Division over how to account for research expenses

A political struggle is under way over how universities and research centres should account for expenses in the European Union’s (EU) upcoming Horizon 2020 research programme. With a projected €70 billion budget from 2014-20, the sums available are significant.

On the one side is the European Commission, which in the name of simplification wants to use flat-rate grants that give universities the freedom to spend research grants as they see fit, as long as the promised outcome is achieved.

And on the other is the European University Association (EUA), which sees value in the old system – used in the outgoing EU Seventh Framework Programme, or FP7 – where project costs are fully accounted for in detail, and recouped through presentation of receipts and spending records.

In debates on the shape of Horizon 2020 at the European parliament, the EUA is backing proposed amendments that would allow universities and research centres attracting Horizon 2020 grants to account for spending using the old system.

“The EUA strongly supports the European parliament’s proposal that an option for reimbursement based on full costing methodologies should be retained,” it said in a recent note.

The association is concerned that the EU Council of Ministers (representing member states) is backing the commission line: both the council and parliament must back any final system for it to be approved.

Current proposals foresee the EU reimbursing 100% of eligible direct costs in Horizon 2020 projects and between 20% and 25% of the indirect costs of projects.

The association said that by developing full costing methodologies and systems to operate them, universities improve their accounting controls. Forcing universities to abandon them would be “counterproductive”, it argued:

“Evidence from good practice examples show how the current FP7 reimbursement rules have acted as a driver for universities to develop full costing. EUA firmly believes, therefore, that it would be a backward step to exclude reimbursement based on full costing methodologies in Horizon 2020.”

Flat rates key to simplified procedures

It will be a tough task for the EUA to change the commission’s mind, as flat-rate systems are a key part of simplified procedures in spending and reporting on EU grants written into a new EU financial regulation laying out the simplified rules.

This was announced in October 2012, and entered into effect on 1 January 2013. It encourages accountants and financial officers administering EU-provided money to spend it in lump sums, unit costs and flat rates for small amounts, instead of reimbursing costs claims based on paperwork evidence.

According to the October regulation, flat rates will be calculated using statistical data or on previous costs related to similar activities with the same outcome.

And the commission will also be able to calculate lump sums on a case-by-case basis, depending on organisations benefiting from the grant, looking at the beneficiaries’ past spending records “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 European Commission, is that instead of gathering every little proof of expenditure, grant beneficiaries will have to deliver the results they have promised – and then the money will continue to flow (or won’t have to be paid back).

“This new regulation brings significant improvements to all beneficiaries of EU funding,” said European Budget Commissioner Janusz Lewandowski when announcing the simplification in October.

“We succeeded in reducing administrative burden for recipients of union funds, which translates into easier access and a shortened time span for getting funding from the European budget,” he continued.

Commission budget spokesperson Patrizio Fiorilli added: “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.”

Peter Walton FCCA, professor of accounting at the ESSEC Business School in Paris, noted: “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.”

He added: “The supplier just has to decide whether they can operate economically within the offered tariff, and if successful just claim it without having to provide endless vouchers”, he explained.

But for universities that have already set up receipt-based accounting systems to work with the FP7, a move to flat rates could be disruptive, as they may use these procedures for all spending.

At best, universities might have to operate parallel systems: “I don’t think that lump sums and flat rates impact on us an awful lot,” said Judith Mogra, head of research finance at Britain’s University of Leicester. “Our own financial regulations require us to report actual costs incurred for any travel and costs, so we would still have to use actual costs reimbursements.”

Some possible benefits

There are some other changes, however, that might offer benefits.

Unlike in the past, organisations benefiting from European money for their research projects will no longer have to open separate interest-bearing bank accounts. Moreover, the commission said it would no longer request that the interest generated, if any, be paid back.

This would have a real impact on the work of accountants and financial officers, according to Judith Mogra. “That removes a whole level of administration.”

Another element that Brussels is reforming is that grant recipients will no longer have to pay Brussels all profits they earned as a result of work funded by European financing. The European Commission will now ask for a portion of the profits to be paid – and that will correspond to the proportion of the initial costs financed by EU money.

However, there is at least one practical issue left unresolved by the new financial rules: the reporting cycle, which for research projects currently spans 18 months rather than a year.

Grantees funded by FP7 are required to submit a statement of the costs incurred every one-and-a-half years during the project, which leaves a lot of uncertainty regarding currency exchange rates.

“When we convert from Sterling into Euros, we use the exchange rate of the day after the period on which we are reporting,” explained Judith Mogra. “When you do it every 12 months, this kind of fixes the exchange rate,” she continued, noting that a yearly reporting cycle is preferable, in order to have a better idea of how much an amount of money spent in pounds will be worth in Euros in the moment of reporting the costs to Brussels.

Fiorilli said the reporting cycle for research projects remains unchanged so far, but it is different for each funding programme, taking into consideration the duration and the details of the supported projects.

Besides making life easier for accountants and their organisations, Brussels argues that the new rules increase transparency in the way European taxpayers’ money is spent, and prevent fraud.

According to Walton, the rules will make combating fraud easier since the commission will pay beneficiaries only if the work has been done based on a set price. But there are pitfalls, he warned.

“The problem will be the level at which the price is set,” Walton explained, recalling how in France, where the government used to set audit fee levels that became unrealistic over time, auditors colluded with clients to find ways of making the work financially viable.