Financial Management and Internal Control

This section reports on the control results and other relevant information that supports management's assurance on the achievement of the financial management and internal control objectives. It includes information necessary to establish that the available evidence is reliable, complete, and comprehensive. It covers all activities relevant to the Chips Joint Undertaking.

The revised internal control framework of the Chips JU was adopted by the Governing Board (GB) in August 2020 (Decision GB 2021.02, Annex 11). The revised Internal Control Framework is based on the framework adopted by the European Commission that consists of five internal control components and 17 principles based on the COSO 2013 Internal Control-Integrated Framework.

The revised internal control framework considers the structure and size of the Chips JU, the nature of its tasks, and the financial and operational risks involved. The Executive Director and other members of the Chips JU’s management, together with the Internal Control and Audit Manager and the Chips JU staff at all levels ensure the implementation of the internal control framework.

The priority objective remains to implement and maintain an effective internal control framework so that reasonable assurance can be given that resources assigned to the activities are used according to the principle of sound financial management and control procedures in place give the necessary guarantees concerning the legality and regularity of transactions. The implementation of the internal control framework is assessed by the internal auditor (Internal Audit Service of the Commission) and the internal audit capability. At this point in time, controls are present and are assessed as functioning effectively.

Control results

The Chips JU has a clear control strategy, which is multiannual in nature and combines ex-ante and ex-post controls while taking cost-efficiency into consideration.

Effectiveness of controls (ex-ante and ex-post controls)

In 2024, the JU conducted the 2023 appraisal exercise and was concluded on 14 May 2024. The JU was able to proceed with the reclassification exercise following ED 2024.183. As a result, 4 temporary agents and 0 contact agents were reclassified.

Legality and regularity of the financial transactions

The Chips JU is implementing the Financial Rules which were adopted by the Governing Board Decision GB 2021.02, Annex 12. The Financial Circuits have been updated in 2024 by an Executive Director decision No 2024.150.

Financial procedures

Ex-ante Controls on Operational Expenditure

In 2024, the Chips JU has been operating under three different regimes: - For the implementation of projects selected under H2020, in accordance with the H2020 common rules: ex-ante control of operational expenditure is implemented using the tools and methods developed by the European Commission. - For the implementation of projects selected under Horizon Europe (HE), in accordance with the HE common rules: ex-ante control of operational expenditure is implemented using the tools and methods developed by the European Commission - For the implementation of projects selected under DEP, in accordance with the DEP common rules: ex-ante control of operational expenditure is implemented using the tools and methods developed by the European Commission.

Ex-post Control of Operational Expenditure and Error Rates Identified

The operational expenditure of the Chips JU in 2024 can be split in three parts: H2020 payments (EUR 11 million), HE payments (EUR 453 million including EUR 378 million of pre-financing) and DEP payments (EUR 12 million of pre-financing).

The Common Audit Service (CAS) of the Common Implementation Centre of the European Commission carries out all audits for H2020 and Horizon Europe while HaDEA carries out all audits for DEP.

The JU has been cooperating with the other stakeholders of the H2020 research family on the implementation of the H2020 common Audit Strategy for interim and final payments of operational expenditure and in the definition of implementing rules.

For Horizon Europe (HE), the common Audit Strategy for interim and final payments of operational expenditure has been adopted in 2024 in close collaboration with the implementing services following the HE governance working arrangements under the coordination of the Common Implementation Centre and of the CAS.

For DEP, the common Audit Strategy for interim and final payments of operational expenditure has been adopted in 2024 under the coordination of DG CNECT of the European Commission. No audit has been launched in 2024 for the Chips JU as no interim or final payment has been processed in 2024.

The Chips JU works closely with CAS in the implementation of the common H2020 and HE audit strategy, contributes to the relevant working groups, provides inputs during the entire audit cycle from selection of audits to implementation of audit findings, and provides opinions on draft audit reports and extensions of systemic audit findings.

The main objective of the ex-post audit strategy is to provide the individual Authorising Officers with the necessary elements of assurance in a timely manner, thus allowing them to report on the budget expenditure for which they are responsible. Ex-post controls on operational expenditure contribute to:

• assessing the legality and regularity of expenditure on a multi-annual basis; • providing an indication of the effectiveness of the related ex-ante controls; • providing the basis for corrective and recovery mechanisms, if necessary.

