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Document 52015TA1209(21)

Report on the annual accounts of the European Institute of Innovation and Technology for the financial year 2014, together with the Institute’s reply

OJ C 409, 9.12.2015, p. 187–196 (BG, ES, CS, DA, DE, ET, EL, EN, FR, HR, IT, LV, LT, HU, MT, NL, PL, PT, RO, SK, SL, FI, SV)

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Official Journal

9.12.2015

Official Journal of the European Union

C 409/187

REPORT

on the annual accounts of the European Institute of Innovation and Technology for the financial year 2014, together with the Institute’s reply

(2015/C 409/21)

INTRODUCTION

The European Institute of Innovation and Technology (hereinafter ‘the Institute’, aka ‘EIT’), which is located in Budapest, was created by Regulation (EC) No 294/2008 of the European Parliament and of the Council (1). The Institute’s objective is to contribute to sustainable European economic growth and competitiveness by reinforcing the innovation capacity of the Member States and the European Union. The Institute awards grants to an increasing number of ‘Knowledge and Innovation Communities’ (KICs), linking the higher education, research and business sectors with one another and aiming thereby to boost innovation and entrepreneurship (2). KICs coordinate the activities of hundreds of partners. The grants provided by EIT reimburse partners’ costs and costs stemming from the KICs’ coordination activities.

INFORMATION IN SUPPORT OF THE STATEMENT OF ASSURANCE

The audit approach taken by the Court comprises analytical audit procedures, direct testing of transactions and an assessment of key controls of the Institute’s supervisory and control systems. This is supplemented by evidence provided by the work of other auditors and an analysis of management representations.

STATEMENT OF ASSURANCE

Pursuant to the provisions of Article 287 of the Treaty on the Functioning of the European Union (TFEU), the Court has audited:

(a)	the annual accounts of the Institute, which comprise the financial statements (3) and the reports on the implementation of the budget (4) for the financial year ended 31 December 2014, and

(b)	the legality and regularity of the transactions underlying those accounts.

The management’s responsibility

The management is responsible for the preparation and fair presentation of the annual accounts of the Institute and the legality and regularity of the underlying transactions (5):

(a)

The management’s responsibilities in respect of the Institute's annual accounts include designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies on the basis of the accounting rules adopted by the Commission’s accounting officer (6); making accounting estimates that are reasonable in the circumstances. The Director approves the annual accounts of the Institute after its accounting officer has prepared them on the basis of all available information and established a note to accompany the accounts in which he declares, inter alia, that he has reasonable assurance that they present a true and fair view of the financial position of the Institute in all material respects.

(b)

The management’s responsibilities in respect of the legality and regularity of the underlying transactions and compliance with the principle of sound financial management consist of designing, implementing and maintaining an effective and efficient internal control system comprising adequate supervision and appropriate measures to prevent irregularities and fraud and, if necessary, legal proceedings to recover funds wrongly paid or used.

The auditor’s responsibility

The Court’s responsibility is, on the basis of its audit, to provide the European Parliament and the Council (7) with a statement of assurance as to the reliability of the annual accounts and the legality and regularity of the underlying transactions. The Court conducts its audit in accordance with the IFAC International Standards on Auditing and Codes of Ethics and the INTOSAI International Standards of Supreme Audit Institutions. These standards require the Court to plan and perform the audit to obtain reasonable assurance as to whether the annual accounts of the Institute are free from material misstatement and the transactions underlying them are legal and regular.

The audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the accounts and the legality and regularity of the underlying transactions. The procedures selected depend on the auditor’s judgement, which is based on an assessment of the risks of material misstatement of the accounts and material non-compliance by the underlying transactions with the requirements in the legal framework of the European Union, whether due to fraud or error. In assessing these risks, the auditor considers any internal controls relevant to the preparation and fair presentation of the accounts, as well as the supervisory and control systems that are implemented to ensure the legality and regularity of underlying transactions, and designs audit procedures that are appropriate in the circumstances. The audit also entails evaluating the appropriateness of accounting policies, the reasonableness of accounting estimates and the overall presentation of the accounts. In preparing this report and Statement of Assurance, the Court considered the audit work of the independent external auditor performed on the Institute’s accounts as stipulated in Article 208(4) of the EU Financial Regulation (8).

