The European Programmes for Agriculture and Rural Development. Shortcomings related to Implementation, Enhancement and Audit

Abstract

Most of the relevant difficulties regarding the implementation, development and auditing of projects financed from European funds (EAFRD) in Romania, reported in special by the audits, are mainly arising from the changes in EU regulations (that implicitly determine changes and adaptations of the Romanian legal ^ framework) or ^ from the relatively frequent reorganizations of national structures involved in the implementation and management of European funding programs. This paper is addressing the implementation, enhancement (deployment) and auditing of programmes and measures financed through EAFRD, and the author proposes a short review of the phenomenon of fraud of EU funds aimed at agriculture. First, causes and factors that facilitate the emergence of irregularities and fraud (as a prerequisite for the management of the risk related to the implementation and enhancement of European projects) are identified, and the essential role of the audit thereof is reaffirmed. Then, on the basis of documents and public reports of the bodies involved in carrying out programmes and projects financed from EAFRD, specific factors (internal or external) which may give rise to problems and difficulties are briefly dealt with. The author analyses a number of issues which reflect difficulties and typical problems encountered in implementing the PNDR. Finally, the role of the external audit and, particularly, the Audit Authority's responsibility are also briefly examined.

Headnote

Abstract

Most of the relevant difficulties regarding the implementation, development and auditing of projects financed from European funds (EAFRD) in Romania, reported in special by the audits, are mainly arising from the changes in EU regulations (that implicitly determine changes and adaptations of the Romanian legal ^ framework) or ^ from the relatively frequent reorganizations of national structures involved in the implementation and management of European funding programs. This paper is addressing the implementation, enhancement (deployment) and auditing of programmes and measures financed through EAFRD, and the author proposes a short review of the phenomenon of fraud of EU funds aimed at agriculture.

First, causes and factors that facilitate the emergence of irregularities and fraud (as a prerequisite for the management of the risk related to the implementation and enhancement of European projects) are identified, and the essential role of the audit thereof is reaffirmed. Then, on the basis of documents and public reports of the bodies involved in carrying out programmes and projects financed from EAFRD, specific factors (internal or external) which may give rise to problems and difficulties are briefly dealt with. The author analyses a number of issues which reflect difficulties and typical problems encountered in implementing the PNDR.

Finally, the role of the external audit and, particularly, the Audit Authority's responsibility are also briefly examined.

Keywords: EU funds for agriculture, EAFRD, irregularity and fraud, audit of EAFRD projects

JEL Classification: M42, Q14

1.Introduction

In addressing the implementation, enhancement (deployment) and auditing of programmes and measures financed through the European Agricultural Fund for Rural Development (EAFRD), the author took into account the situation of fact, namely that for the current period (the second edition of EAFRD, 2014-2020) the experience gained during the first edition (2007-2013) is already available, and thus, also, a wide range of experience relevant enough to formulate general conclusions, useful both in the organizational plan (administrative) and operational plan (irregularities, fraud).

Administrative', in order to facilitate the transition to the new legal framework for the programming period started on January 1, 2014, the European Parliament and the Council of the European Union have adopted transitional rules in order to avoid any difficulties or to prevent delays in the implementation of rural development support, which could possibly intervene until the date of adoption of the new rural development programmes. For this reason, through Commission Regulation (EU) No. 1310/2013, Member States were allowed to undertake further legal commitments in the year 2014, by virtue of their rural development programmes, for certain measures, the resulting expenditure being eligible for support in the new programming period.

In these circumstances, at national level, the general framework has been modified with respect to the application of procedures for the evaluation, selection, contracting, procurement, payment, control and monitoring of projects co-financed from EAFRD through the National Programme of Rural Development (PNDR).

In addition, in year 2014 the legislative activity conducted at the level of institutions responsible for implementing the PNDR has mainly dealt with the preparation of the programming period 2014-2020, while also completing / modifying existing laws in order to avoid decommitment of funds granted to Romania through PNDR 2007-2013.