The main legality and regularity indicators for payments made to beneficiaries, as defined in the ex-post audit strategy, are the representative and residual error rates detected through financial ex-post audits: • The cumulative representative error rate (RepER) is the detected error rate resulting from the representative audits. • The cumulative residual error rate (ResER) is the level of error remaining in the population after deducting corrections and recoveries made by the Chips JU. This includes the extension of audit results to non-audited financial statements of the audited beneficiaries to correct systematic errors.

The methodology applied is described in Annex 10: Materiality criteria. The targets set for this control system are, respectively: • For H2020, to ensure that the cumulative residual error rate remains within a range of 2-5 %, aiming to be as close as possible to 2%. Progress against Horizon 2020 targets is assessed annually based on the results of the implementation of the ex-post audit strategy and taking into account the frequency and importance of the detected errors along with cost-benefit considerations regarding the effort and resources needed to detect and correct the errors. • For HE, to ensure that the cumulative residual error rates do not exceed 2%. There is no representative error rate for HE yet as the ex-post audit campaign for HE has been launched by CAS in the second half of 2024. • For DEP, to ensure that the cumulative residual error rates do not exceed 2%. There is no representative error rate for DEP yet as the ex-post audit campaign for DEP has been launched by HaDEA in the second half of 2024. It should be noted, that since EU Framework Programmes are multi-annual, the effectiveness of the ex-post control strategies can only be measured and assessed fully in the final stages of the EU Framework Programmes, once the ex-post audit strategies have been fully implemented, and errors, including those of a systemic nature, have been detected and corrected. Therefore, the implementation of the audit results over time tends to lower the cumulative residual error rate thus increasing its difference with the representative detected error rate.

Ex-post control results of the H2020 programme globally as of 31/12/2024

The Horizon 2020 audit campaign started in 2016. At this stage, six Common Representative Samples with a total of 944 expected results have been selected. The error rates for Horizon 2020 on 31 December 2024 are: - Cumulative representative detected error rate for the Framework Programme: 3.55% - Cumulative residual error rate for the Framework Programme: 1.79%

Ex-post control results specific to the H2020 Chips JU population as of 31/12/2024

Cumulative representative detected error rate for the Chips JU: 2.24% - Cumulative residual error rate for the Chips JU: 0.85%, the latter staying below the targeted threshold of 2%.

The Chips JU audit coverage in term of audited EU contributions has reached 11.37% as of 31 December 2024. As of 31 December 2024, 145 beneficiaries have been subject to ex-post audits leading to a financial impact worth EUR 3.092.545 of EU contributions in favour of the Chips JU. 97% of the financial audit adjustments have been implemented as of 31/12/2024. The following table gives an overview of the status of individual audit assignments as of 31 December 2024:

Closed audits	H2020	HE
Representative	145	0
Risk based	0113.542.487,17	0

Closed audits

Closed audits	H2020	HE
Representative	5	7
Risk based	0	8

Ongoing audits

When an ex-post audit detects findings of a systematic nature, the Chips JU extends them to non-audited cost claims of the same beneficiary. As of 31 December 2024, 37 beneficiaries have been subject to an extension of systematic audit findings leading to a financial impact worth EUR 423.288 of EU contributions in favour of the Chips JU.

Fraud prevention, detection, and correction

In 2024, the Chips JU implemented the Common Anti-Fraud Strategy in the Research family (RAFS) which was last updated in December 2023. Following this latest update and the entry into force of the Chips Act in September 2023, the Governing Board has adopted in February 2025 a new anti-fraud strategy for the years 2025 to 2027 (GB Decision 2025.100). The Chips JU is represented in the Fraud and Irregularities in Research (FAIR) Committee. The FAIR Committee remains the main network and forum on anti-fraud matters, in which the Chips JU participates. Furthermore, most of the Chips JU staff members have participated in anti-fraud trainings with the latest one organised in November 2024. In 2024, the Chips JU’s activities focused on raising awareness about fraud risk across the Chips JU, continuing its cooperation with OLAF and the FAIR Committee activities. In 2024, the Chips JU identified and transmitted to OLAF four cases of suspicion of irregularities or suspected fraud while managing its project portfolio. OLAF concluded that the Chips JU took the relevant measures to protect the EU financial interests and reported one case to the EPPO which prompted the Chips JU to report two similar cases to EPPO. Based on the above information, the Chips JU has reasonable assurance that the anti-fraud measures in place are effective.