The Court considers that the audit evidence obtained is sufficient and appropriate to provide a basis for its statement of assurance.

Opinion on the reliability of the accounts

In the Court’s opinion, the Institute’s annual accounts present fairly, in all material respects, its financial position as at 31 December 2014 and the results of its operations and its cash flows for the year then ended, in accordance with the provisions of its Financial Regulation and the accounting rules adopted by the Commission’s accounting officer.

Opinion on the legality and regularity of the transactions underlying the accounts

In the Court’s opinion, the transactions underlying the annual accounts for the year ended 31 December 2014 are legal and regular in all material respects.

Emphasis of matter

10.

Without calling into question the unqualified opinion expressed in paragraph 9, the Court draws attention to the fact that the EIT financial contribution may not exceed 25 % of the KIC’s global expenditure over the first five years, from 1 January 2010 to 31 December 2014. According to the figures reported by the KICs, this ceiling was respected. The EIT obtained audit certificates by 31 March 2015 on the costs of KIC complementary activities (KCA) incurred during 2010-2014. In addition to obtaining the audit certificates, in 2015 the EIT conducted a review of the portfolio of KIC complementary activities to ensure that only those activities are accepted that meet all legal and operational requirements set for KCAs including to have a link with KIC added value activities funded by the EIT.

11.	The comments which follow do not call the Court’s opinions into question.

COMMENTS ON INTERNAL CONTROLS

12.

The EIT has gradually improved its financial verification of the KICs’ cost claims. However, the operational verification of deliverables is lagging behind. The KICs’ annual business plans still include an inadequate definition of deliverables and there is no clear link between planned deliverables and eligible cost per partner and cost category. Also, the Court has found cases where the full amount of the EIT grant was paid out even if some of the objectives set in the business plan have not been achieved.

COMMENTS ON BUDGETARY MANAGEMENT

13.

The Institute overestimated its budgetary needs for 2014 by 13,1 million euro, i.e. 5,6 % (2013: 3,4 million Euro, i.e. 2,5 %) and only 220 million of the 233,1 million euro available were committed. The low implementation rate is mainly related to non-used appropriations for grants (11,4 million euro) to fund KIC activities. The KIC’s business plans, on the basis of which grant agreements were signed, did not require the use of total 2014 appropriations available to the Institute. The appropriations not used will be re-entered in the Institute’s budgets for the years 2015-2017 as stipulated in the Institute’s Financial Regulation.

OTHER COMMENTS

14.

While the KICs are to develop strategies for financial sustainability, to date, and in the fifth year of their existence, they remain fully dependent on financing by the Institute and KIC partners.

15.

Since its creation in 2009, the Institute has suffered from high staff turnover and instability at management level. In June 2014, the Governing Board decided to second the Institute’s Director on a long-term research mission to the European University Institute in Florence for the remaining eleven months of his mandate. The interim Director took over duties in August 2014 (just after his recruitment and appointment as Chief Operating Officer (COO)) and is now the fourth person occupying the Director’s post within a period of six years. The vacancy notice to recruit a new Director was published in July 2015.

16.

Two of the three Head of Unit posts have been vacant since 2013. One is occupied ad interim since 2013 which is in contradiction with the Staff Regulations that stipulate a maximum period of one year. The other is currently occupied by the COO who also serves as the interim Director and who thus fulfils three roles at the same time.

17.

Although the situation has improved in comparison with 2013, 20 % of the posts in the EIT establishment plan were still vacant at the end of 2014 (compared with one third at the end of 2013).

FOLLOW-UP OF PREVIOUS YEARS’ COMMENTS

18.

An overview of the corrective actions taken in response to the Court's comments from the previous years is provided in Annex I.