Irregularities, fraud: by the normative acts developed starting with 2014, authorities have pursued ensuring the administrative framework necessary for the implementation of PNDR 2014-2020, including provisions to prevent the phenomenon of fraud of EU funds aimed at agriculture. The authorities have constituted a (self)-referential for institutions involved in the auditing of projects financed by the EAFRD, whereas the phenomenon of fraud of public money and in particular European funds is identified also in Romania, cases of detected fraud being found as well and in large part in the management of the projects in the agricultural field.

2.Difficulties in the process of implementation, enhancement and audit of projects financed from European funds

In Romania, with respect to the implementation, enhancement (deployment) and auditing of the projects financed from European funds through EAFRD, the most relevant difficulties reported, in particular by the audit assignments, refer to: (a) aspects of changes in the rules of the European Union, which implicitly determine adjustments to the Romanian legal framework, (b) relatively frequent changes or reorganizations of the national structures involved in the conduct and management of European funding programmes, (c) the phenomenon of fraud of public funds, including Community funds, and (d) corruption, that characterizes the Romanian society.

The European Union and the Member States through their institutions are engaged in far-reaching actions to combat fraud and any other illegal activity affecting the financial interests of the Union, by implementing measures to deter fraud and to provide effective protection for Member States and the institutions, bodies, offices and agencies of the Union. To this end, Member States shall organise, together with the Commission, close and constant co-operation at the level of the competent authorities and shall submit annually to the European Parliament and the Council a report on the measures taken.

Identification of the causes and factors that facilitate the emergence of irregularities and fraud constitutes an important step in the management of the risk related to the implementation and enhancement of European projects, plus the essential role of the audit thereof. From this perspective, we must keep in mind a number of factors, internal or external, which may give rise to problems and difficulties with respect to the implementation, enhancement and audit of programmes/measures financed by the EAFRD.

2.1 Factors of influence on the deployment, management and audit of projects financed from the EAFRD

(a) Amendments to the rules of the European Union, which impose and determine the adaptations of the legislative framework in Romania.

In this context there is a need to adapt the operational methodologies and procedures related to the deployment and the management of the projects financed from European funds, including activities specific to the internal and external audit thereof. Frequent legislative changes, especially domestically, involves a constant training of staff within the institutions (agencies or bodies) involved in carrying out the implementation and the audits, of programs or measures financed from European funds.

(b)Relatively frequent reorganisations of the national structures involved in the deployment and management of European funding programmes constitutes a disruptive factor in ensuring continuity, both operationally and in terms of human and financial resources with respect to the management of national and EU funds.

(c) The poor definition (establishment) of the responsibilities and accountability of those having tasks and duties in managing EU funds, leading to the dilution and dispersion of liability.

(d) The reduced degree of absorption of EU funds is generated by frequent institutional changes, changes that generate completely different approaches and policies in this field.

(e) Difficulties in carrying out the public external audit missions, due to frequent changes in terms of the procedural framework or in the determination of liability in the case of identification of irregularities or fraud.

(f) The phenomenon offraud ofpublic funds, including Community funds

(g) Corruption, that characterises Romanian society, constitutes a factor with a special influence over the management of EU funds. We believe the approach of this subject matter may constitute separate a topic of utmost importance.

