial management has been sound. In doing so, it shall report in particular on any cases of irregularity".
Irregularity is defined by [link new-window title="Article%201%20of%20Council%20Regulation%202988%2F95" link="https%3A%2F%2Feur-lex.europa.eu%2Flegal-content%2FEN%2FTXT%2F%3Furi%3DCELEX%3A31995R2988%23d1e145-1-1" icon="external-link" /]
.
[link new-window title="Article%20325%20of%20the%20TFEU" link="https%3A%2F%2Feur-lex.europa.eu%2Flegal-content%2FEN%2FTXT%2FPDF%2F%3Furi%3DCELEX%3A12012E%2FTXT%26from%3DEN%23page%3D142" icon="external-link" /]
provides the legal framework for the protection of financial interests against fraud and other illegal activities detrimental to the Union’s financial interests. Its paragraph 4 states that the Court of Auditors has to be consulted by the European Parliament and the Council before adopting measures concerning the prevention of and fight against fraud affecting the financial interests of the Union.
Standards
The professional standards provide guidance on matters pertaining to fraud and irregularity:
[link new-window title="ISSAI%20100%2F47%3A%20Identifying%20and%20assessing%20the%20risks%20of%20fraud%20relevant%20to%20the%20audit%20objectives" link="https%3a%2f%2fwww.issai.org%2fwp-content%2fuploads%2f2019%2f08%2fISSAI-100-Fundamental-Principles-of-Public-Sector-Auditing.pdf%23page%3D25" icon="file-pdf-o" /]
Financial audit
[link new-window title="ISSAI%20200%2F44-45%3A%20Considerations%20relating%20to%20fraud%20in%20an%20audit%20of%20financial%20statements" link="https%3a%2f%2fwww.issai.org%2fwp-content%2fuploads%2f2020%2f12%2fISSAI-200-English.pdf%23page%3D17" icon="file-pdf-o" /]
[link new-window title="ISA%20240%3A%20The%20auditor%E2%80%99s%20responsibilities%20relating%20to%20fraud%20in%20an%20audit%20of%20financial%20statements" link="https%3a%2f%2fwww.ifac.org%2fsystem%2ffiles%2fpublications%2ffiles%2fIAASB-2020-Handbook-Volume-1.pdf%23INTERNATIONAL%2520STANDARD%2520ON%2520AUDITING%2520240" icon="file-pdf-o" /]
[link new-window title="ISA%20315%3A%20Identifying%20and%20Assessing%20the%20Risks%20of%20Material%20Misstatement%20through%20Understanding%20the%20Entity%20and%20its%20Environment" link="https%3a%2f%2fwww.ifac.org%2fsystem%2ffiles%2fpublications%2ffiles%2fIAASB-2020-Handbook-Volume-1.pdf%23INTERNATIONAL%2520STANDARD%2520ON%2520AUDITING%2520315%2520(REVISED%25202019)" icon="file-pdf-o" /]
[link new-window title="ISA%20330%3A%20Responding%20to%20significant%20risks%20of%20material%20misstatement" link="https%3a%2f%2fwww.ifac.org%2fsystem%2ffiles%2fpublications%2ffiles%2fIAASB-2020-Handbook-Volume-1.pdf%23INTERNATIONAL%2520STANDARD%2520ON%2520AUDITING%2520330" icon="file-pdf-o" /]
Compliance audit
[link new-window title="ISSAI%204000%2F58-62%3A%20Considering%20the%20risk%20of%20fraud%20throughout%20the%20audit%20process%2C%20and%20document%20the%20result%20of%20the%20assessment" link="https%3a%2f%2fwww.issai.org%2fwp-content%2fuploads%2f2019%2f08%2fISSAI-4000-Compliance-Audit-Standard.pdf%23page%3D19" icon="file-pdf-o" /]
Performance audit
[link new-window title="ISSAI%203000%2F58-62%3A%20Assessing%20the%20risk%20of%20fraud%20when%20planning%20the%20audit%20and%20being%20alert%20to%20the%20possibility%20of%20fraud%20throughout%20the%20audit%20process" link="https%3a%2f%2fwww.issai.org%2fwp-content%2fuploads%2f2019%2f08%2fISSAI-3000-Performance-Audit-Standard.pdf%23page%3D19" icon="file-pdf-o" /]
Instructions
Audit procedures in relation to fraud
The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management, which, in the context of the EU funded activities, comprises the:
- European Commission (and other institutions and bodies);
- National, regional and/or local authorities; and
- Relevant economic operators (beneficiaries).
Due to the nature of fraud, and the inherent limitations of an audit, there is an unavoidable risk that fraud may occur and not be detected by audit work. Fraud may consist of acts designed intentionally to conceal its existence. There may be collusion between management, employees or third parties, or falsification of documents. For example, it is not reasonable to expect the auditor to identify forged documentation in support of claims for grants and benefits, unless they are obvious forgeries.