This Report was adopted by Chamber IV, headed by Mr Milan Martin CVIKL, Member of the Court of Auditors, in Luxembourg at its meeting of 15 September 2015.

For the Court of Auditors

Vítor Manuel da SILVA CALDEIRA

President

(1) OJ L 97, 9.4.2008, p. 1.

(2) Annex II summarises the Institute's competences and activities. It is presented for information purposes.

(3) These include the balance sheet and the statement of financial performance, the cash flow table, the statement of changes in net assets and a summary of the significant accounting policies and other explanatory notes.

(4) These comprise the budgetary outturn account and the annex to the budgetary outturn account.

(5) Articles 39 and 50 of Commission Delegated Regulation (EU) No 1271/2013 (OJ L 328, 7.12.2013, p. 42).

(6) The accounting rules adopted by the Commission’s accounting officer are derived from the International Public Sector Accounting Standards (IPSAS) issued by the International Federation of Accountants or, where relevant, the International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board.

(7) Article 107 of Regulation (EU) No 1271/2013.

(8) Regulation (EU, Euratom) No 966/2012 of the European Parliament and of the Council (OJ L 298, 26.10.2012, p. 1).

ANNEX I

Follow-up of previous year’s comments

Year	Court's comment	Status of corrective action (Completed/Ongoing/Outstanding/N/A)
2012	In addition to the matter described in paragraphs 9 to 13, budgets for grant agreements signed in 2010 and 2011, which resulted in payments in 2012, were not sufficiently specific. There was no link between the approved funds and the activities to be implemented. Grant agreements did not set individual thresholds for specific cost categories (i.e. staff costs, sub-contracting, legal services, etc.) and did not include rules for the procurement of goods and services by the KICs and their partners. EIT also carried out technical verifications for all funded projects as part of its ex ante verifications. However, there was a lack of quantifiable targets that hampered an effective assessment of project activities and results. Business plans did not define in detail the activities to be implemented; nor did they set clear milestones, deliverables per activity or quality criteria. Out of the committed appropriations carried over from 2011 amounting to some 22 million euro, some 10 million euro (45 %) were cancelled in 2012. The high level of cancellations is mainly due to lower than estimated costs claimed by beneficiaries under 2011 grant agreements (9,2 million euro or 92 % of cancelled carry-overs).	Ongoing
2013	In 2013, the Institute made final payments and clearings of pre-financings (transactions) for grants amounting to 84,1 million euro (2012 activities). Grant expenditure represents some 97 % of total 2013 expenditure. All grant transactions are subject to review by the Commission before authorisation by EIT. The Institute itself continued to make considerable efforts to implement effective ex ante verifications with the aim of providing reasonable assurance on the legality and regularity of grant transactions. About 87 % of grant expenditure claimed by the KICs is covered by certificates issued by independent audit firms contracted by the KICs and their partners. EIT itself carried out ex ante verifications consisting of comprehensive desk checks. Supporting documents obtained from the KICs and their partners were reviewed by EIT in the case of particular risks identified. The Court found however that, although the quality of the audit certificates is improving, in part due to better guidance, there is room for further improvement in the work of the independent audit firms, in general.	Completed
2013	In order to have a second layer of assurance on the legality and regularity of grant transactions, EIT contracted complementary ex post verifications for grant transactions that were carried out by an independent audit firm. The cost claims of 29 of the 300 KIC partners were verified ex post, corresponding to 29 % of the total grant transactions made in 2013. Ex post verification results confirmed that ex ante verifications are improving, but not yet fully effective. On the basis of the errors detected by the ex post verifications, EIT decided in 2014 to recover a total amount of 5 75 593 euro, corresponding to 3 % of the audited 2012 grants.	Completed
2013	Payments amounting to some 6 65 000 euro and 1 05 000 euro, in respect of two framework contracts which had been concluded in 2010 and 2012 using a negotiated procedure, were made in 2013. From the audit it emerged that the use of a negotiated procedure was not justified, the resulting payments are therefore irregular.	Completed
2013	The combined error rate of the matters explained in paragraphs 9 to 11 is between 2 % and 3 % of total 2013 expenditure.	Completed
2013	The Framework Partnership Agreements (FPA) with the three KICs stipulate that the EIT financial contribution may cover up to 25 % of the KIC’s global expenditure over the first four years, from 1 January 2010 to December 2013. According to the figures reported by the KICs, this ceiling was respected by all three KICs. However, as these figures will not be audited before 2015, there is no appropriate audit evidence that the EIT funding did not exceed this 25 % ceiling.	Ongoing
2013	In 2013 the overall level of committed appropriations was 97 %, indicating that overall commitments were made in a timely manner. The budget implementation rate was low, however, at 74 % of the EU contributions for title I (staff expenditure), which is mainly related to the high turnover of staff and the outstanding adoption of the regulations on salary adjustments.	N/A
2013	The Institute carried over committed appropriations under title II (administrative expenditure) amounting to 1 93 420 euro (24 %). Carry-overs mainly concerned invoices not yet received and ongoing IT projects. It did not implement 91 918 euro (29 %) of the committed appropriations carried over from 2012 to 2013 under this title, which were largely due to overestimated costs for a Governing Board meeting.	N/A
2013	The Institute had budgeted 3 4 0 78 025 euro under title III (operational expenditure) for KIC grants. The relatively low execution rate of 82 % is due to the fact that the KICs did not fully absorb the available funding for 2012 activities (2012 grants).	N/A