2.2 Risks in the implementation, management and audit of projects financed by the EAFRD

The most relevant risks and their impact on the work of implementation, management and audit of projects financed by the EAFRD are generated by the strategic and operational framework and by the or financial aspects:

(a) Risks arising from the strategic and operational framework:

o failure to comply with the objectives laid down in the PNDR;

o the low level of absorption of funds allocated to Romania through the EAFRD;

o failure to comply with the accreditation criteria laid down in the Community regulations, PNDR and national legislation (acquisitions, internal audits, counting);

o faulty management of funds and operational systems, including accounting and financial systems;

o making wrongful or incorrectly calculated payments to beneficiaries;

o allocation of funds for projects that do not meet the eligibility criteria;

o failure to comply with the time deadlines for the approval of applications for funding and payment , in accordance with the working procedures;

o an inadequate system of information technology, which might affect the audited entity to carry out basic functions;

o insufficient organization of human resources; o lack of control over high-risk operations

(b)Risks arising from financial aspects:

o improperly protection of the community's financial interests;

o non-recovery of debts and of excess payments;

o errors in preparing the financial statement in accordance with the Community rules;

o errors in processing of payments (mismanagement of financial and accounting systems).

3.Typical problems and difficulties encountered in implementing the PNDR

Documents and public reporting of the bodies involved in carrying out programmes and projects financed from the EAFRD noted a number of issues which reflect the difficulties and the typical problems encountered in implementing the PNDR:

* Human resources were a serious problem by the insufficient and inadequate staff training work, taking into account workload and peculiarity for staff involved in the implementation of both the PNDR 2007-2013 and the related programmatic documents elaborating for the period 2014-2020.

* The existence of bottlenecks in the procurement process conducted by the public beneficiaries, indicating requirements for some improvements in the work procedures and continuing measures to monitor the status of their progress.

* Ensure private co-funding sources. Although the banking system has seen a rapid development in the years before and after the crisis, the access to loans remains a major problem for most of the farmers and SMEs operating in the countryside.

The general behavior of financial institutions was hesitant towards the financing of agricultural activities, being determined, mainly, by the following factors:

* banks are usually present in urban environments and their main objective was the financing of trade and industry. It was not until during the last decade that banks have created specific tools for financing agricultural entities;

* small dimensions farmers are numerous, but with modest financial needs. The need for small loans has increased accordingly, whilst management costs for these loans directly influence the final cost to be borne by the beneficiary;

* the profitability of investment in agriculture is relatively small in Romania, as well as in all developing countries. Also, those profits are usually shelved, and always unpredictable, the risk for the lender being high;

* there is a lack of mutual trust between banker and farmer: the first is afraid of the risk of non-reimbursement, while the second considers the bank is asking high loan costs;

* The impact of the large number of canceled (terminated) contracts, meaning that significant funds have been blocked in related projects. This may be a subject of analysis, particularly of the causes which led to the cancellation of a large number of contracts financed from the EAFRD.

4.Typical irregularities in the implementation of projects financed by EAFRD

Irregularities (or deficiencies) are generally understood as a category broader than the category of frauds. The element of "intention" distinguishes fraud from irregularities. For the purposes of Council Regulations (EC) No. 1782/2003 and 2988/95 (of 18 December 1995) on the protection of the financial interests of the European communities, the term "irregularity" is a broad concept and covers both the intentional irregularities and the unintentional ones committed by the economic operators.

Matters concerning irregularities identified in the implementation of projects financed by the EAFRD may constitute major risk issues, by the degree of repeatability and seriousness thereof.

The national programme for rural development (PNDR) presented a special interest among the public beneficiaries, a fact that has led to an increase in the degree of access to funds, but also to an increase in the rate of error in the implementation of projects.

The EAFRD financing undertakes to respect the compliance with the provisions of the regulations of the European Community, in accordance with the principles of sound financial management (economy, efficiency and effectiveness).

Romania attracts European funds for agriculture and rural development of the following programs:

* European agricultural fund for rural development (EAFRD);

* The European Agricultural Fund for Guarantee (EAFG);

* European Fisheries Fund (EFF).

Coordination and management of the absorption of funds are entirely made by the Ministry of agriculture and rural development, through its various agencies.

In the context of missions carried out by the Audit Authority within the Romanian Court of Accounts, as the Certification Body of EC, a number of deficiencies were identified: some at the level of the management and internal control system, as well as some irregularities with financial implications as a result of improperly applying the procedural provisions concerning the authorization and making of the payments, and also as a result of the failure to meet the criteria for eligibility of the expenditure declared to the European Commission.

