CONTENTS

REPORT OF THE EXTERNAL AUDITOR
ON THE FINANCIAL STATEMENTS OF
THE FOOD AND AGRICULTURE ORGANIZATION
OF THE UNITED NATIONS
FOR THE FINANCIAL PERIOD
1 JANUARY 2000 TO 31 DECEMBER 2001

GENERAL

Introduction

1. – The present report is being submitted on the results of the audit of the Food and Agriculture Organization (FAO) for the 2000-01 biennium. The scope of the audit was determined in compliance with Financial Regulations 12.1 to 12.10 of the Organization as well as with the Additional Terms of Reference Governing External Audit appended thereto. The audit was carried out at Headquarters and in the field offices. In 2001 and 2002, my staff visited ten FAO Representations (FAORs) in Asia (four), Africa (three), Latin America (two) and Middle-East (one) where they carried out financial and management audits and reviewed a selection of projects, especially the Special Programme for Food Security (SPFS), whenever applicable. Their observations and recommendations were reported separately to the Director-General. They have been incorporated in the present report when and where appropriate.

2. – The present report, which was written in English, includes the observations and recommendations arising from the audit of the financial statements of the FAO for the period 1 January 2000 to 31 December 2001 (first part) and from the management reviews conducted (second part). The third part addresses other matters such as losses written off and cases of fraud or presumptive fraud.

Audit of the Financial Statements

3. – My staff audited the financial statements of the FAO for the period 1 January 2000 to 31 December 2001, which were submitted by the Director-General. Compared to previous biennia (especially the last one), efforts were made to provide the biennial financial statements in advance of the 31 March deadline prescribed by Financial Regulation 11.5. However, the financial statements, which were provided to my staff on 8 March 2002, were not complete. They did not include the budget transfers in Statement IV and were still based on the actuarial value as at 31 December 1999 since the results of the latest valuation were not known yet. Moreover, since the outstanding obligations had been computed on a different basis compared to prior periods, the financial statements had to be revised and re-submitted.

4. – The revised financial statements, which also incorporated the results of the last actuarial valuation, were eventually provided to my staff on 4 April 2002 together with the statement of losses written off during the financial period, defined by Financial Regulation 10.4. With regards to the statement of ex-gratia payments made during the financial period, my staff were informed, on 20 March 2002, that there were none.

5. – The audit of the financial statements was carried out in accordance with the common auditing standards of the Panel of External Auditors of the United Nations (UN), the Specialized Agencies and the International Atomic Energy Agency. These standards require that the audit be planned and carried out so as to obtain reasonable assurance that the financial statements are free of material misstatement. The Director-General is responsible for preparing these financial statements, and I am responsible for expressing an opinion on them.

6. – The audit included an examination, on a test basis, of evidence supporting the disclosures in the financial statements. Also, it included assessing the accounting principles used and the compliance with legal authority as well as evaluating the overall presentation of the financial statements. Finally, an examination was also carried out in connection with the audit that I was requested to perform on the following separate financial statements for the programmes executed and/or implemented in cooperation and/or on behalf of other organisations, namely:

• the FAO/UN Population Fund (UNFPA) Status of Funds and Schedule by Project and Component as at 31 December 2001, submitted on 20 March 2002; and
• the FAO/UN Development Programme (UNDP) Status of Funds and Schedule of Expenditure as at 31 December 2001, submitted on 5 April 2002.

The audit enabled me to issue the unqualified audit opinion on the FAO financial statements, which is reproduced on page 1.

Review of Management Matters

7. – In addition to the audit of the accounts, my staff carried out two management reviews. The first one examined the implementation of the “Oil for Food” Programme, which financed humanitarian supplies to Iraq under the Security Council Resolution (SCR) 986. Like other UN agencies, the FAO, which was in charge of the agricultural component, supervised the Iraqi Government’s implementation of the programme in the central and southern Governorates and directly implemented it in the three northern Governorates. The combination of the surging oil prices and the removal of the ceiling on Iraqi oil export made the SCR 986 Programme reach unprecedented financial importance. It has become the largest programme ever managed by the FAO in its history [paras. 45 to 120].