ANNEX II

European Institute of Innovation and Technology (Budapest)

Competences and activities

Areas of Union competence deriving from the Treaty

(Article 173 of the Treaty on the Functioning of the European Union)

The Union and the Member States shall ensure that the conditions necessary for the competitiveness of the Union’s industry exist.

For that purpose, in accordance with a system of open and competitive markets, their action shall be aimed at:

—	speeding up the adjustment of industry to structural changes,

—	encouraging an environment favourable to initiative and to the development of undertakings throughout the Union, particularly small and medium-sized undertakings,

—	encouraging an environment favourable to cooperation between undertakings,

—	fostering better exploitation of the industrial potential of policies of innovation, research and technological development.

Competences of the Institute

(Regulation (EC) No 294/2008 of the European Parliament and of the Council as amended by Regulation (EU) No 1292/2013 of the European Parliament and of the Council)

Objectives

The Institute’s objective is to contribute to sustainable European economic growth and competitiveness by reinforcing the innovation capacity of the Member States and the Union. It shall do this by promoting and integrating higher education, research and innovation of the highest standards.

Tasks

In order to achieve its objective, the Institute shall:

(a)	identify its main priorities and activities;

(b)	raise awareness among potential partner organisations and encourage their participation in its activities;

(c)

select and designate KICs in the priority fields and define their rights and obligations by agreement; provide them with appropriate support; apply appropriate quality control measures; continuously monitor and periodically evaluate their activities; and ensure an appropriate level of coordination between them;

(d)	mobilise funds from public and private sources and use its resources in accordance with this Regulation. It shall in particular seek to raise a significant and increasing proportion of its budget from private sources and from income generated by its own activities;

(e)	encourage the recognition in the Member States of degrees and diplomas which are awarded by higher education institutions that are partner organisations and which may be labelled EIT degrees and diplomas;

(f)	promote the dissemination of good practices for the integration of the knowledge triangle in order to develop a common innovation and knowledge transfer culture;

(g)	seek to become a world class body for excellence in higher education, research and innovation;

(h)	promote multidisciplinary approaches to innovation, including the integration of technological, social and non-technological solutions, organisational approaches and new business models;

(i)	ensure complementarity and synergy between the Institute's activities and other Community programmes.

(j)	promote the KICs as excellent innovation partners inside and outside the Union;

(k)	establish a Stakeholder Forum to inform about the activities of the EIT, its experiences, best practices and contribution to Union innovation, research and education policies and objectives and to allow stakeholders to express their views.

