This article was first published in the April 2013 International edition of Accounting and Business magazine.
Accountants working for organisations provided with loans and grants by European Union institutions – notably the European Commission – may have something to celebrate this year. Brussels is introducing simplified procedures in spending and reporting on EU grants.
A new EU regulation laying out the simplified rules was announced last year and came into effect on 1 January.
For accountants and financial officers with experience of the convoluted ways the EU assigns, spends and records its money, this will come as something of a relief – perhaps leavened with some justifiable scepticism. From the beginning of the year, accountants and financial officers administering EU-provided money no longer need to provide paperwork evidence to have their cost claims reimbursed but can spend the money on the basis of lump sums, unit costs and flat rates for small amounts.
Brussels will, however, still ensure that organisations benefiting from financing have to secure matching funding and not make profits (directly at least) from taxpayers’ money.
According to the new rules, flat rates will be calculated using statistical data or previous costs related to similar activities with the same outcome. The Commission will also be able to calculate lump sums on a case-by-case basis, depending on organisations benefiting from grants, looking at a beneficiary’s past spending record ‘by reference to certified or auditable historical data… or to its usual cost accounting practices’. The calculation of such lump sums may be done before financing is granted, but also afterwards ‘through an appropriate strategy for ex post controls’.
What this really means, says the Commission, is that instead of gathering every proof of expenditure, grant beneficiaries will continue to enjoy a flow of funds (or won’t have to pay them back) as long as they deliver the results they have promised.
The new system is expected to reduce the burden of having to report about and provide documentary justification for each and every item of EU-funded spending. Reporting the overall spending of millions of Euros has generated a huge workload, as Peter Walton FCCA, professor of accounting at ESSEC Business School in Paris, says: ‘The advantage of moving to a system of flat-rate allowances and prices means that service suppliers and the Commission do not have to take a lot of time reviewing proposals based on extensive cost information, and then checking claims against this. The supplier has to decide whether they can operate economically within the offered tariff, and if successful just claim it without having to provide endless vouchers.’
Of course, accountants will still have to follow their organisation’s internal accounting rules on spending, which in practical terms could mean the new EU regulation may not change spending rules in some instances. Judith Mogra, head of research finance at the University of Leicester in the UK, says: ‘I don’t think that lump sums and flat rates impact us an awful lot. Our own financial regulations require us to report actual costs incurred for any travel and costs, so we would still have to use actual cost reimbursements.’
In addition, in debates on the shape of the EU’s 2014-20 research spending programme Horizon 2020, the European University Association (EUA) wants universities to be allowed to use the old expense and reclaim system if they wish. It has some allies within the European Parliament on this issue and has released a note saying: ‘The EUA strongly supports the European Parliament’s proposal that an option for reimbursement based on full costing methodologies should be retained…’ The association said the old system had encouraged universities to develop full costing methodologies and systems to operate them, improving their accounting controls. Forcing them to abandon them would be a ‘counterproductive’, it argued: ‘Evidence from good practice examples show how the current…reimbursement rules have acted as a driver for universities to develop full costing. [The] EUA firmly believes, therefore, that it would be a backward step to exclude reimbursement based on full costing methodologies in Horizon 2020.’
That said, even if these old rules are allowed to live on within EU-funded research programmes, the new system would certainly remove a red tape involving dealing with Brussels. The new rules come just in time for the launch of the new EU budget for 2014 and 2020, about which a compromise deal was struck by EU heads of government in February. The sums are large – EU spending hit €147bn in 2012 and over 2014-20, spending can be as high as €960bn.
Despite the continued uncertainty of the overall distribution of the EU pot of money, one thing is sure: research and development will get a significant chunk, with the European Commission having requested €80bn stretched between 2014 and 2020 – it may get around €60bn, but no less. Research projects usually receive several million Euros in funding and while the EUA is pushing for the old reporting system to be retained as an option, there are other reforms in the new accounting system that may prove more palatable to the academics.
Organisations benefiting from European money for their research projects will no longer have to open separate interest-bearing bank accounts. Moreover, the Commission says it will no longer request that any interest generated be paid back. It will have a real impact on the work of accountants and financial officers, according to Mogra: ‘That removes a whole level of administration.’
Another change is that EU grant recipients will no longer have to pay Brussels all the profits they have earned as a result of work funded by the EU. The Commission will now ask for only a portion of the profits – and that will correspond to the proportion of the initial costs paid for by EU money.
However, there is at least one practical issue left unresolved by the new financial rules: the reporting cycle. For research projects the cycle currently spans 18 months rather than one year. Grantees funded by the current R&D programme (FP7 – the seventh framework programme) have to submit a statement of the costs incurred every 18 months, which leaves a lot of uncertainty over currency exchange rates.
Mogra says: ‘When we convert from sterling into Euros, we use the exchange rate of the day after the period on which we are reporting. When you do it every 12 months, this kind of fixes the exchange rate.’ She adds that a yearly reporting cycle would give a better idea of how much an amount of money spent in sterling would be worth in Euros at the moment the costs are reported to Brussels.
According to European Commission budget spokesperson Patrizio Fiorilli, the reporting cycle for research projects remains unchanged so far, but is different for each funding programme, taking into consideration the duration and the specificity of the supported projects.
Besides making life easier for accountants and their organisations, Brussels wants the new rules to increase transparency in the way European taxpayers’ money is spent and to prevent fraud.
Fiorilli says: ‘Increased use of lump sums, unit costs and flat rates also reinforces transparency for applicants and beneficiaries, which may better anticipate the amounts to be awarded, thus better plan and manage the corresponding budgets.’
According to Walton, the rules will make combating fraud easier since the European Commission will pay beneficiaries only if the work has been done based on a set price. But there are pitfalls, he warns: ‘The problem will be the level at which the price is set.’ He recalls that in France, where the government used to set audit fee levels which became unrealistic over time, auditors colluded with their clients to find ways of making the work financially viable.
Carmen Paun, journalist