8. – The second management review of the Organization’s internal controls [paras. 121 to 202] was conducted for the following reasons:

• As indicated in my previous report on the 1998-99 biennium [paras. 211 to 219], one of the cases of fraud reported raised the issue of internal controls on the use of the Organization’s resources.
• The changes introduced during past biennia in terms of decentralisation and implementation of new information systems (Oracle integrated software in particular) led to greater responsibility being granted to budget holders both at Headquarters and in the field. In my opinion, these changes should have led to a reassessment of internal controls since the overall function of oversight should not be carried out in the same way in a centralised or decentralised organisation.

9. – My staff also conducted a follow-up review of the following:

• Treasury management [paras. 203 to 239];
• Finance Division (AFF) reorganisation and staffing [paras. 240 to 254];
• Implementation of the SPFS [paras. 255 to 267].

Previous Recommendations

10. – The present report also includes comments on action taken in response to recommendations contained in previous reports when such matters remain significant enough to be brought to the attention of the Governing Bodies. Comments on such matters are either incorporated in the section where they belong or regrouped at the end of the report in a specific section where follow-up action is analysed and assessed.

SUMMARY OF RECOMMENDATIONS

11. - The table that follows recapitulates my recommendations. As requested by the Finance Committee at its 97^th session in September 2001, table 1 that follows indicates the relative priority of these recommendations (fundamental, significant or merits attention¹) as well as the timeline for their implementation.

FINANCIAL MATTERS

Format of the Financial Statements

Manual Adjustments

12. – No change was made to the format and presentation of the 2000-01 financial statements compared to the previous biennium. In my previous report [para. 23], I noted that the opportunity of implementing the Oracle system was not taken to eliminate the necessity of manually adjusting the Trial Balance in order to produce the financial statements. I also noted, however, the Organization’s intention to reduce the scope of the manual adjustments needed. Little progress was made in this regard for the 2000-01 biennium. Therefore, I recommend that the Organization critically review the chart of accounts to identify further possibilities of reducing manual adjustments.

Absence of Consolidation of non-main Stream Activities

13. – Since the 1994-95 biennium, the FAO financial statements consolidate all the operations of the Organization regardless of their funding (Regular Programme - RP or voluntary contributions). The FAO accounts are, however, not fully consolidated since the non-main stream activities of the Credit Union and the Commissary are still reported separately on a yearly basis. I have not raised the issue previously because I considered that there were more pressing priorities for the Organization. The Internal Audit raised it in 2001. They considered it sufficient to show a disclosure in FAO’s financial statements stating that the accounts of the Credit Union and the Commissary have not been consolidated and are reported separately. My staff concurred with such a recommendation, which was, however, not implemented for the 2000-01 financial statements because the Organization wished to have the opportunity to review the matter before making any decision.

14. - For the future, however, I am of the opinion that the accounts of the Credit Union and of the Commissary should be consolidated with the ones of the FAO in order to produce truly consolidated financial statements. It was argued that the accounting principle of substance over form would justify a separate financial reporting for the non-main stream activities of the Organization. In my opinion, and as detailed in the respective reports on the Credit Union and Commissary 2001 accounts, both are an integral part of the FAO. Subsequently, the final responsibility in case of failure of the Credit Union or the Commissary rests with the Organization. In my opinion, it would justify the consolidation of their accounts with the ones of the FAO. As previously indicated in my reports on the Credit Union and Commissary accounts for 2001, the decision to do so remains with the Governing Bodies. Therefore, I recommended that the advice of the Finance Committee be sought on this matter. At the time of writing my report, my staff were informed that the Organization agreed to review the issue of consolidated accounts based on considerations such as prior decisions of the Governing Bodies, generally accepted accounting principles and consistency with the other UN agencies reporting practices. The Organization would report the results of the review to the Finance Committee.

