Hundred and Seventh Session
Rome, May 2004
Separate Value-for-Money Reports from the
1. At its 102nd Session, 5-9 May 2003, the Finance Committee enquired whether the so-called long-form part of the External Auditor report could be prepared “on a piecemeal basis”, throughout the biennium. At its 104th Session, 15-19 September 2003, the Committee “decided that the matter of separate reporting should be considered again at its session in May 2004 and requested that the Legal Counsel further investigate alternative solutions, in the light of the introduction of similar separate reporting in WFP, the interim reporting system in WHO and relevant experience of other UN agencies”. In practice, the External Auditor would issue separate reports to the Finance Committee. Eventually, they would be included in the long-form part of the audit report with respect to the biennium in question, to be referred to the Conference, through the Council.
2. So far, the External Auditor has prepared a single general report with respect to each financial period of the Organization, i.e. one report per biennium. The report is referred to the Finance Committee, the Council and the Conference. The report consists of three parts, i.e. (a) the opinion of the External Auditor on the accounts of the Organization, as such; (b) the audited accounts, with relevant schedules and notes; and (c) a long-form part containing “observations with respect to the efficiency of the financial procedures, the accounting system, the internal financial controls and, in general, the administration and management of the Organization” (Financial Regulation 12.4 refers).
3. The issuance of a single general report used also to be the practice at the World Food Programme until 2002, except that in this case, the report is referred to the Executive Board, after having been submitted for advice to the United Nations Advisory Committee on Administrative and Budgetary Questions and the FAO Finance Committee1. In taking the above decision, the Finance Committee had in mind new reporting arrangements that have been introduced recently at the Programme, whereby the External Auditor issues report findings as they arise. This document will describe briefly these new arrangements, prior to dealing with the manner in which they could be implemented in FAO.
4. As it is the case at FAO, the report of the External Auditor has generally been a single document, comprising three main parts, i.e. (a) the opinion of the External Auditor on the accounts of the Programme, as such; (b) the audited accounts with relevant schedules and notes and (c) a long-from part containing “observations with respect to the efficiency of the financial procedures, the accounting system, the internal financial controls and, in general, the administration and management of WFP”.
5. In 2002, the Executive Board requested that, if possible, the External Auditor issue report findings to it as they arise during the biennium, rather than altogether at the end of the biennium. In general, this matter was followed closely by the Board and its Bureau.
6. In its Programme of Work for the 2002-2003 biennium, the External Auditor recalled that, under the terms of his engagement with the Board, he was committed to review activities in at least 12 countries and to provide a total of 19 reports to management during each biennium, comprising management letters to the Executive Director on the three main phases of the audit; draft reports on substantive value for money/management audit topics; management letters on the results of each country office visited and a final consolidated audit report to the Executive Board. One of these topics was the Programme’s human resources strategy.
7. The External Auditor also recalled that the Executive Board had requested that, if possible, the External Auditor should issue report findings to the Executive Board as they arise during the biennium, rather than altogether at the end. The External Auditor expressed his willingness to follow that arrangement by providing interim reporting to the Executive Board during the biennium; and by raising management letters on management report topics with the Executive Director as they arise. He further indicated that he would produce a consolidated report for consideration at the end of the biennium, to accompany the financial statements and audit opinion, and to comply with the Financial Regulations.
8. More specifically, the External Auditor wrote: “in accordance with the Executive Board’s request for more frequent reporting, we will provide interim reports to the Board in addition to a consolidated end-of-audit report on the biennium as a whole”, and “I intend to present an interim report to the Executive Board in October 2003, which will cover progress of the audit; financial issues; and the management report on human resources outlined above”.
9. Insofar as the above arrangements are still at initial stages of implementation, it is important to emphasize that the experience gained at WFP remains limited, and the manner in which the arrangements will operate is not yet entirely known.
10. In considering whether and how the above arrangements could be introduced in FAO, it is necessary to distinguish between the legal and practical issues involved.
11. A first question arises as to whether under the relevant provisions of the Basic Texts, which refer to a single report, as well as consistent practice developed on that basis, it would be legally possible for the External Auditor to prepare the long-form part of its report in a sequential manner, by issuing several specific reports.
12. FAO Financial Regulation 12.9 provides that “the External Auditor shall issue a report on the audit of the financial statements and relevant schedules, which shall include such information as he deems necessary in regard to matters referred to in Financial Regulation 12.4 and in the Additional Terms of Reference”. Under Financial Regulation 12.4 “the External Auditor may make observations with respect to the efficiency of the financial controls and, in general, the administration and management of the Organization”. Financial Regulation 12.6 provides that “the Finance Committee may request the External Auditor to perform certain specific examinations and issue separate reports on the results”. Financial Regulation 12.10 states, inter alia, that “the External Auditor’s reports shall be transmitted through the Finance Committee, together with the audit financial statements, to the Council in accordance with any directions given by the Finance Committee. The Council shall examine the financial statements and the audit reports and shall forward them to the Conference with such comments as it deems advisable (...) ”2.
