FC 92/6

FINANCE COMMITTEE

Ninety-second Session

Rome, 3 - 7 May 1999

Progress Report On Implementation Of The External Auditor's Recommendations

Attached for the information of Finance Committee Members is the Progress Report on the Implementation of the External Auditor's Recommendations.

LONG FORM REPORT

External Auditor's Recommendation

Action taken

FINANCIAL MATTERS

Financial Position of the Organisation

Tax Equalisation Fund

I recommend that the necessary arrangements be made with the Member Nations concerned with a view to reducing their credits from the tax equalisation fund by the amount of tax reimbursement to their nationals.

The error was due to an oversight. Corrective action is being taken to ensure that this will not occur in future.

Currency Exchange Arrangements

As a result of the audit of the 1996-97 accounts, I wish to put forward the two following recommendations:

a) that the FAO review the present methodology for accounting for and reporting on currency exchange differences with a view to simplifying it, making it more comprehensive and better differentiating notional and real gains and losses;

b) that the FAO review their current policy for hedging against changes in exchange rates (flat two-year forward purchase contract) with a view to better taking into consideration the new, more unstable, international exchange environment. Because of the narrowing interest rate differential, forward purchase may no longer be the preferable option.

It is intended to present a paper to the Finance Committee proposing a number of steps to manage exchange rate risk in 1999 and in the future. A task force has been set up to look into this and other related currency management issues including contracting in Europe in Euros, and making payroll payments from the Lit and US dollar accounts, etc. This should simplify the accounting and reporting of exchange rate variances and match assets and liabilities in currency terms.

Unliquidated Obligations

I wish to reiterate my previous recommendation to carry out closer checking of ULO at the end of the biennium. I understand that this is a complex and time consuming exercise with a variety of criteria to be applied across objects of expenditure. In this connection, I would recommend that, for the future, the Organisation might consider simplified criteria which could be incorporated into the accounting systems for recognising the validity of undisbursed commitments at the end of a biennium.

The accrual procedures in the new Oracle accounting system will address this issue and accruals for the 1998/99 Biennium Accounts will be based on simple transaction-specific objective criteria.

Cash and Investments

Control of Bank Accounts

The number of bank accounts derives, at least in part, from their dedication to specific groups or transactions (e.g. Regular Programme, Trust Funds, etc.). In my previous report I had recommended that such complex arrangements be abandoned and cash managed centrally at the Organisation level, while maintaining the identification of transactions necessary for reporting purposes. While consideration was given to this recommendation in the context of the implementation of the new financial management and accounting software, the situation had not changed yet at the end of 1997.

Necessary actions have since been taken to reduce the number of bank accounts as also acknowledged by the External Auditor. As of January 1999 it is expected that FAO will have 13 Headquarters accounts (this includes four TF accounts), reduced from 26 accounts in January 1998. Further reductions will be considered following the introduction of the Euro.

Cash and Investments

Cash Management

I wish to recommend formally that the Organisation call for international bids for the provision of corporate banking services.

My staff noted that a consultant had recommended to "externalise" the management of cash to achieve higher returns at reduced risks and free up treasury unit resources for other tasks. I recommend that such proposals be carefully considered by the Organisation. If they were to be implemented, the FAO should call for bids from several international cash managers and start revamping and upgrading the treasury unit to allow it to become a professional counterpart to the selected cash manager.

The Organisation has taken action to issue a tender for the corporate banking services. Action has also been taken to appoint a consultant who will advise on the appointment of specialist fund managers to handle the Organisation's liquid funds. A tender will be issued to provide the necessary services. Finally, the strengthening of the Treasury function is being addressed as part of the re-organisation of Finance Division.

Long-term Investments

Closer monitoring of the fund manager(s) performance including visits to the manager's office, is necessary and will require revamping and upgrading of the Treasury.

As mentioned above, an external consultant has been selected to advise on the appointment of two or more specialist fund managers to handle the Organisation's portfolio, following which a tender will be issued. The strengthening of the Treasury function is being addressed as part of the re-organisation of Finance Division.

Support Costs

In view of the current proliferation of support costs of various types which obscure the purpose and the measurability of the policy, I recommend that the Secretariat be requested to prepare a comprehensive but much simplified framework for support cost arrangements. In my opinion there are two possible approaches to this question:

a) either tailor support costs to the requirements of individual projects and clearly identify support costs in project budgets;
b) or limit support cost to broad but well defined activities and charge such support costs to projects by applying a pre-agreed recovery percentages to expenditure.
Of course a combination of the two approaches may also be implemented, provided that the resulting policy document submitted to the Governing Bodies is kept both comprehensive and simple to apply.

A paper will be prepared proposing to the Finance Committee a new, less complex pricing structure.