Assets and information, reliability of reporting

The assets reported by the Chips JU in the balance sheet 2024 mainly concern current assets, that represent around 63% of the total assets, specifically short-term and long-term pre-financing related to Horizon 2020 and Horizon Europe (26% of current assets) and short-term exchange receivables and non-exchange recoverable concerning central treasury liaison accounts (74% of current assets) and customers. The remaining 37% of the total value of assets correspond to non-current assets, mostly long-term prefinancing (99,9% of non-current assets) related to Horizon 2020 and Horizon Europe and a residual value of fixed assets (less than 0.1%). During the year 2024, two write-offs were processed for items disposed during the standard course of business. In September 2024, the Chips JU finalized successfully the migration to ABAC assets from a manual system. As of 31 December 2024, Chips JU had fixed assets with a gross value of EUR 245 thousand and a net value (after depreciation) of EUR 64 thousand. During the year, the assets are checked regularly as part of the quarterly controls performed by the Accounting Correspondent at the Chips JU and the Back Office Arrangement (BOA). It should be noted that in addition to the internal controls, the value of the pre-financing is safeguarded through the Mutual Insurance Mechanism and the value of the cash receivable from the EC is safeguarded by the standard cash management policies of the EC treasury.

Efficiency of controls (“Time to”)

The main efficiency performance indicators for the activities carried out in the Chips JU in Horizon 2020, HE and DEP Programmes are namely: • Time-to-Inform (TTI) represents the time needed by the Chips JU to manage the evaluation and selection phase from the Call deadline to informing the participants. • Time-to-Grant (TTG) represents the maximum of eight months between the Call deadline and grant signature. • Time-to-Pay (TTP) represents the outcome of the process for the payment

Indicator	Target	2024	2023
Average Time to Inform (TTI)	153 days	53 days	99 days
Risk Average Time to Grant (TTG)	245 days	251 days	218 days
Average Time to Pay (TTP) for cost-claims and final payments	90 days	64 days	67 days
Average Time to Pay (TTP) for pre-financing	30 days	7 days	14 days

Efficiency performance indicators

As in previous years, the Chips JU made all its payments on time and all indicators are better than targets except for the TTG for which the standard HE target is not directly applicable for Chips JU as a tripartite Joint Undertaking. Indeed, the Chips JU grant preparation is heavily affected by the fact that several grant agreements are prepared for each proposal (2 grants per beneficiary: one Chips JU grant and one national grant). Further in the 2023 calls, for some proposals, the availability of the Chips JU and up to 14 national budgets had to be considered and negotiated. In several cases some of these budgets were partially available or totally missing. This required extensive negotiations with consortia and the respective national funding agencies to ensure the proper replacement of partners and the preservation of original scope and objectives of the proposal. In addition, the TTG for 2023 calls was affected by the late declaration of usage of the Resilience and Recovery Facility by Spain as national contribution to Chips JU programme. This affected 7 out of the 18 projects in grant agreement preparation. Consequently, additional time was needed to introduce proper measures to avoid suspicion of double funding. This required an additional amendment to the PAB funding decision, adding time to the TTG. Based on the assessment of the above key indicators, it is considered that an efficient control system has been put in place.

Economy of controls

In this section, we report on the cost of the controls put in place in the Chips JU. The purpose of this section is to report on the overall assessment of the costs and benefits of controls. The information is summarised in the tables presented below:

Operational Expenditure (in EUR)	624.466.716
% in total expenditure	98.9%
Estimated cost of controls ex-ante	2.152.482
Cost of ex-ante controls as % of operational expenditure	0.34%
Total estimated FTEs (ex-ante & ex-post)	13.95
Estimated costs of total controls (ex-ante & ex-post)	2.439.557
Cost of total controls as % of operational expenditure	0.39%
Estimated Benefits of controls (EUR)	1.456.556

Operational Expenditure

Based on the above estimation, the cost of control remains very economical in proportion of the annual expenditures. The estimated benefits of control corresponds to ex-post audit financial adjustments and costs rejected at ex-ante controls in 2024. Detailed table of the FTEs performing the control activities:

Sector	Estimated FTEs allocated to controls	FTEs costs	Other costs related to controls	Total
Call management, selection and evaluation phase, Grant award, Grant management	12.3	1.982.560	169.922	2.152.482
Total cost of ex-ante controls	12.3	1.982.560	169.922	2.152.482
Total Ex-post control	1.65	287.075		287.075
Total (ex-ante + ex-post controls)	13.95	2.269.635	169.922	2.439.557

FTEs performing the control activities

Conclusion on the cost-effectiveness of controls

Based on the key indicators for legality and regularity of transactions, the key indicators for efficiency and for economy, the Chips JU has assessed the effectiveness, efficiency and economy of its control system and reached a positive conclusion on the cost-effectiveness of its control system.