Presentation of Statement I

15. – In Statement I, two lines disclose miscellaneous and sundry income, respectively. As detailed in Note 7 to the financial statements, the former aggregates investment income, bank interest, lapse of accrued liabilities and other income. The latter is composed of Government Cash Contributions (GCC) to local operating costs, Information Products Revolving Fund (IPRF), gains or losses on exchange and sundries, as detailed in Note 8 to the financial statements. Since the distinction between miscellaneous and sundry income is not obvious, I recommend the following disclosure more in line with the presentation prescribed by Annex II to the UN Accounting Standards (UNAS) and the respective importance of the financial amounts concerned:

• The gains or losses on exchange would be disclosed separately in one line entitled “Currency exchange adjustments”;

• The proceeds of sales of information products and the revenue from advertising in and sponsoring of such products would be disclosed separately in one line entitled “Revenue producing activities”;
• The GCC would also be disclosed separately under the line “Government cash contributions for local costs”;
• The line entitled “Miscellaneous income” would regroup, as prescribed by Financial Regulations 4.4. and 7.1., lapse of accrued liabilities and other miscellaneous income.

Considering their importance, I would also consider appropriate to disclose separately (long-term) investment income and bank interest (in fact bank interest and short-term investment income) into one line entitled “Interest income”. However, this would require a change to Financial Regulation 7.1.

16. – Furthermore, I am of the opinion that prior period expenditures, which have always been reported as an offset to miscellaneous income, should be disclosed separately. This would be more in line with UNAS 17, which states the following: “Unusual items or prior period items should be disclosed if they have a material effect on the financial statements or schedules. Such items should be either:

(i) Reported by adjusting opening balances in the financial statements for the current period and amending the comparative information in respect of prior years which is included in the financial statements; or

(ii) Separately disclosed in the current financial statements.

In either case the disclosure relating to these items should be adequate to facilitate comparisons of the figures for the periods presented.”

I recommend that a new line entitled “Prior period expenditure” be added after the computation of the excess/shortfall of expenditure, as prescribed by Appendix II to the UNAS.

Disclosure for the Working Capital Fund and the Special Reserve Account

17. – Regarding the Working Capital Fund (WCF) and the Special Reserve Account (SRA), as recommended by my staff, the Organization agreed, starting with the 2002-03 financial statements, to expand the information presently disclosed in the notes with the following:

• established level of the WCF/SRA at the beginning of the biennium;
• adjustments made to the WCF/SRA level in the course of the biennium, if any;
• transfers from/to the WCF/SRA to/from the General Fund during the course of the biennium (all advances made by the WCF/SRA during the biennium should be indicated, even if they have been reimbursed since this information gives a good indication of the treasury situation of the Organization);
• for the SRA only: exchange difference for the biennium broken-down between the one related to the translation of foreign currencies and the one due to the forward exchange contract.

The Organization also agreed to include, for both the WCF and SRA, a detailed schedule of assessed contributions outstanding at the end of the biennium, in line with the schedule currently provided for RP assessed contributions.

Rounding Policy

18. – The UNAS are not prescriptive on the question of rounding. The UNAS 12 only states that “financial statements may be presented in thousands or millions of the currency of account, whichever is appropriate” but does not indicate any thresholds for rounding off in thousands or millions. Since the 1998-99 biennium, FAO’s financial statements have been presented in US Dollar thousands. Although the UNAS do not prescribe a specific disclosure on the policy used for rounding off in financial statements, I am of the opinion that a note on this matter would be worthwhile. Therefore, I recommend that, starting with the 2002-03 financial statements, a note relating to the rounding policy be included clearly indicating the level of rounding off. Should the FAO continue with its policy of adjusting line items for differences created by rounding so that totals equal the sum of the addends in a column, such should also be indicated in the note. Otherwise, the note should warn that totals might vary due to rounding. Last but not least, rounding off should not be permitted for ex gratia payments and written-off of losses of cash, commodities and other assets.