Governance

Governing Board

Composition

The Institute's Governing Board (GB) consists of 12 appointed members providing a balance between experience and excellence in business, higher education and research, and three representative members proposed by the Knowledge and Innovation Communities (KICs). The European Commission has observer status.

Tasks

The Governing Board is responsible for steering the activities of the Institute, for the selection, designation, grant allocation to and evaluation of the KICs, and for all other strategic decisions.

Executive Committee

Composition

The Executive Committee consists of four Governing Board members, including the Chairperson and Vice-Chairperson. It is chaired by the Chairperson of the Governing Board.

Tasks

The Executive Committee oversees the running of the Institute and takes such decisions as are necessary between meetings of the Governing Board.

Director

Appointed by and responsible to the Governing Board for the administrative and financial management of the Institute; the Institute's legal representative.

External audit

European Court of Auditors.

Discharge authority

European Parliament acting on a recommendation from the Council.

Resources made available to the Institute in 2014 (2013)

Final Budget

235,40(142,20) million euro for commitment appropriations and 174,91 (98,76) million euro for payment appropriations.

Staff as at 31 December 2014

Authorised posts: 60 (58)

Posts occupied: 48 (41)

Other posts: 0 (0)

Total staff: 48 (41) assigned to the following duties:

—	operational tasks: 33 (25)

—	administrative and support tasks: 15 (16)

Products and services in 2014

—	Selection and nomination of two new KICs in the areas of Health and Raw Materials by the EIT Governing Board in December.

—	Decision of the Governing Board on 11 December 2014 to allocate in 2015 a total of 268 million euro to the funding of KIC Value Added Activities for the five KICs after the implementation of a process of Competitive Funding corresponding to 40 % of the overall budget.

—	The three KICs managed a total budget of 21 5 2 64 780 euro for EIT funding of KIC Value Added Activities and a budget of 1 08 7 4 26 142 euro for non-EIT Funding of KAVA activities and complementary activities.

—	The total number of KIC partners involved in the three KICs rose to 605 organizations, i.e. 216 for Climate-KIC, 122 for EIT ICT Labs, and 267 for KIC InnoEnergy.

—

The KICs provided EIT with 6 core Key Performance Indicators and their respective supporting documents for the year 2013; they were assessed and validated by EIT, as part of the KICs past performance assessment in view of the competitive funding process for the 2015 allocation. The KICs also provided EIT with estimates for their 2014 Key Performance Indicators.

—	Organisation of the EIT 2014 Call for Knowledge and Innovation Communities (KICs) Information Day in Budapest (Hungary) on 14 March 2014.

—	Development of a refined Strategy for the EIT Awards (including conceptualisation of a third category, i.e. EIT Innovators Award).

—	Development of a refined Concept for the EIT Roundtable of Entrepreneurs.

—	Adoption of the EIT Community Brand Book and launch on 1 December 2014.

Source: Annex supplied by the Institute.

THE INSTITUTE’S REPLY

10.

On the basis of the audit certificates obtained for KIC complementary activities, the EIT funding percentages for the period 2010-2014 are 16 % for Climate KIC, 19 % for KIC InnoEnergy and 21 % for EIT ICT Labs. All of these are well below the 25 % ceiling set out in the EIT-KIC Framework Partnership Agreements. In addition, the EIT has drawn valuable conclusions from the review of KCA portfolios mentioned by the European Court of Auditors that will be used to improve the relevance of KIC complementary activities as well as the link between KIC complementary activities and KIC added value activities funded by the EIT.

12.

The EIT agrees that there is still room for improvement in the verification of KICs’ performance. However, the ex-ante technical assessment of the implementation of KIC activities has already improved significantly in comparison with previous years. The 2013 KIC Reports were prepared in accordance with the improved Guidelines for the Preparation of Reports issued by the EIT. A structured analysis of the vast amount of information received, complementing the work done by external experts, allowed the EIT to obtain a satisfactory level of assurance about the provision of deliverables by KICs, which were included in the Business Plans. As a result of improved guidance provided by the EIT to the KICs, Business Plans for 2014 and onwards provide significantly more details on each planned KIC added value activity. Moreover, a more robust methodology is now in place to assess the KICs’ performance based on the reporting.