Audit observations and recommendations

Internal Audit

Internal Audit Service

The IAS of the European Commission performs the role of Internal Auditor of the Chips JU. In 2022, the IAS carried out an in-depth risk assessment which led to the establishment of a strategic internal audit plan for the period 2023-2025.

Based on the 2023-2025 internal audit plan, the IAS performed an audit on HR management and ethics in 2024. The final audit report was issued in January 2025 and included three very important recommendations on the ethics framework, staff wellbeing and recruitment. The Chips JU has accepted all recommendations and will implement an action plan in 2025.

Considering the significant impact of the Chips Act on the Chips JU in term of additional EU budget (+ EUR 2.375 billion), new programme (DEP) and new activities (Pilot Lines, Design Platform, Competences Centres), IAS has decided to re-perform an in-depth risk assessment in 2025 to prepare the 2026-2028 strategic internal audit plan. The strategic internal audit plan will be subject to an annual review and the topics may be adjusted or new topics may be added to reflect any new and emerging risks as well as significant changes in the Chips JU processes.

Internal Audit Capability

Based on Article 32(2) of the SBA establishing the Chips JU and Article 30 of the Chips JU Financial Rules, the Governing Board established an Internal Audit Capability which provides independent, objective assurance to the Executive Director as to the effectiveness and efficiency of risk management, control and process in the Chips JU as defined in the Internal Audit Capability charter. The Internal Audit Capability is performed by the Internal Control and Audit Manager (ICAM). In January 2024, the IAC work plan for 2024 was approved by the Governing Board. The main activities in audit focused on coordinating the audit on HR management and ethics carried out by the IAS, on coordinating and following-up the audits carried out by the European Court of Auditors, the external auditor (Ernst & Young) and the Chips JU ex-post audits as per H2020 and HE Common Audit Strategies. The main activities in internal controls focused on performing the annual general risk management (please refer to section 4.3.2) and the annual self-assessment of the effectiveness of the Chips JU Internal Control Framework.

Audit of the European Court of Auditors

For the financial year ended 31 December 2023, the European Court of Auditors issued an unqualified (“clean”) audit opinion on the accounts of the Chips JU and on the legality and regularity of the payments and revenue underlying the 2023 annual accounts. The report concluded the following: • The Chips JU accounts for the year ended 31 December 2023 present fairly, in all material respects, the financial position of the Chips JU, the results of its operations, its cash flow and changes in net assets for 2023, in accordance with its Financial Rules and the accounting rules adopted by the Commission’s accounting officer which are based on internationally accepted accounting standards for the public sector. • The revenues underlying the accounts for 2023 are legal and regular in all material respects. • The payments underlying the accounts for 2023 are legal and regular in all material respects.

Without calling into question the European Court of Auditors´ unqualified opinion, ECA made observations on budgetary management and administrative procurement procedure. The Chips JU measures to address these observations are monitored by the Court. The report also included a follow-up of previous years observations which were all completed except common observations to Joint Undertakings on time recording, staff need assessment and risk-based grant management. Regarding management and control systems, ECA reported that their 2023 audits of randomly selected Chips JU payments to Horizon 2020 beneficiaries revealed no error. The full report, including the Chips JU’s replies, can be found here: Annual report on EU Joint Undertakings for the financial year 2023 The ECA report for the financial year 2024 is expected in the fourth quarter 2025.