Financial Position of the Organization

Net Shortfall of Income over Expenditure

19. – Compared to the previous biennium, the financial position of the Organization as at 31 December 2001 weakened with a net shortfall of income over expenditure of US$30.2 million, as opposed to a net shortfall of US$25.9 million for 1998-99. Contributions received for the RP improved slightly over the last biennium (plus 1%) but fell short of the budgeted level by US$12.4 million, or 2%. Other income accruing to the RP was also below expectations as detailed below:

• Project servicing costs amounted to US$29,095 thousands only, broken down into US$26,500 for projects financed through voluntary contributions and US$2,595 thousands for projects’ funds received under inter-organisation arrangement with the UNDP. They amounted to US$33,041 thousands for the previous biennium (US$28,172 thousands and US$4,869 thousands, respectively).
• Income from jointly financed activities and services rendered was also below both the projections for the biennium and the previous biennium income.
• The major decline for miscellaneous income (only US$15,527 thousands compared to US$38.3 million expected and US$81.7 million in 1998-99) was due to the fall in long-term and short-term investment income.
• The sundry income was in fact a loss of US$38,964 thousands.

20. – Expenditures for the RP amounted to US$669,794 thousands, compared to US$696,337 thousands for the previous biennium, or a 3.8% decrease. In line with UNAS 37, they were the sum of disbursements made during the biennium as well as valid unliquidated obligations made against the appropriations for the biennium. Since the latter has not led to disbursements yet, the counterpart liabilities were disclosed under the line “Unliquidated obligations” in Statement II for an amount of US$47,498 thousands. As detailed in Note 9 to the financial statements, staff salaries and other human resources expenses represented the bulk of RP expenditures (US$398 million and US$72 million, respectively or 70% in total). It should be noted, though, that, in line with Conference Resolution 3/99, these did not include redeployment and separation costs disclosed separately as detailed in the paragraphs that follow.

Redeployment and Separation Costs

21. – A total amount of US$8,360 thousands is disclosed, in Statement I, under the line “Redeployment and separation costs”. As indicated by Note 10 to the financial statements, “Conference Resolution 3/99 authorised the Director-General to spend up to $9 million for the purposes of meeting redeployment and separation costs over and above the net budgetary appropriations approved for 2000-01. The same resolution authorised the advance of Working Capital Fund up to the amount of $9 million to complete restructuring pending eventual receipt of assessed contributions in arrears from the major contributor.” As also indicated by Statement I, an amount of US$10,576 thousands was spent for the same purpose in 1998-99 in line with Conference Resolution 7/97.

22. – My staff were provided with the list of the 172 staff members separated from the Organization in line with the Conference Resolutions mentioned above (110 in 1998-99 and 62 in 2000-01). As part of their review, they compared the list with the one of all consultants hired during the 2000-01 biennium in order to determine if some of the staff members separated during the period 1998 to 2001 had been subsequently hired back as consultants during the biennium. They found that this was indeed the case for 13 former staff members who had been separated (four in 2000-01 and nine in 1998-99) and had taken early retirement. Honorarium for a total amount of US$54,819.49 was paid to the four staff members separated in 2000 and hired again as consultants in 2001. For the nine former staff members separated in 1998-99 and hired again as consultants in 2000-01, honorarium amounted to US$150,436.92.

Basis of the Separation

23. – My staff reviewed all the files of the staff members concerned except one located in a Regional Office (RO). They noted that the staff members were terminated on the basis of Staff Regulation 301.911, which states the following. “The Director-General may also, in exceptional circumstances, terminate the appointment of a staff member who holds a continuing or a fixed-term appointment if such action would be in the interest of the good administration of the Organization and in accordance with the standards of the FAO Constitution, provided that the action is not contested by the staff member concerned.” Termination indemnities were paid in accordance with Staff Regulation 301.151, which provides that staff members whose appointments are terminated “upon abolition of post, reduction of staff, or in the interest of the good administration of the Organization” receive an indemnity proportional to their length of service. With one exception, all the staff members concerned had completed more than 15 years of service with the FAO and, therefore, received the maximum indemnity possible (equivalent of 12 months of pay calculated on the basis of their net base salary). One staff member, who had 12 years of service only, received the equivalent of nine and a half months.