Audit of Field Transactions

In order for local audits of field expenditure to support a decentralised accounting structure at a reasonable cost, I recommend that the periodicity of reporting be lengthened (one or two reports a year), the number of contracting auditors reduced and the auditors required to provide audit assurance that imprest reports convey a true and fair view of field transactions.

The following improvement actions have been taken for the local audit programme: (a) the frequency of RP fund audits will be reduced to two per year. The savings arising from the foregoing will be used to finance the costs for project audits within the limit of available funds, (b) the opportunities are being reviewed for reducing the number of firms to handle the local audits, (c) consideration will be given to introducing a full scope audit but this will depend on availability of funding and other considerations.

Payable and Receivable Accounts

I recommend that, in the context of the installation of the new financial and accounting software being implemented in FAO, the accounting and organisational procedures for posting transactions to receivable and payable accounts be reviewed with a view to making them easier to identify, monitor and clear throughout the biennium.

Following the AFF reorganisation, functional responsibilities have been better defined with respect to these accounts. . In addition, the new Oracle system will include adequate checks and controls to ensure regular monitoring and prompt clearance of these balances. These actions will eliminate the problems experienced with the current system. Furthermore, it is the duty of the newly established Controls Unit in AFF to monitor that responsible units take the necessary actions on all such suspense accounts.

Personnel Related Liabilities

a) I recommend that, in the future, the liability relating to the SPS be reported in conformity with stated policy (actuarial value) and that an agreement be reached with the WFP to implement such policy.

b) I recommend that the purpose and operation of this fund (Terminal Payments Fund) be thoroughly reviewed with a view to establishing a consolidated mechanism to provide for the funding of all recognised end of service liabilities.

Any reporting inconsistencies in the treatment of the SPS will be corrected by Finance Division in the 1998/99 Accounts. Meanwhile the TPF will be reviewed with a view to establishing a consolidated mechanism for the funding of all recognised end of service liabilities and, if necessary, a Paper will be presented to the Finance Committee at its September session on the TPF.

Telefood

Since the Telefood operation is going to be continued and expanded in the current and successive biennia (Conference Resolution 3/97, refers), I should recommend that, if special audit arrangements are again deemed necessary, their implementation be more strictly monitored.

The audit of all Telefood accounts is foreseen and this will be undertaken either by the local audit firms or AUD. The audit arrangements will be adjusted as necessary.

MANAGEMENT MATTERS

Decentralisation

I recommend that the Organisation finalise and formalise the delegation of authority to the regional representatives.

A new Circular on Responsibilities and Relationships (FAO Headquarters and decentralised offices) has been issued in final form. In addition, various Manual Sections have been revised and new manuals have been issued for the Finance function. These steps will result in improved operations between Headquarters and field locations.