Overall Conclusions

Assessment of the effectiveness of internal control (IC) systems

According to Article 14 of the Chips JU Financial Rules and Article 36 of the EU Financial Regulation, the internal control framework is designed to provide reasonable assurance regarding the achievement of the following five objectives: (1) effectiveness, efficiency and economy of operations; (2) reliability of reporting; (3) safeguarding of assets and information; (4) prevention, detection, correction and follow-up of fraud and irregularities, and (5) adequate management of the risks relating to the legality and regularity of transactions, taking into account the multiannual character of programmes as well as the nature of the payments concerned. As an entrusted body implementing the EU Budget, the Chips JU needs to ensure a proper management and control mechanism in accordance with Article 36 of the EU Financial Regulation and provide a level of assurance from its systems at least equivalent to the one of the European Commission. Since 2020, the JU has implemented the new Internal Control Framework proposed by the EC (GB Decision No 2021.02). In 2024, the Chips JU has assessed the effectiveness of its internal control systems based on the revised framework. The overall objective of the self-assessment exercise was to understand if all principles were present and functioning.

The Internal Control and Audit Manager of the Chips JU has performed an assessment of the entire internal control system of the Chips JU. The assessment is based on an evaluation of monitoring indicators defined in the revised Internal control framework and an analysis of information from various sources: • the indicators set out in the Internal Control Framework of the Chips JU for the 17 internal control principles (including the representative and residual error rates for Horizon 2020); • interviews with the management team and key staff members on the control activities and objectives of the Chips JU; • staff survey on internal controls; • the register on exceptions and non-compliance events. The Chips JU keeps a register of exceptions and non-compliance events to manage and monitor deviations from established processes and procedures. All deviations reported are recorded in the register and analysed to identify any control failures; • the observations and recommendations reported by the Internal Audit Service; • the observations and recommendations reported by the European Court of Auditors; • the report on periodic validation of Chips JU users access rights granted in ABAC.

The Chips JU has assessed the internal control system during the reporting year and has concluded that it is effective and that the components and principles are present and functioning as intended but the following main improvements had to be implemented: • Component “Control environment” A policy on managing sensitive function was adopted on 05/06/2024 by the ED decision No 2024.179. • Component "Risk assessment” The Chips JU anti-fraud strategy was updated, please refer to section 4.1.1.2 for further information. • Component "Control activities” The Joint Undertakings business continuity plan and disaster recovery plan was updated by a new plan adopted by the Joint Undertakings located in the White Atrium on 16/12/2024. A procedure for managing the new Chips JU activity in pilot lines was adopted on 27/01/2025 by the ED decision No 2024.227. A Chips JU risk-based ex-ante control strategy and implementation guidance were approved by the ED (Ares(2025)491505). • Component "Information & Communication” The mandatory information on recipients of EU funds (in accordance with Article 15.3 of the Chips JU financial rules) was made public by 30/06/2024.

Continuous monitoring

Continuous monitoring in the Chips JU is coordinated by the Internal Control and Audit Manager. Identified improvements during the self-assessment of the internal control system are followed up during the year, as per timeframe indicated in the relevant actions.

Risk assessment and management

Risk Management is one of the key elements in an effective internal control framework. The JU systematically analyses the risks in relation to its main activities at least once a year, develops action plans to address them and assigns staff responsible for implementing those plans. A risk is defined as "any event or issue that could occur and adversely impact the achievement of the Joint Undertaking´s, strategic and operational objectives. Lost opportunities are also considered as risks". Hence, risks relate to the non-achievement of objectives. In 2024, the Internal Control and Audit Manager of the Chips JU coordinated the annual risk assessment with the management team and as a result the risk register was updated with appropriate mitigating measures. The risk register documents the most significant risks and provides a record of risks and measures taken to manage them. Risks are assessed in terms of impact and likelihood, mitigation actions are proposed to reduce the probability of the risk materialising, or the severity of the exposure should the risk occur, owners of mitigating actions are identified and deadlines set.

Prevention of Conflict of Interest

Prevention of conflict of interests is addressed at different levels in the Chips JU. Boards members (PAB and GB) are asked to sign a declaration of interests at the time of their nomination. Signature of this declaration is a condition to access the documents and be invited to the meetings. At the beginning of each meeting, the Chair makes sure that no delegate is concerned by a specific conflict of interest. The rules of procedure of the concerned Boards include the relevant provisions on conflict of interests. Experts in evaluation procedures are requested to sign a declaration of absence of conflict of interests before accessing project proposals to be evaluated. Potential conflicts are solved by limiting access to some proposals. Members of evaluation and selection committees in procurement and recruitment procedures must also sign a declaration of absence of conflict of interests. Finally, staff members of the Chips JU at the time of recruitment sign a declaration of interests and a declaration of commitment and independence.