Irregularities at the management and internal control system level. As a result of the assessment of the internal control environment at the level of the Agency for the Financing of Rural Investment (AFIR) and the Agency for Payments and Intervention in Agriculture (APIA), with respect to the accreditation criteria laid down in the Regulation (EC) relating to the accreditation of paying agencies and other bodies and the clearance of EAFRD accounts, specific irregularities (deficiencies) were identified concerning the quality of administrative controls, the inadequate authorization, in some cases, of certain requests for payment or the violation of working procedures.

Also, identified deficiencies concerned the fact that the checks carried out by the audited entities were not able to find the existence of a conflict of interest or a double financing (funding), as well as, in some cases, the disregard with respect to legal regulations in the process of acquisition or settlement in case of inconsistencies (discrepancies) between the surface (area) required by the payment application and the supporting documents proving ownership / operation rights.

Irregularities in the process of selection of the applications for funding. It is important to highlight the fact that, for example, deficiencies were identified concerning the process of selection of the applications for funding at the level of the Management Authority (MA), namely:

- deficiencies in the process of verification of eligibility and of the technical and economic assessment of applications for funding;

- quality of management checks on the acquisition procedures;

- in the Information System, flows are not available to enable validation of payments based on necessary approvals.

Other deficiencies identified were:

- the performance of the functions of control and anti-fraud;

- deducting the amounts of the requests for reimbursement without issuing debt securities.

In this context, of strengthening prevention of irregularities, the Agency for Financing of Rural Investments (AFIR) has a huge responsibility towards the European Union and the Romanian Government, but also against all those who invest money and time in implementing investment projects funded through the national programme for rural development, PNDR.

In practice, this concern is materialized also by the permanent checking of financed investments - both during the implementation and during the monitoring period, once the project is completed.

Artificial conditions of eligibility. Under EU (European Union) Regulation No. 1306/13, art. 60, the Circumvention clause states that: "Without prejudice to specific provisions, no advantage provided for under sectoral agricultural legislation shall be granted in favour of a natural or legal person in respect of whom it is established that the conditions required for obtaining such advantages were created artificially, contrary to the objectives of that legislation.".

In view of the above, which refers to the artificial conditions as conditions for eligibility or selection created voluntarily by the applicants, we detail the following types of situations that may be encountered in practice:

- non-eligible, in order to create the appearance of certain eligible applicants;

- to increase the score obtained in the framework of the selection criteria;

- to obtain financial benefits greater than those due;

- to avoid the restrictions imposed with respect to the maximum number of projects that can be implemented by a single recipient at the same time within the same support measures;

- to increase the intensity of non-repayable financial support.

Types of irregularities. Such deviations have a diversified and comprehensive range. Several types of irregularity of invitations were highlighted as a result of the experience and activity of certain authorities or bodies having the ability to check and identify irregularities:

* Corruption/conflicts of interest. Strong links between the civil servants of the State (for example, the contracting authority and the various suppliers involved);

* Increasing / artificial inflating of prices for machinery and purchased equipment;

* Non-compliant documents: unsigned by the legal representative, unreal document entries or phony tax certificates etc.;

* The disparity between the minutes relating to the execution of works and the actual physical stage of works.

Further details regarding irregularities can be found in the Guide of AFIR (www.afir.info).

The phenomenon of fraud of public funds, including Community funds. Generally, the fraud relates (refers) to abuses in the line of duty (in the exercise of powers by the service), to presenting false, incorrect or incomplete statements and documents, to non-disclosure of information in violation of a specific obligation, all of which have the effect of improper assigning/acquisition or the misuse of public funds.

Despite all of the efforts of institutions / authorities in Romania in identifying and combating this phenomenon, still frequent cases of fraud of public funds or European funds spending, respectively, are identified.