13. From a legal point of view, the above provisions, seen together and in light of the practice followed at FAO, would seem to indicate that there should be a single general report of the External Auditor, which he is required to prepare in respect of each financial period.
14. That said, if the Governing Bodies of FAO were to request the External Auditor that the long-form part of his report be submitted in a sequential manner, and the External Auditor decided to accede to that request, such a decision would not be inconsistent with the relevant provisions of the Basic Texts, provided that the various documents issued be ultimately consolidated in a report to be submitted to the Governing Bodies, with particular reference to the Conference. In general, insofar as the External Auditor is completely independent and solely responsible for the conduct of the audit he should enjoy a measure of discretion in organizing his work and could thus, for the sake of convenience, submit to the Finance Committee his work under Financial Rule 12.4, as it becomes available. Nothing in the process leading to the adoption of the present Regulations would suggest that there was ever any intention of excluding the possibility for the External Auditor to organize his work in that manner in response to a request of the Finance Committee.
15. In addition, it may be of some interest to mention that the External Auditor of WHO, whose regulations on the subject matter under consideration are identical to those of FAO, has began issuing interim reports of a general nature to the World Health Assembly (WHO has a financial period of two years but the World Health Assembly holds annual sessions).
16. Consequently, if the External Auditor were to present the long-form part of his report to the Finance Committee and the Council in a sequential manner, this would not be inconsistent with the Financial Regulations, as that seems to be confirmed by the most recent practice of WHO and WFP. Whether or not, for the sake of clarity, this should be reflected in revised Regulations, should be considered on an inter-agency basis, taking into account the process that led to their adoption in 1971.
17. In considering whether the scheme being implemented at WFP could be applied to FAO, account should be taken of the fact that, contrary to the situation at the Programme, the process of review of the report of the External Auditor involves three FAO bodies, i.e. the Finance Committee, the Council and the Conference. In practical terms, this would perhaps mean that there should be distinct segments of the long-from part of the report which would be referred sequentially to different sessions of the Finance Committee and the Council. The various segments so referred to the Finance Committee and the Council would have to be consolidated into a single report. The manner in which this consolidation would be done, is a matter for discussion with the External Auditor. Two options could be considered tentatively. Under one of the options, the consolidation could take the form of a summary of the various separate reports, without reproducing them. Under another option, the consolidated report would merely reproduce the various separate reports of the audit of the administrative and financial management operations, either with a general covering summary of their content, or without such covering document. The relevant consolidated documents would have to be submitted to the Finance Committee, the Council and the Conference. While some references to the “final consolidated report” have been made at WFP (see paragraphs 6 to 8 of this document), at this stage the experience of WFP cannot yet be considered as conclusive.
18. Issues such as FAO’s response to the observations made by the External Auditor in his reports under a new reporting scheme, would need to comply with the fundamental requirement that the Director-General should be given the opportunity to comment on each draft report of the External Auditor prior to finalization, in accordance with the relevant provisions of the Additional Terms of Reference Governing External Audit (Annex I to the Financial Regulations).
19. In conclusion, the Organization believes that if the External Auditor were to present the long-form part of his report to the Finance Committee and the Council in a sequential manner, this would not be inconsistent with the Financial Regulations, as that seems to be confirmed by the most recent practice of WHO and WFP. Adjustments to current practice would be required to accommodate the new reporting scheme, on which the guidance of the Finance Committee would be needed. In accordance with the relevant provisions of the Additional Terms of Reference Governing External Audit (Annex I to the Financial Regulations), practical arrangements to be put in place should ensure that the Director-General is given the opportunity to comment on each draft report of the External Auditor prior to finalization.
20. The Committee is invited to review this document and provide such views and guidance on the issues raised as appropriate. In particular, should the Finance Committee be of the view that the External Auditor should issue separate reports on its activities, the Committee in invited to offer such guidance as may be required on the practical implementation of the reporting scheme.
1 In accordance with Article XIV, paragraph 6 of the General Regulations of the Programme.
2 The provisions of the FAO Financial Regulations, as they stand at present, were approved in 1971 under circumstances that should be recalled. At that time, an Ad Hoc Committee of Experts was established by the Advisory Committee on Coordination to examine the finances of the United Nations and the Specialized Agencies and its work was reviewed by the Consultative Committee on Administrative Questions (CCAQ) (Cf. CL 57/5, Report of the 26th Session of the Finance Committee, September 1971, paragraphs 125-129; CL 57/REP, November 1971, paragraphs 125-128). The Ad Hoc Committee recommended that internal regulations regarding budget preparation format and practices be standardized as far as possible. It was further proposed that the first regulation to be standardized, as far as possible, was the regulation relating to “External Audit”. At its 16th Session, in November 1971, the Conference adopted new Financial Regulation XII. This Regulation was, mutatis mutandis, the same as adopted by a number of Specialized Agencies by that time.