LONG FORM REPORT
External Auditor's Recommendation	Action taken
FINANCIAL MATTERS Financial Position of the Organisation *Tax Equalisation Fund* I recommend that the necessary arrangements be made with the Member Nations concerned with a view to reducing their credits from the tax equalisation fund by the amount of tax reimbursement to their nationals.	The error was due to an oversight. Corrective action is being taken to ensure that this will not occur in future.
*Currency Exchange Arrangements* As a result of the audit of the 1996-97 accounts, I wish to put forward the two following recommendations: a) that the FAO review the present methodology for accounting for and reporting on currency exchange differences with a view to simplifying it, making it more comprehensive and better differentiating notional and real gains and losses; b) that the FAO review their current policy for hedging against changes in exchange rates (flat two-year forward purchase contract) with a view to better taking into consideration the new, more unstable, international exchange environment. Because of the narrowing interest rate differential, forward purchase may no longer be the preferable option.	It is intended to present a paper to the Finance Committee proposing a number of steps to manage exchange rate risk in 1999 and in the future. A task force has been set up to look into this and other related currency management issues including contracting in Europe in Euros, and making payroll payments from the Lit and US dollar accounts, etc. This should simplify the accounting and reporting of exchange rate variances and match assets and liabilities in currency terms.
*Unliquidated Obligations* I wish to reiterate my previous recommendation to carry out closer checking of ULO at the end of the biennium. I understand that this is a complex and time consuming exercise with a variety of criteria to be applied across objects of expenditure. In this connection, I would recommend that, for the future, the Organisation might consider simplified criteria which could be incorporated into the accounting systems for recognising the validity of undisbursed commitments at the end of a biennium.	The accrual procedures in the new Oracle accounting system will address this issue and accruals for the 1998/99 Biennium Accounts will be based on simple transaction-specific objective criteria.
Cash and Investments *Control of Bank Accounts* The number of bank accounts derives, at least in part, from their dedication to specific groups or transactions (e.g. Regular Programme, Trust Funds, etc.). In my previous report I had recommended that such complex arrangements be abandoned and cash managed centrally at the Organisation level, while maintaining the identification of transactions necessary for reporting purposes. While consideration was given to this recommendation in the context of the implementation of the new financial management and accounting software, the situation had not changed yet at the end of 1997.	Necessary actions have since been taken to reduce the number of bank accounts as also acknowledged by the External Auditor. As of January 1999 it is expected that FAO will have 13 Headquarters accounts (this includes four TF accounts), reduced from 26 accounts in January 1998. Further reductions will be considered following the introduction of the Euro.
Cash and Investments *Cash Management* I wish to recommend formally that the Organisation call for international bids for the provision of corporate banking services. My staff noted that a consultant had recommended to "externalise" the management of cash to achieve higher returns at reduced risks and free up treasury unit resources for other tasks. I recommend that such proposals be carefully considered by the Organisation. If they were to be implemented, the FAO should call for bids from several international cash managers and start revamping and upgrading the treasury unit to allow it to become a professional counterpart to the selected cash manager.	The Organisation has taken action to issue a tender for the corporate banking services. Action has also been taken to appoint a consultant who will advise on the appointment of specialist fund managers to handle the Organisation's liquid funds. A tender will be issued to provide the necessary services. Finally, the strengthening of the Treasury function is being addressed as part of the re-organisation of Finance Division.
Long-term Investments Closer monitoring of the fund manager(s) performance including visits to the manager's office, is necessary and will require revamping and upgrading of the Treasury.	As mentioned above, an external consultant has been selected to advise on the appointment of two or more specialist fund managers to handle the Organisation's portfolio, following which a tender will be issued. The strengthening of the Treasury function is being addressed as part of the re-organisation of Finance Division.
Support Costs In view of the current proliferation of support costs of various types which obscure the purpose and the measurability of the policy, I recommend that the Secretariat be requested to prepare a comprehensive but much simplified framework for support cost arrangements. In my opinion there are two possible approaches to this question: a) either tailor support costs to the requirements of individual projects and clearly identify support costs in project budgets; b) or limit support cost to broad but well defined activities and charge such support costs to projects by applying a pre-agreed recovery percentages to expenditure. Of course a combination of the two approaches may also be implemented, provided that the resulting policy document submitted to the Governing Bodies is kept both comprehensive and simple to apply.	A paper will be prepared proposing to the Finance Committee a new, less complex pricing structure.
Audit of Field Transactions In order for local audits of field expenditure to support a decentralised accounting structure at a reasonable cost, I recommend that the periodicity of reporting be lengthened (one or two reports a year), the number of contracting auditors reduced and the auditors required to provide audit assurance that imprest reports convey a true and fair view of field transactions.	The following improvement actions have been taken for the local audit programme: (a) the frequency of RP fund audits will be reduced to two per year. The savings arising from the foregoing will be used to finance the costs for project audits within the limit of available funds, (b) the opportunities are being reviewed for reducing the number of firms to handle the local audits, (c) consideration will be given to introducing a full scope audit but this will depend on availability of funding and other considerations.
Payable and Receivable Accounts I recommend that, in the context of the installation of the new financial and accounting software being implemented in FAO, the accounting and organisational procedures for posting transactions to receivable and payable accounts be reviewed with a view to making them easier to identify, monitor and clear throughout the biennium.	Following the AFF reorganisation, functional responsibilities have been better defined with respect to these accounts. . In addition, the new Oracle system will include adequate checks and controls to ensure regular monitoring and prompt clearance of these balances. These actions will eliminate the problems experienced with the current system. Furthermore, it is the duty of the newly established Controls Unit in AFF to monitor that responsible units take the necessary actions on all such suspense accounts.
Personnel Related Liabilities a) I recommend that, in the future, the liability relating to the SPS be reported in conformity with stated policy (actuarial value) and that an agreement be reached with the WFP to implement such policy. b) I recommend that the purpose and operation of this fund (Terminal Payments Fund) be thoroughly reviewed with a view to establishing a consolidated mechanism to provide for the funding of all recognised end of service liabilities.	Any reporting inconsistencies in the treatment of the SPS will be corrected by Finance Division in the 1998/99 Accounts. Meanwhile the TPF will be reviewed with a view to establishing a consolidated mechanism for the funding of all recognised end of service liabilities and, if necessary, a Paper will be presented to the Finance Committee at its September session on the TPF.
Telefood Since the Telefood operation is going to be continued and expanded in the current and successive biennia (Conference Resolution 3/97, refers), I should recommend that, if special audit arrangements are again deemed necessary, their implementation be more strictly monitored.	The audit of all Telefood accounts is foreseen and this will be undertaken either by the local audit firms or AUD. The audit arrangements will be adjusted as necessary.
MANAGEMENT MATTERS Decentralisation I recommend that the Organisation finalise and formalise the delegation of authority to the regional representatives.	A new Circular on Responsibilities and Relationships (FAO Headquarters and decentralised offices) has been issued in final form. In addition, various Manual Sections have been revised and new manuals have been issued for the Finance function. These steps will result in improved operations between Headquarters and field locations.