24. – Most of the staff members concerned also received an additional percentage of the termination indemnity to which they were entitled. This additional payment was made in application of Staff Regulation 301.152, which provides that payment “of an amount not more than 50 per cent higher than that which would otherwise be payable under the existing Staff Regulations may be authorised where the circumstances warrant and the Director-General considers it justified”. The percentage received amounted to 25% in nine cases. Only three staff members did not get an additional percentage while another one got the maximum of 50%. They were also paid the equivalent of three months salary “in lieu of notice period” as provided by Staff Regulation 302.9034 plus, in the case of general service staff, separation payments under the provisions of Section 314.65 of the FAO Manual. Payments were also made for accrued leave and repatriation grant, if applicable.

Applicable Rules and Regulations for Employment of Retirees

25. – Since all the staff members concerned were between 55 and 60 years of age at the time of their termination and had more than five years of contributory service in the UN Joint Staff Pension Fund (UNJSPF) they were all entitled to an early retirement benefit. As retirees, they were allowed to be re-employed. For the UN, administrative instruction ST/AI/1999/5 issued on 27 May 1999 defines, in particular, the following conditions to implement the provisions of General Assembly decision 51/408 of 4 November 1996 and of General Assembly resolutions 53/221 of 7 April 1999 concerning employment of retirees.

26. – For the FAO, similar rules exist for employment of retirees. Under the Programme for the Use of Retired Experts, for which retirees between 55 and 70 years of age are eligible, the following conditions were disclosed on the Organization’s website at the time of our review.

• “Appointment of all FAO/UN retirees can start only after three months following the date of retirement and the assignment under the Programme is limited to a maximum of six months in any one calendar year”.
• “Retirees work on assignments [...] for an honorarium of no more than US$100 a day. FAO meets travel costs, daily subsistence allowance at the normal UN rates and social security costs. The level of honorarium and the DSA [Daily Subsistence Allowance] rates are identical for both the FAO/UN retirees and the national retired experts.”

27. – My staff noted, however, that while these guidelines had been issued by the appropriate authority within the Organization, not all the conditions mentioned above were included in the relevant sections of the FAO Manual. In fact, only the six-month maximum employment condition was provided for under Sections 317 and 319 of the FAO Manual, which are applicable to consultants and Special Service Agreement (SSA), respectively. Therefore, they recommended that the maximum honorarium condition also be included in Sections 317 and 319 of the FAO Manual. The same recommendation was made for the three-month lapsed time between retirement and re-employment, which should be disclosed under Section 314 of the FAO Manual that defines the rules applicable to separation. My staff were subsequently informed that their recommendations would be implemented and that the FAO Manual would be amended accordingly.

28. – Furthermore, my staff noted that no specific rules were provided in the FAO Manual for re-employment after agreed terminations. The only document they found, which defines only one rule, was a Memorandum issued on 10 February 1997 by the Deputy Director-General, in which the following was indicated.

29. – For ten of the cases reviewed, the former staff members were only hired back after the time covered by the agreed termination had passed (18 months in most cases), as prescribed. However, my staff noted that it had not been the case for three former staff members. Two of them were hired back 15 months and 16 months, respectively, after their respective termination date while the Organization should have waited 18 months. For the third staff member, the Organization should have waited 15 months after the termination that took place on 16 October 2000. On 3 December 2000, i.e. less than two months after having been terminated, he was offered an SSA under the Programme for the Use of Retired Experts mentioned above on the basis of a waiver granted by the Director-General. My staff was informed that the justification for this waiver was based on the urgent need to train field staff in the use of the Field Accounting System (FAS) in view of the decentralisation of project operations to the FAOR and this former staff member’s unusual combination of skills.

