FINANCE COMMITTEE

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.

Invoices are now being sent routinely to those member nations which assess tax on the FAO salaries of its nationals.

Our review of the 1998 interim financial statements (conducted in April 1999) disclosed that some TEF outstanding balances remained to be cleared. Our next review will cover actions taken since that date.

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.

With effect from 1 January 1999 the UN Operational rate of exchange for the Euro, is communicated by the UN New York to FAO based on parities set by the European Central Bank two working days before the end of the month. To the extent that the use of a monthly UN rate is an approximation of the market rate, this approach conforms to generally accepted accounting standards which foresee the use of approximations or averages for practical reasons.

The other two rates referred to above (budget and forward) are not accounting rates because they are not used for converting non dollar transactions or balances and they do not give rise to exchange differences requiring to be recognised as income or as expenses.

The forward rate is the rate at which we contract to purchase lire and occurs whenever any enterprise enters into forward purchases of its exchange requirements. There is no way of avoiding this rate if we continue to do forward purchases. However, we believe that the recent issue of IAS 39 provides us with the opportunity to introduce hedge accounting, which should simplify/rationalise our accounting for the staff currency variance. Following the standard we would book the assets and liabilities arising from our financial instruments at inception and record the unrealised gain or loss in the Special Reserve. The latter provision would be released over the period of the contract to the income statement neutralising our currency risk. Providing our hedge matches our requirements the effect will be that the currency variance will not arise, in which case there will no longer be an appropriation from or to the Special Reserve account in this respect.

The budget rate is used to determine the amount of the appropriation that should be transferred from and to the Special Reserve Account in accordance with Conference Resolution 27/77. Transfers are not subject to accounting legislation and are the prerogative of an enterprise. In the present case, we believe that the objective of the Conference is to ensure that funds received in excess of requirements are set aside as a reserve for future use. This situation arises where the exchange rate assumptions underlying the budget do not materialise. We do not consider that the Conference would wish to give up its prerogative and change this mechanism.

b) The possibility of using a structured forward purchase has been considered and submitted to Top Management for its consideration. After consulting with various institutions (World Bank, IMF), it was the decision of the Director-General not to proceed with this tool.

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 most significant change results from the fact that, in Oracle, only approved Purchase Orders in place at the period end will be automatically accrued. The Oracle applications implemented have no equivalent to non-Purchase Order related commitments.

With regard to transactions which will not be processed through Oracle Purchasing, (e.g. travel transactions), the accruals procedure will be simplified to include only those transactions which can be demonstrated to relate to the year being closed.

Accordingly, in simple terms, period end accruals procedures will now concentrate on identifying items to accrue rather than identifying existing commitments which should be excluded from the accrual.

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.

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.

� A tender was issued for the Organisation's Banking Services on 26 March 1999 with a closing date of 10 May 1999.

� A total of 28 Banks were invited to bid and it is envisaged that the new contract will be operational by 1 September 1999, provided that no major delays are experienced in the award process.

� The Procurement Committee approved the criteria for the Evaluation of Bids.

� An Evaluation Panel was appointed to evaluate the bids and they have completed the Technical Evaluation of valid bids.

The Evaluation Panel has been requested to complete deliberations by the end of June 1999 and put forth a recommendation for the selection of the bank to which the contract should be awarded.

It is expected that a recommendation will shortly be submitted to the Director-General.

The consultant's recommendation referred to in the recommendation was reviewed by the FAO Advisory Committee on Investments ( ACI ) held last year. In this regard, the Committee concluded that on the grounds of increased returns, reduced risk and operational efficiency, it was appropriate that the FAO short-term assets invested in time deposits and call accounts be outsourced to a commingled short-term investment fund at The Northern Trust Company. Effective 1 January 1999, such arrangements have been implemented.

With regard to long term assets, following the meeting of the ACI held at the end of May 1999, it was recommended that half of the assets presently managed by Fiduciary Trust be apportioned to other managers by appointing an equity manager with a value bias and a specialist fixed income manager. It was also agreed that FAO should take IFAD's guidance on the selection of both the fixed income and equity managers, with the assistance of the Organization's Investment consultant, Cambridge Associates.

With regard to the strengthening of the Treasury function, adequate steps are currently being taken and we have recognised the staff time, training and travel expenses needed to adequately supervise external managers. As a first step, IFAD has offered FAO its assistance in the training of staff and in the evaluation of investment management performance. Following IFAD and FAO senior management approval, we expect to commence the proposed arrangements with IFAD with respect to both training and performance management.

As far as the "externalisation" of the management of cash is concerned, we noted that the decision was endorsed by the ACI in May 1998. However the manager was chosen without resorting to a competitive process.

Regarding the management of long-term assets, our statement whereby a closer monitoring of the fund manager(s) performance was necessary has been taken into consideration. We will look at the arrangements the Organisation is entering into with the equity and fixed term managers, as well as with IFAD.

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.

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.

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.

With regard to the reduction in the number of contracting auditors, our plan is to identify a suitable firm in each Region with correspondents in countries where FAO has Representations. To this end we are collecting information to determine how best to award contracts on a Regional basis, but this work has been slowed by the introduction of the Field Offices Accounting System which requires priority.

In view of the high cost involved in doing a full audit, the limited scope of the local audit (agreed upon procedures) will remain valid for 1999. A cost-benefit analysis of the merits of changing the audit scope will then be performed as part of a more general review of risk within the Organisation.

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.

Procedures relating to travel advances and LRIs have also been changed, resulting in both streamlining of accounts and increased control. All staff related transactions are now accounted for in the same way: through an account opened for each staff member within the sub-ledger, managed by the Accounts Receivable Unit.

Standard functionality within the Oracle sub-ledgers permits ageing of the balances and the responsibilities of the Accounts Payable and Receivable Units include ensuring that the ageing of balances are at acceptable levels. Also in this regard, one of the responsibilities of the Controls Unit will be to review the reports used by the Accounts Receivable and Payable Units to manage their business and ensure that the relevant functional units take appropriate action to resolve problem cases.

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.

With effect from the accounts for this biennium, the TPF has been incorporated into the Staff Related Liabilities of the General and Related Funds and the funding is being provided in accordance with and on the basis of the actuary's report at 31 December 1997. We will be reviewing with the actuary the advisability of setting a consolidated funding rate as opposed to having separate rates for each scheme in view of the fact that the investments are now managed as one fund.

Finally, as part of the reorganisation within AFF a new unit has been esteablished with responsibiity for reserve accounting. This unit will be headed by a social security accountant who will be responsible for monitoring all the social security plans and reserves, including the accounting for assets/liabilities and charges.

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.

Income received into Telefood bank accounts is booked at Headquarters on the basis of Telefood account bank statements. Telefood transactions, like all other transactions will be subject to audit by AUD.

New policy and procedure statements relating to the processing of Telefood transactions are currently being drafted. These will be in place prior to the 1999 Telefood initiative.

Decentralisation

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