* In the case of entities, authorities or other bodies involved in the management of public funds, in particular the European funds, the main characteristic element in the cases of detected fraud is the quality of the human factor, but also the level of salary/incentive for the staff responsible for carrying out projects with European funding.

* The European Union finances many programs and projects that improve the lives of citizens in the EU and beyond. Misuse of funds granted from the budget of the Union or evading the payment of taxes, duties and other amounts, owed to finance the EU budget, directly affects citizens and is detrimental to the entire european project.

External audit. With respect to external audits conducted by the Audit Authority (http://www.curteadeconturi.ro/AutoritateAudit.aspx?categ=3), through its structures and according to its competence, we consider this track has an essential role in finding irregularities. Both at the stage of planning and carrying out the audit procedures, and in the phase of evaluation and reporting of the audit results, care should be given to taking account of the risk of material misstatement (significant distortions) that may be due to fraud or error.

A qualitative analysis of observed distortions should be done, in order to determine if there are either weaknesses of the system of controls and/or violations of the rules of the European Commission. To this end, we will identify and analyze: the identified error (to decide upon the error: is it an individual error or is it of a systemic nature); the causes which have caused the error occurred; the controls in place to prevent and detect the error and the cause of their failure (for example, human error).

Without neglecting or diminishing the importance of the entire audit process, Audit Authority's responsibility is to formulate an opinion in relation with the scope of the audit for certification of EAFRD accounts, particularly: (a) the fulfilment of the conditions of accreditation of paying agencies and the operational risk assessment, and (b) the preparation of annual accounts, in accordance with the provisions of the European Union.

The audit process does not end with the preparation of the final report of the audit mission, discussing of the recommendations and with the measures that will be undertaken by the audited entities: this proces continues with the monitoring of the implementation of the recommendations as the last stage of the audit process.

5.Conclusions

According to EC guidelines, European Commission regulations on the assessment of the risk of fraud and on the adoption of effective and proportionate fraud preventing measures must be taken into account. Thus, according to article 59 (2) of the Financial Regulation, Member States shall take all necessary and appropriate measures, including legislative, regulatory and administrative provisions in order to protect the financial interests of the EU, in particular by preventing, detecting and correcting irregularities and fraud.

This paper proposes a review of the phenomenon of fraud of EU funds aimed at agriculture. First, the causes and factors that facilitate the emergence of irregularities and fraud (as this constitutes a prerequisite in the management of the risk related to the implementation and enhancement of European projects) are identified, and the essential role of the audit thereof is reaffirmed.

From this perspective, on the basis of documents and public reports of the bodies involved in carrying out programmes and projects financed from EAFRD, the paper analyses a number of issues which reflect the difficulties and the typical problems encountered in implementing the PNDR. The conclusion is that the main factors that should necessarily be taken into account, at least at this stage of things, can be summarized as: irregularities at the management and internal control system level, irregularities in the process of selection of the applications for funding, artificial conditions of eligibility, the phenomenon of fraud of public funds, including Community funds.

Finally, the role of the external audit and, particularly, the Audit Authority's responsibility are also briefly examined.

References

References

Regulamentul (UE) nr. 1310/2013, https://www.parlament.gv.at/PAKT/EU/XXV/ EU/07/21/EU_72119/index.shtml

Regulamentul Consiliului (CE) nr. 2988/95, 18 decembrie 1995, http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31995R2988:EN:HTML

European Court of Auditors (2015), Annual Report of European Court of Auditors for 2014 year, http://www.eca.europa.eu/Lists/ECADocuments/

European Commission, Directorate-General for Agriculture and Rural Development / Directorate E - Economic analysis, perspectives and evaluation; communication / Unit E.4 - Evaluation and studies, Synthesis Of Ex Ante Evaluations Of Rural Development Programmes 2014-2020, http://ec.europa.eu/agriculture/capfunding/index_fr.htm