30. – As for the other conditions of employment of separated staff, my staff noted that the same rules defined for the Programme for the Use of Retired Experts were applied, namely that honorarium was limited to US$100 per day and that employment was restricted to six months in any one calendar year. Nevertheless, still in the case of the person mentioned above, my staff noted that the second rule was also waived. After his initial six-month SSA mentioned above (13 December 2000 to 31 May 2001), his employment was extended up to the end of 2001. According to the memorandum requesting a waiver, “there [had] been a number of precedents” (three other cases were specifically mentioned) in which the waiver of this six-month rule had been granted.

Overall Conclusion

31. – In view of the above, I recommend the following:

• The existing guidelines and practices for the re-employment of former staff members who have been separated should be consolidated into a comprehensive policy, which should address, in particular, the following issues: minimum time lapse between termination and re-employment, maximum time of employment, nature of the assignment, financial and other conditions of employment.
• As far as the first point is concerned, I consider the UN standard rule of three years minimum to be a good practice. It should be duly recalled in all termination agreements. The Director-General could, of course, always grant a waiver to this rule on the basis of detailed justifications. The maximum time of employment could be based on the one for retirees (six months).
• Once defined, the rules governing re-employment of separated staff should be incorporated into the FAO Manual under Section 300.

32. – At the time of writing this report, my staff were informed that the FAO agreed to prepare a consolidated policy in line with my recommendations. As regards to the minimum time lapse, the 18-month rule, which was established in 1997, would be adhered to. While accepting these recommendations, the Organization wished to stress that, in the specific case mentioned above, the circumstances were indeed quite unusual and approval for the exception had been sought from, and given by, the appropriate authority.

33. – In my previous report [para. 112], I especially recommended that to avoid the renewal of additional redeployment and separation costs, the Organization should “use all the tools available such as human resources planning, managing recruitment levels and types of contracts to allow more flexibility”. As indicated in the reports presented to the Finance Committee at its 97^th and 99^th Sessions², the Organization has recognised that there was scope for improvements in the area of Human Resources (HR) management. It has begun development of a new HR Management Information System (Oracle HR), which would include an integrated HR planning system, encompassing skills and competence requirements (present and future), mobility, staffing levels and use of external collaborators.

Technical Cooperation Programme Appropriations and Deferred Income

34. – In line with Financial Regulation 4.3, unspent Technical Cooperation Programme (TCP) appropriations for the previous biennium were carried over to the 2000-01 biennium. They amounted to US$13,127 thousands as disclosed under the line “Deferred income” in Statement I. For the 2000-01 biennium, new TCP appropriations amounted to US$89,118 thousands as indicated by Note 21 to the financial statements. Expenditures charged to these appropriations amounted to US$7,034,644 in 2000 and US$4,288,972 in 2001. With the addition of the overspending for the TCP Liaison Unit, which amounted to US$73,632 (US$2,410,632 of expenditures for only US$2,337,000 of appropriations), total expenditures charged to the 2000-01 appropriations amounted to US$11,397,248 rounded to US$11,397 in Note 21 to the financial statements. An amount of US$77,721 thousands was, therefore, carried forward as deferred income.

35. – At its 97^th Session in September 2001, the Finance Committee “expressed its concerns about the slow delivery of TCP and noted that this had the effect of acting as a source of liquidity to cover periods of cash flow shortfall due to the timing and delays of current assessment and arrears of contributions”³. As recapitulated in table 2 that follows, the final rate of consumption of TCP new appropriations for the 2000-01 biennium was the lowest since 1994-95, after taking into account the reduction resulting from the re-charge of expenditure to use up funds remaining from the previous biennium. On this basis, the rate of consumption had continuously decreased from 46.4%, in 1994-95, to only 12.8%, in 2000-01.

