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Finding and rectifying a fraud case while auditing EU funds

How to start to put a stop to fraud? Source: Pixabay

How does an auditor find out about an error or possibly a fraud case? When does he or she realise that a finding concerns a case of suspected fraud rather than an error? And what does he or she then do to start the clock against the alleged perpetrator? Orsolya Szarka has audited many projects financed with EU funds. In this article, she zooms in on a particular audit experience from several years ago, which contributed to a multi-million euro recovery of EU funds.

By Orsolya Szarka, Investment for Cohesion, Growth and Inclusion Directorate

When you doubt it find more about it

Auditing can be full of surprises. One thing I have learnt over the years while auditing cohesion projects is not to judge a case based on first impressions. Several times I have experienced that things are not black and white. It is safer to have another look at an issue before drawing a final conclusion. And this is not only due to the multi-level EU and national rules we need to deal with. Sometimes you might find disastrous-looking documentation at the beneficiary’s premises but end up finding no serious problems. In other cases, you might ‘dig’ deeper into a perfectly documented file just to find out that the carefully compiled papers are concealing some severe issues.

Judging why an irregularity has occurred is not an easy task. Was it an unintentional mistake? Ignorance of the applicable rules? Maybe the national authorities overlooked the problem while conducting their checks? Or was it committed intentionally by stepping beyond the bounds of legality and regularity to maximise the use of available funds — not from an EU budget point of view, of course, but rather for the benefit of those receiving the grants. We do not necessarily need to understand the underlying reasons, but if we suspect that EU money has been used illegally or for a fraudulent activity, we are responsible for reporting this to the European anti-fraud office (OLAF), which can follow up on such cases.

I believe that each of us, within certain boundaries, has his or her own approach to doing our job. I came across a definition of a jigsaw puzzle recently. It said: “Each piece usually has a small part of the picture on it; when complete, a jigsaw puzzle produces a complete picture.” For me, auditing is like putting together a puzzle. I work my way through the documents, piece by piece, to build up the complete picture, i.e. to find the audit trail for the expenditure I am auditing. However, the puzzle pieces do not always fit, which means there is a problem with the picture. Most often, I can conclude that this is due to an unintentional error. But not always…

On-the-spot visit to a big infrastructure project

The case, which I recall very vividly, goes back a few years to when I was assigned to a compliance auditto contribute to our Statement of Assurance. The sample covered big projects with extensive documentation. We were already prepared, prior to the on-the-spot-visit, for the fact that one of our projects already had a certain ‘reputation’. National authorities and the European Commission had already identified several problematic contracts and excluded these from eligible expenditure.

By their nature, our compliance audits cover expenditure from a well-defined period. It is possible, therefore, that the scope of our audit will include only a small part of the cost of a given project, particularly when we are auditing a large project with a long implementation period. This was the case in audit in question. Even though our project was huge, involving countless contracts, our sample covered only a short period and we needed to review only a limited number of expenditure items.

As always, after some preparations, our audit work started with the on-the-spot visit. We were able to identify and obtain the necessary documents, we understood the procedures and, overall, we could trace — what seemed like — a proper audit trail. However, the work was far from over at this point — we still had a lot of work ahead of us in the office.

Identifying contradictory puzzle pieces

When we started the in-depth analysis of the documents, it turned out that the different ‘puzzle pieces’ for one of the consultancy invoices contradicted each other. This cost type usually requires some extra attention due to its immaterial nature. In this case, we were able to trace an hourly fee back to the contract, but somehow the value of the single invoice exceeded the amount budgeted for several years. It was only a periodic invoice, which did not cover the entire lifetime of the contract. And we neither found nor were presented with any contract modification.

In such a situation, we inevitably need to go back to the beneficiary and ask for clarifications. As a result of our enquiry, we received further pieces of the puzzle which answered one question, but raised several others. We were unable to obtain convincing arguments showing that the expenditure was regular, instead, we grew more confident that we had a serious finding.

We also discovered additional elements that made the situation even more suspicious. Many more and different people had worked for the project than those originally planned; significant modifications had been made at the contractor’s request within a very short timeframe; the audit evidence called into question the project manager’s independence from the contractor.

A contract with an intangible output but without a well-defined scope (in terms of both subject matter and budget) may be seen as an opportunity to gain money in bad faith.

This article was first published on the 2/2019 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.

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The ECA Journal features articles on a variety of current audit topics, the ECA’s role and work. It is available in electronic form below, and paper copies can be ordered online at the EU Bookshop.

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