risk analysis (uver)

Risk analysis

(UVER) Luigi Guerci

Public Investment Verification Unit (UVER)

The organisational principles at the foundation of the management and control system defined by the Community regulations refer to the following key elements of the system itself:

• integration of management and control system components;• separation of functions;• risk assessment.


Integration of management and control system components (art. 71 Reg. (EC) 1083/06 and annex XII Reg. (EC) 1828/06)

•management activities (programming, ordinary management, payment,reporting, etc);•risk assessment;•routine check activities (1st level);•sample check activities (2nd level);•monitoring system.


It is a sequential procedure, where each component may affect another, regardless of the sequence of the process.


Management activities must ensure the effectiveness and correctness of theImplementation

Risk analysis is the activity that allows to identify and oversee those internal and external factors that may compromise the fulfilment of intervention objectives, withspecial reference to the objectives of sound financial management.


Routine check activities (1st level) are carried out in parallel with interventionmanagement and are represented by all those controls accompanying the activities of the Managing authorities and shall include: - administrative check regarding 100% of applications for payment - on the spot check on a sample basis

Art. 60 let. b 1083/2006


Sample check activities (2nd level) are aimed at verifying the efficacy of themanagement and control systems implemented and, based on selective criteria and on a risk analysis, the statements of expenditure presented at the various levels involved

Public Investment Verification Unit (UVER)Routine check activities (1st level)

First level activities

Sequence of activities

Administrative Checks

Art. 13 par 2 lett. A 1828/06

On the Spot check Art 13 par. 12 lett. B

Reg 1828/06

Self control Administrative check Risk analysis Sampling

operationsOn the Spot

check

Tipology control

Control

activitiesC

ontolrepresentativeness

Alloperations

Alloperations

Sample check


Sampling activities are performed on reported eligible expenditure based onthe administrative check.


For assessment purposes, risks may be classified as:

- inherent risks (IR) of the management system- control risks (CR), i.e. the possibility that a systematic control be unable to prevent or detect errors or irregularities.


Inherent risks (IR) of the management system are mainly related to:

- type of operation involved - type of beneficiaries involved


The Operation classes considered are the following:1. construction of public works2. procurement of goods and services3. granting of funds and services to individual beneficiaries4. training

the adoption of the operation class is proposed as a baseline for the identification of management macro-processes and the relevant risks


To define the risk level of each macro-process we have considered the following main factors:- number of activities into the macro-process- number of administrative documents handovers- number of entity involved and number of level of responsibility


According to these factors we can identify different level of risk as follow:

High risk: 1. construction of public works with presence of intermediate body; 2. granting of funds and services to individual beneficiaries with presence of intermediate body;3. training with presence of intermediate body;


Medium risk:

1. construction of public works; 2. granting of funds and services to individual beneficiaries;3. training;4. procurement of goods and services with presence of intermediate body

Low risk:

1. procurement of goods and services;


With reference to risk level associated with Beneficiaries we can identify:

- Public Administrations- Public Bodies- Private Bodies

In this case, the risk level is connected to the presence of public controls and to the solvency capacity in case of recovery of sums wrongly paid.


According to these factors we can identify different level of risk as follow:

High risk: Private Bodies Beneficiaries

Medium risk: Public Bodies Beneficiaries

Low risk: Public Administrations Beneficiaries


Combining risk levels obtained considering type of operations (Macro process) and type of Beneficiaries we have the following:

Type of Macro Process Private Body Public Body Public Administration

Granting of funds and services to individualbeneficiaries with I .B.; H Mtraining with I .B.; H M LConstruction of public works with I .B. ; M LGranting of funds and services to individualbeneficiaries; H Mtraining; H M LConstruction of public works; M Lprocurement of goods and services with I .B. M Lprocurement of goods and services L L

Type of Beneficiaries


We can now identify the values of the Inherent Risk (I.R.) for each risk level:

High risk: IR=1

Medium risk: IR=0,65

Low risk: IR=0,45


Self control risk

The risk level has to be found in relation to the financial impact of irregularities detected during the administrative check regarding 100% of applications for payment


We have set the following level of self control risk:

High self control risk: financial impact of irregularities detected during the administrative check over 30% of the reported expenditures

Medium self control risk: financial impact of irregularities detected during the administrative check between 10% and 30% of the reported expenditures


Low self control risk : financial impact of irregularities detected during the administrative check under 10% of the reported expenditures


According to previous factors we can now identify the values of the Self Control Risk (C.R.) for each risk level:

High self control risk: CR=1

Medium self control risk: CR=0,28

Low self control risk: CR=0,17


We can now classify all operations, with eligible reported expenditure after the administrative check, in different group according to the general risk level(Inherent risk + Control risk) obtaining the following table


Type of Macro ProcessPrivate Body

Public Body

Public Admin.

Private Body

Public Body

Public Admin.

Private Body

Public Body

Public Admin.

Granting of funds and services toindividual beneficiaries with I .B.; 1 0,65 0,28 0,18 0,17 0,11

training with I .B.; 1 0,65 0,45 0,28 0,18 0,13 0,17 0,11 0,08

Construction of public works withI .B. ; 0,65 0,45 0,18 0,13 0,11 0,08

Granting of funds and services toindividual beneficiaries; 1 0,65 0,28 0,18 0,17 0,11

Training; 1 0,65 0,45 0,28 0,18 0,13 0,17 0,11 0,08

Construction of public works; 0,65 0,45 0,18 0,13 0,11 0,08

Procurement of goods and services with I .B. 0,65 0,45 0,18 0,13 0,11 0,08

procurement of goods and services 0,45 0,45 0,13 0,13 0,08 0,08

Low self control riskHigh self control risk Medium self control risk


Sampling activities are performed in relation to:- risk level- financial dimension- number of operation

Firstly we can identify our sample considering a higher rate of expenditures in connection with higher Risk level


Case 1: Y 0.65, N < 100

High riskLow number of operations

The sample shall identify operations for over 30% of expenditures


Case 2: Y 0.65, N > 100

High riskHigh number of operations

Firstly we organize operation in a decreasing order

The sample shall identify N1 operations for over 30% of expenditures of the first 100 biggest operations


Than we identify N2 operations covering the 15% of expenditures of the group from operation 101 and operation 500

In the end we identify N3 operations covering the 6% of expenditures of the group from remaining operations

The number of operations in our sample will be N1 + N2 + N3


Case 3: 0,17 Y 0.45, N < 100

Medium riskLow number of operations



Case 4: 0,17 Y 0.45, N > 100

Medium riskHigh number of operations




Case 5: Y < 0.17, N < 100

Low riskLow number of operations



Case 4: Y < 0.17, N > 100

Low riskHigh number of operations




This methodology ensure, in case of high number of operations (up to 1.800) that the sample will cover roughly 12% of expenditures for group characterized with an high risk level and roughly 4% of expenditures for group characterized with a low risk level


Rate of expenditures to be checked on a sample basis considering risk level and number of operations

High Medium Low

Projects Y=0,65 0,17<=Y<=0,45Y<0,17

N1 for N=100 30% 20% 10%

N2 for 100<N<500 15% 10% 5%

N3 for N>500 6% 4% 2%

Risk level

risk analysis (uver)

Documents

levelsample check activities

ordinary management

spot check art

levelmonitoring system

onthe administrative

control systems

systematic control

construction of public