36. – When my staff brought the matter to the attention of the Organization, the following reasons, some affecting the Field Programme in general and others more specific to the TCP, were given:

• For the former, the FAO acknowledged that the decentralisation to FAORs and technical officers inevitably involved a number of start-up problems, which impacted project delivery. In addition, difficulties with Oracle and the FAS deprived budget holders of reliable financial reports for monitoring delivery. It was added, however, that these difficulties had been addressed and that their impact on delivery should continue to decline.
• For the latter, the FAO stated that TCP projects had become more complex, with more technical divisions involved in a single project and more widely differentiated objectives. In addition, there have been difficulties in recruiting experts and other consultants under TCDC [Technical Cooperation between Developing Countries] conditions. Several measures, however, have been taken to address these problems, in particular, the alignment of the allowances of TCDC experts with those of other partnership programme experts (US$100 per day) and establishment of Quarterly Project Implementation Reports (QPIR), task forces at ROs’ level and active monitoring of field programme implementation through the Field Programme Management Information System (FPMIS).

Working Capital Fund

37. – The Conference determines the level of the WCF, which currently amounted to US$25 million as per Conference Resolution 15/91. Since 1991, the Conference has also approved the application for membership of several countries, which were requested, “according to established principles and customs”, to make an advance to the WCF. At the beginning of the 2000-01 biennium, the opening balance of the WCF amounted to US$23,756 thousands and arrears amounted to US$1,614 thousands. Since only an amount of US$86 thousands was received during the biennium, arrears reached US$1,529 thousands as at 31 December 2001, or a 5.3% decrease only. At the end of the biennium, the WCF had a debt towards the General Fund amounting to US$8.36 million since it was used, in line with Conference Resolution 3/99, to cover the redeployment and separation cost mentioned above. As a result, the balance of the WCF as at 31 December 2001 amounted to US$15,482 thousands as disclosed in Note 19 to the financial statements.

Special Reserve Account

38. – As disclosed in Note 20 to the financial statements, the authorised level of the SRA was set by Conference Resolution 13/81 at 5% of the effective working budget for the respective subsequent biennium. As at 1 January 2000, the SRA had an opening balance of US$23,152 thousands. During the biennium it had, however, to absorb the negative impact of foreign exchange differences (a loss of US$47 million only partly compensated by a positive currency variance on staff standard costs of US$24 million). Furthermore out of the US$10,874 thousands of contributions in arrears as at 1 January 2000, only US$351 thousands was paid. As a result, the closing balance of the SRA as at 31 December 2001 was close to nil with US$457 thousands only.

39. – In view of the near depletion of the SRA and in the absence of any cash surplus in the General Fund and any major payments of arrears, my staff asked to be informed of “the proposals”, which would be made “to the Conference, through the Finance Committee and Council, concerning the ways and means of bringing the Special Reserve Account up to the level of five percent of the total effective budget for [the 2002-03 biennium]”, in line with paragraph 6 of Conference Resolution 13/81. The Organization’s response was that “pending replenishments or payment of arrears, the plan [was] to operate with the SRA below the level of 5% of the biennium budget” and that the Finance Committee would “be informed of this decision at its September meeting”. While my staff did acknowledge that the forward purchase contract concluded for the 2002-03 for Euro should lead to a favourable impact on the SRA, they still recommended that alternatives be presented to the Finance Committee for review. At the time of writing this report, they were informed that the Organization would monitor the situation and report to the Finance Committee in time for proposals to be considered by the Conference in 2003, as appropriate.