Notwithstanding the comment of the European Court of Auditors on cases of partial achievement of Business Plan objectives, it is important to note that the EIT does not accept costs associated to non-implemented parts of KIC added value activities. Furthermore, if a KIC underperforms in its activities compared to the Business Plan targets in a given year, this will have a negative impact on the maximum grant allocated to that particular KIC for year N+2, as a result of the EIT’s annual competitive funding allocation exercise.

13.

Significant uncertainties surrounded the EIT’s 2014 annual budget due to the ongoing negotiations related to the 2014-2020 Multiannual Financial Framework and Horizon 2020. Therefore, the EIT Governing Board took a prudent approach and decided in September 2013 to allocate only 180 million euro, as a first tranche, for the 2014 grant agreements. After the 2014 annual budget had been confirmed, the EIT awarded further grants totalling 38,5 million euro, as a second tranche, to the three KICs in March 2014. However, it was not possible to use the full amount of the remaining commitment appropriations, as KICs had requested less EIT grant than what would have been possible to be awarded on the basis of the remaining available EIT budget. Furthermore, as the second tranche of grants was allocated when three months had already passed from the calendar year, awarding higher amounts would have put in risk the full implementation of the Business Plans.

14.

While the EIT agrees that the EIT grant was the main source of funding for KIC added value activities in 2013, it is important to note that the steps made by KICs by developing strategies for financial sustainability are in full compliance with the relevant legal obligations. Pursuant to the EIT Founding Regulation, a KIC ‘shall normally have a time-frame of seven to fifteen years’. Furthermore, the EIT Strategic Innovation Agenda provides that ‘while KICs will not be fully financially independent from the EIT during the first years of operation, they will be encouraged to become sustainable in the medium-term; i.e. gradually reduce their dependency from EIT funding for their further consolidation and further expansion’.

In line with the EIT Founding Regulation, KICs are further improving their strategies for financial sustainability. A summary of these strategies has been presented both in Business Plans 2014 and 2015. Furthermore, the EIT Governing Board adopted the ‘Principles on KICs’ Financial Sustainability’ on 5 March 2015. This document sets a clear direction by providing definitions, funding principles and incentives for the KICs to work towards financial sustainability. As a next step, the EIT will provide the KICs with specific guidelines for the proper implementation of the ‘Principles on KICs’ Financial Sustainability’, including a specific template for reporting on the progress made towards financial sustainability.

15.

In order to mitigate the high staff turnover, the EIT has identified improvements in the vacancy management and they are being implemented according to an action plan. In addition, the EIT put in place an appraisal and re-classification system in autumn 2014 to provide a better career perspective to EIT staff. The EIT also revised and improved its training policy. Moreover, exit interviews are now carried out with all staff analysing the reasons for departure. The EIT also set up a HR Working Group in 2015. Furthermore, the EIT has strengthened the middle management level, as a new Head of Unit has been appointed for managing grant operations and will take up duties on 1 August 2015. As a result of the ongoing mitigating actions, staff turnover has dropped to 12 % in 2014 as compared with the 20 %-25 % experienced in 2012-2013.

16.

The management vacancies are gradually being filled, i.e. the Chief Operating Officer is already in place since August 2014 and the Head of Unit Partnerships Management will take up duties on 1 August 2015. The position of the Head of Unit Policy and Communications is expected to be filled by end of 2015. The EIT will complete the recruitment procedures of the management posts in a fully regular and transparent manner, ending the temporary arrangements which became necessary in order to ensure operational continuity.

17.

Whilst accepting the comment of the European Court of Auditors on the vacancy rate at the end of 2014, it is important to note that, as of June 2015, there are only seven vacant positions out of the 60 authorised posts in the EIT, i.e. the vacancy rate has dropped to 12 % from 20 % in the first half of 2015. The remaining vacant positions are expected to be filled during 2015.

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