This training has been organised by EIPA under the Framework Contract Nr 2018CE16BAT060. The opinions expressed are those of the contractor only and do not represent the EC's official position

Role of Member State auditors in fraud prevention and detection

Dermot Byrne, Head of Authority ERDF Audit Authority, Ireland

Identifying and preventing fraud & corruption in ESI Funds

Contents

Introduction

Legal framework for ESIF

How systems audits help to prevent and detect fraud

How audits of operations help to prevent and detect fraud

Specific training in fraud prevention and detection

Systems audit Key Requirement 7: Assessment criteria (Annex 2)(‘Effective implementation of proportionate anti-fraud measures’)

Fraud response plan (Annex 3 - Ireland)

AFCOS (Anti-Fraud Co-ordination Service)

Handbook for auditors

Introduction - background

Why?

Result of a joint working procedure – Experts from MS & OLAF

Develop collaboration and cooperation – national authorities and EC

A practical guide that MS and EC can use as good practice

Based on key principles of international audit standards

2014-20 legal framework requires MS to develop AFM’s for EU Funds

Auditors have to assess compliance by MA’s and IB’s

Objective?

Experts from 11 Member States

Improve auditors’ awareness of their role in FPD for 2014-20

Exchange experience and good practice in different MS’s

Identified two key roles of Auditors:

• Audit role: As independent bodies, they give assurance on the regularity and legality of operations and accounts of audited bodies and proper functioning of their control systems.

• Advisory role: Auditors may make recommendations to improve or correct weaknesses or failures in operations, accounts and systems.

Introduction - background

Legal framework - ESIFEU legal framework

Articles 310, 325 of Treaty – CION and MS’s must counter fraud/illegality Article 59.2(b) Financial Regulation (FR) – MS primary responsibility for preventing, detecting

and correcting irregularities and fraud. Article 125(4)(c) of CPR – effective and proportionate AFM’s … A59 of FR provides for audits of (i) systems, (ii) operations, (iii) accounts & MD

International framework

Standards of the International Auditing & Assurance Standards Board (IAASB) of IFAC (International Federation of Accountants)

International standards of Supreme Audit Institutions (ISSAI) Standards of the Institute of Internal Auditors (IIA) – ‘audit and advisory’

National framework

Some (not all) MS’s have provisions in national legislation re audit procedures. Examples include Estonia (follow IIA) and Netherlands (IFAC transposed).

A System audit aims to seek assurance tha MCS functions effectively and efficiently, in order to prevent errors and irregularities (including fraud)

• Effective and proportionate anti-fraud measures is a Key Requirement for ESIF

• ISA 240 – auditors should:• evaluate risk of misstatements in financial statements arising from fraud

• Report suspected fraud cases to those charged with governance/management

• Professional skepticism – ‘an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud and a critical assessment of audit evidence’

• AA Audit Strategy (A127 of CPR) must prioritise systems audits based on risk

• KR7 is specific thematic area

Systems Audits - prevention

List of 7 assessment criteria under Key Requirement 7 (Annex 2 of Handbook)

1. Before Programme implementation, carry out a fraud risk assessment – repeat each year or every two years.

2. Anti-fraud measures must be structured around four key elements: Prevention – Detection – Correction – Prosecution

3. Adequate/proportionate preventive measures (mission, code of conduct, tone/top, training etc).

4. Appropriate detective measures – red flags – are in place and implemented

5. Adequate measures if a suspected fraud is detected

6. Adequate procedures for follow-up recoveries of EU funds spent fraudulently

7. Adequate follow-up to review processes, procedures and controls connected to the potential or actual fraud

Systems Audits – KR 7

Primary responsibility for detection lies with management of audited body

• However, if auditor identifies suspected fraud during systems audit, it needs to react immediately to protect EU & National budget.

• May decide to perform supplementary tests or extend segment audited.

• Notify the MA or CA which is responsible.

• Inform national authority which will notify OLAF (In Ireland, Certifying Authority)

• Annex 3 to the Handbook contains a Fraud Response Plan (Ireland)

Systems Audits – detection

Auditors conduct administrative audits … not criminal investigations.Scope of auditor’s power and authority is limited – examples of areas of focus:

• During on-the-spot visit, confirm no misappropriation of assets

• Be particularly vigilant when a project raises income, particularly cash

• Be vigilant to any signs of collusion or conflict of interest in award of contracts

• Check for favouritism in evaluation of tenders

• Be vigilant to false labour claims or other falsified documents

• Carry out cross checks for potential double funding.

• In general – be aware of Information note on fraud indicators

Audits of operations – detection

Training - prevention & detection

Analysis &Learning

Targeted controls

Prevention Detection

Audits & Investigations

• Initial fraud awareness training – regular refreshers

• Induction training for new auditors • definition of fraud• International Auditing Standards (ISA’s)• EU regulations and guidance on fraud• Role of OLAF• Examples of fraud in EU co-funded projects

• Continuous training will be desirable given:• the new measures being implemented for 2014-20• Developing experience in implementation of these new measures

Training - prevention & detection

Anti-Fraud Coordination Service (AFCOS)

• EU Member States must designate an AFCOS as per Article 3(4) of Regulation 883/2013

• to facilitate effective cooperation and exchange of information, including information of an operational nature, with OLAF.

• Member States are autonomous in deciding where to best place the AFCOS within their national administrative structure.

• The placement of AFCOS should provide for its visibility and importance in relation to other relevant authorities in the field of protection of the EU's financial interests.

• Some Member States placed their AFCOS either within the Ministry of Finance or the Ministry of Interior; some established it as an independent Government's service.

AFCOS

Anti-Fraud Coordination Service (AFCOS)

What do AFCOS do?

• The mandate of the AFCOS may vary, depending on country-specific circumstances.

• In all cases however, the AFCOS should have the mandate for:

• Ensuring co-operation with OLAF as required by Article 325 of the Treaty on the Functioning of the EU.

• Co-ordinating within the country, • legislative, • Administrative, and,• investigative obligations & activities for protection of the EU’s financial interests

AFCOS

Examples of activities?

• ensuring fulfilment of obligations under Regulation 2185/1996 on on-the-spot checks

• helping cooperation between national administrations, prosecution authorities & OLAF

• sharing information on irregularities/suspected fraud with national authorities and OLAF

• dissemination of information

• leading creation/implementation of national strategies to protect EU’s financial interests (and promoting the related administrative/legislative changes)

• identifying possible weaknesses in national systems for managing EU funds and initiating appropriate remedial measures

AFCOS

AFCOS - ExamplesMember State Name of the Authority Relevant Administration

AUSTRIA Department for Anti-fraud, Tax and Customs Ministry of Finance

CROATIA Service for Combating Irregularities and Fraud - Directorate forFinancial Management, Internal Audit and Supervision Ministry of Finance

ESTONIA Financial Control Department Ministry of Finance

FINLAND Government Financial Controller Ministry of Finance

GERMANY Division for the protection of EU financial interests Ministry of Finance

IRELAND EU & International Division - EU Budget Section Ministry of Finance

ITALY Guardia di Finanza, Division Specialised in Countering EU frauds at the Department of European Policies

Presidency of Council of Ministers

LATVIA EU Funds Audit Department Ministry for Finance

LITHUANIA Financial Crime Investigation Service Ministry of the Interior

SLOVENIA Budget Supervision Office Ministry of Finance

UNITED KINGDOM National Police Coordinators Office for Economic Crime -Economic Crime Directorate City of London Police

AFCOS – ACA’sSigned Administrative Cooperation Agreements – December 2016

Questions?

https://ec.europa.eu/anti-fraud/olaf-and-you/report-fraud_en