Specific Financial and Accounting Issues

Contributions Receivable

40. – A global amount of US$263,667 thousands is disclosed in Statement II under the line “Contributions receivable” and broken-down as follows: US$181,014 thousands for the General and other related Funds and US$82,653 thousands for Trust and related Funds. For the former, the amount is offset by a 100% provision disclosed under the line “Provisions for delays of contributions”. A detailed breakdown by type of contributions is disclosed in Note 13 to the financial statements. My staff noted that, among the contributions outstanding for the SRA, there was one for an amount of US$107,800 from a country, which had ceased to exist on 1 January 1993. My staff recommended that the outstanding amount be written off. The Organization agreed that it was no longer collectible and indicated that it would proceed to write-off the amount in 2002 in accordance with the applicable rules and procedures.

41. – Regarding the contributions receivable for Trust Funds, which amounted to US$78 million as at 31 December 2001, my staff noted that they corresponded to shortfalls in contributions for projects in deficit. Normally, no shortfalls should be incurred for Trust Funds in line with the provisions under Section 250.113 of the FAO Manual, which states the following: “In principle, the Organization makes no financial commitment and disburses no funds under a Trust Fund until funds have been received. Advance financing arrangements may be made in exceptional circumstances.” This rule is recalled in paragraph 50 of the AFF procedural manual II entitled “Accounting for projects”. “A fundamental element of financial management for projects is to ensure that funds are available before financial commitments and disbursements are undertaken. For externally funded projects, this means ensuring that funds from donors have been received, whether for an individual project or to cover a range of projects. Funds checking, to confirm the availability before committing an expenditure, is the responsibility of the budget holder.”

42. – The analysis of all projects in deficit showed that, out of a total of US$78 million, 92% was due to the “Oil for Food” Programme in Iraq. As noted in my previous report on the 1998-99 accounts [para 78], for this Programme, the FAO agreed to commit funds allocated to it without having physically received the cash. As at 31 December 2001, no cash deficit was, however, noted since the excess of expenditures over income was not due to disbursements but to accruals of unliquidated obligations.

43. – The analysis also showed that the Trust Fund established for the Emergency Farm Reconstruction Project (EFRP) in Kosovo funded by the World Bank was supposedly in deficit for an amount of US$2,269,744.19. This did not correspond to the reality. The apparent shortfall in contributions was due to the fact that two letters of credit issued by the World Bank in October 2001 for a total amount of US$2,285,416 had not been taken into account for the 2000-01 biennium, since they were posted in 2002, only. Following my staff’s recommendation, Note 13 to the financial statements was amended to disclose additional information in this regard. Mostly international organisations or funds were concerned for the rest of the projects in deficit, which amounted to US$4,2 million. However, deficits were also incurred for projects in two specific countries. I recommend that the rules and regulations recalled above be more strictly applied to avoid any Trust Funds projects going into deficit.

Accounts Receivable and Payable

44. – Compared to the previous biennium, amounts disclosed as accounts receivable and payable decreased to US$49,723 thousands and US$48,150 thousands, or a reduction of 10.2% and 11.4%, respectively. Such was in particular, the result of the efforts made during the biennium to clear most of the unmatched items (22,560 unmatched items for field payroll payments alone as at 31 December 1999). Part of the work had, in fact, been carried out by the Controls Branch from May to December 2001. My staff noted that the implementation of the Oracle Clearing Account Reconciliation Module (CARM) had facilitated the process. The review of FAO information systems disclosed, however, that since FAO information systems were not fully integrated, most of the difficulties encountered with the clearing accounts were due to the FAS. Reconciliation proved difficult notably when the reference of the prepayment made in the field was not duly reported.

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¹ The priority of the recommendations was classified as follows:

Fundamental: action that is considered imperative to ensure that the Programme is not exposed to high risks. Failure to take action could result in severe financial consequences and major disruptions to the operations.

Significant: action that is considered necessary to avoid exposure to significant risks. Failure to take action could result in irregularities, inefficiencies and disagreements, which could have significant consequences, including financial ones, and compromise the attainment of objectives.

Merits attention: action that is considered desirable and should result in enhanced control or better value for money.

² Cf. documents FC97/15 and FC99/10.

³ Cf. paras. 26 to 29 of document CL 121/4.