The auditor shall consider the risk of fraud throughout the audit process:
- consider whether fraud risk factors are indicated in the information presented
- discuss and analyse in the audit team the susceptibility of the entity to fraud
- maintain an attitude of professional scepticism throughout the audit
- document the result of the discussion and the assessment in Assyst
Financial and compliance audit
An auditor conducting an audit in accordance with ISAs is responsible for obtaining reasonable assurance that the financial statements as a whole are free from material misstatement, whether caused by fraud or error.
The key distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of the financial statements is intentional or unintentional.
In audit of financial statements the objectives of the auditor are to:
- identify and assess the risks of material misstatement of the financial statements due to fraud;
- obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and
- respond appropriately to fraud or suspected fraud identified during the audit.
In [a-glossary term="Statement%20of%20Assurance"]Statement of Assurance[/a-glossary]
the ECA also verifies whether the [link title="underlying%20transactions" link="%2Faware%2FCA%2FPages%2FConcepts%2FUnderlying-transactions.aspx" /]
underlying the financial statements are free from material [link title="irregularity" link="%2Faware%2FCA%2FPages%2FConcepts%2FConcept-of-legality-and-regularity.aspx%23Regularity" /]
, regardless of whether caused by fraud or error.
Fraudulent transactions are, by their nature, not in compliance with relevant regulations. The auditor may also determine that transactions where fraud is suspected, but not yet proven, are not in compliance with applicable laws and regulations. Fraud can result in qualification of the compliance opinion in the auditor's report.
Furthermore, ECA's auditors do not have investigative powers, while only a court of law can determine if a particular transaction is fraudulent.
In performance audit the auditor needs to identify and assess the risks of fraud relevant to the audit objectives. If the risk of fraud is significant, it is important during the audit for the auditor to obtain a good understanding of the relevant internal control systems and examine whether there are any signs of irregularities that could hamper performance. The auditor needs to take enquiries and perform procedures to identify and respond to the risks of fraud relevant to the audit objectives.
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[toggle title="Examples%20of%20sources%20of%20information%20for%20risk%20assessment"]
Internal:
External:
The auditors can also acquire knowledge of the audited area/entity by making inquiries of management and others within (e.g. internal audit) and outside the entity to seek their view about the risks of fraud and how they are addressed, and whether they have knowledge of any actual, suspected or alleged fraud affecting the area/entity.
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Suspected fraud during the audit
If there is suspicion of fraudulent activity during the audit, report it to your hierarchical superior, and to the legal service via encrypted e-mail. The legal service informs the President, who then decides whether or not to notify [link new-window title="OLAF" link="https%3A%2F%2Feur-lex.europa.eu%2Flegal-content%2FEN%2FTXT%2F%3Furi%3DCELEX%3A32013R0883%23d1e933-1-1" icon="external-link" /]
or the [link new-window title="EPPO" link="https%3A%2F%2Feur-lex.europa.eu%2Flegal-content%2FEN%2FTXT%2F%3Furi%3DCELEX%3A32017R1939%23d1e2250-1-1" icon="external-link" /]
.
Suspicions of fraud are usually treated in the same way as other errors without any reference to fraud in clearing documents and reports.
A specific guideline presents what to do when confronting cases of suspected fraud or any other illegal activity.
Abuse
Although [a-glossary term="Abuse"]abuse[/a-glossary]
does not necessarily involve fraud , public sector auditors remain alert throughout the audit for its [link title="occurence" link="%2Faware%2FPA%2FPages%2FExamination%2FClearing.aspx" /]
.
Cooperation with OLAF and the EPPO
The ECA has concluded an Administrative arrangement with OLAF and a Working arrangement with the EPPO. The aim is to facilitate how we work together, in particular regarding the transmission of suspected fraud cases, and the organisation of mutually beneficial training courses, workshops or exchanges of staff.
Consult also our internal requirements regarding cooperation with OLAF in respect of access to audit information concerning:
- cooperation with OLAF on suspected fraud and irregularities;
- the confidentiality of information communicated;
- requests by OLAF for information concerning ECA audits;
- the procedures for dealing with unsolicited information received.
Resources
[icons-list icon-size="2" separator="line" icon-vertical-alignment="middle" vertical-alignment="middle"]
[icon-list-item title="Red%20flags%20suggesting%20fraud" description="repository%20of%20elements(red%20flags)%20indicating%20the%20risk%20of%20a%20possible%20fraud%20or%20corruption.%20The%20red%20flags%20are%20organised%20by%20audit%20area%2C%20nature%20of%20the%20transaction%2C%20or%20issue." link="%2Faware%2FGAP%2FPages%2FRed-flags.aspx" icon="simple-directions" /]
[icon-list-item title="Commission's%20Anti-fraud%20Knowledge%20Center" description="Videos%2C%20good%20practices%20examples%2C%20case%20studies%2C%20useful%20tools%20like%20registers%20and%20databases%2C%20links%20to%20relevant%20legislation%20and%20other%20material%20on%20fraud%20prevention%20and%20detection.%20" link="https%3A%2F%2Fec.europa.eu%2Fantifraud-knowledge-centre%2Findex_en" icon="external-link" linking="new-window" /]
[/icons-list]
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