Final report rejected, institution asked to return funding and prosecute my supervisor

You are absolutely not responsible for returning any funding, certainly not at a moral level and almost surely not legally either. You were engaged in research to the best of your ability; as you were not the person who obtained and was responsible for the funding, you are not responsible to the funder for any failures.

Moreover, I think it is pretty unlikely that the funding body will actually claw back any money from your former supervisor. Unless there was genuine skullduggery and/or intent to misuse the funds, the worst that is likely to happen is that the supervisor will be required to resubmit a much better explanatory report.

I am not a lawyer, but I live in the same country as indicated on OP's profile so I can add some specifics.

Per Czech law, not even your supervisor is the bearer ("nositel") of the grant; the research institution is. There have been at least a few cases where the director of a research institute rejected a proposal by a research team to apply for a very large and realistically obtainable grant, because the particular grant conditions meant that the whole institute would end up in financial difficulties should any objectives be unattained or disputed.

Likewise, the institute (university, faculty) needs to deal with any situations like the loss of the principal researcher along the route. That just happens.

You are not morally or financially responsible and neither is your supervisor (fully financially responsible) unless he can be proven to have caused the situation intentionally or in connection to alcohol or drugs, or WITHOUT any connection to his normal job description. First it would be unusual and difficult for the employer to assert his liability in the first place, and second, the liability would be capped at 4.5 times his average salary. On the other hand, your supervisor will likely see a reduced salary bonus or other indications of his sudden unpopularity.

(Outside of the Czech Republic the legal/contractual situation may be more complicated.)

This situation isn't exactly a career promoting achievement for your supervisor and you can learn some lessons from it as well.

Moral/ethical liability and fiscal liability are two different things. I am not sure how things work in Europe, but I would guess that the administrators above you are on the hook. I would avoid getting involved if possible. Good luck.