Hundred and Twenty-seventh session
Rome, 22 – 27 November 2004
Report of the 107th Session of the Finance Committee
Matters requiring attention by the Council
Annual report on budgetary performance and programme and budgetary transfers
financial highlights and status of current assessments and arrears
report on support costs expenditure and related income recoveries
2003 annual activity report of the office of the inspector-general
oversight framework on the use of extra-budgetary funds
progress report on implementation of the external auditor’s recommendations
programme of work of the external auditor for 2004-2005
separate value-for-money reports from the external auditor
action plan on recruitment from under-represented countries
decisions on the general assembly on icsc and un joint staff pension board
audited biennial accounts 2002-2003
Update on the Management Plan 2004-2005
Report of the Inspector-General
date and place of the hundred and eighth session
Possible New Format for the Programme Implementation Report
Update on the UN Investigation of the Oil-for-Food Programme
Report of the Hundred and seventh Sessioen of the Finance Committee
FINANCIAL AND BUDGET REPORTS
|-||Annual Report on Budgetary Performance and Programme and Budgetary Transfers||4 - 8|
|-||Financial Highlights and Status of Current Assessments and Arrears||9 - 18|
|-||Separate Value-for-Money Reports from the External Auditor||48 - 54|
|-||Adjustments to the Programme of Work and Budget 2004-2005||64 - 76|
|-||Report on the Use of Arrears||77 - 80|
1. The Committee submitted to the Council the following report of its Hundred and seventh Session.
2. The following representatives were present:
|Chairperson:||Mr Roberto Seminario (Peru)|
|Vice-Chairperson:||Mr Anthony Beattie (United Kingdom)|
|Members:||Mr Aboubakar Bakayoko (Côte d’Ivoire)
Mr Augusto Zodda (Italy)
Ms Ryuko Inoue (Japan)
Ms Lamya Ahmed Al-Saqqaf (Kuwait)
Mr Simon J. Draper (New Zealand)
Mr Mohammad Saleem Khan (Pakistan)
Ms Ana María Baiardi Quesnel (Paraguay)
Mr J. Michael Cleverley (United States of America)
Ms Verenica Mutiro Takaendesa (Zimbabwe)
3. During the adoption of the Agenda and Timetable, the Committee expressed concern about the late arrival of the documentation in the required language versions. In particular, the late receipt of the materials from the World Food Programme had made it difficult for members to prepare properly for the session.
4. In accordance with Financial Regulation 4.6, the Committee reviewed the Director-General’s Thirty-seventh Annual Report on Budgetary Performance and Programme and Budgetary Transfers, based on the 2002-03 unaudited accounts.
5. The Committee noted that the 2002-03 appropriation of US$651.8 million was essentially spent at 99.9%, and that the transfers from Chapters 2 and 4 into Chapters 1 and 3 were within the levels previously approved by the Committee.
6. The Committee noted with concern that one of the main variances from budget, which affected in particular Chapter 3, was a shortfall in support cost income of US$6.5 million. This was due to the continuing change in the volume and mix of the extra-budgetary programmes as well as difficulties in reducing staff costs for operational services in the Regional Operating Branches. The consequence of the shortfall was that US$6.5 million had to be found by underspending the budget elsewhere.
7. The Committee recalled that a deficit had been reported by the Investment Centre Division (TCI) for the year 2002 and requested further detail on the biennial performance. The secretariat explained that when the deficit became known in March 2003, the Director-General asked the Inspector-General to launch an investigation as part of an extensive review of management practices within TCI. A number of steps were taken including the reining in of all non-essential expenditures, the increased use of staff members versus consultants for missions, and clarification of responsibilities for budgetary processes and performance within the division. These steps, along with a change in the accounting policy for TCI income, resulted in the final expenditure remaining within the biennial appropriation for Major Programme 3.2.
8. The Committee, having considered the Thirty-seventh Annual Report on Budgetary Performance and Programme and Budgetary Transfers:
9. The Committee reviewed the paper on Financial Highlights and status of Current Assessments and Arrears, which showed, at a summary level, the results for the biennium 2002-03, as submitted for external audit. The Committee noted several key messages to be drawn from discussion of the paper.
10. The General Fund deficit had increased in the 2002-03 biennium from US$75 million to US$90 million, essentially due to three factors:
11. The balances of the other two components of the Organization’s reserves, the Working Capital Fund (WCF) and the Special Reserve Account (SRA), had both improved during the biennium. The WCF benefited from the reimbursement of US$8.4 million advanced to the General Fund last biennium for separation and redeployment costs. The SRA was credited in the 2002-03 biennium with US$16 million of net gain resulting from the Euro forward contract which the Organization used to acquire its Euro needs for the biennium. However, the positive developments in both reserves had not been enough to offset the General Fund deficit of US$90 million, and the Organization’s net overall equity position was a negative US$42 million at the end of 2003, compared to a negative US$59 million at the end of 2001.
12. Delay in Members’ payment of contributions, and the persistently high level of arrears, currently US$79 million, were again cited as the most significant factor undermining the financial health of the Organization. The Committee noted that timely receipt of assessed contributions and payment of all arrears would restore the Organization’s overall equity position. In this regard, improvement of Members’ payments would enhance the Organization’s financial health. The Committee discussed at length the worsening trend in collection of Members’ contributions and requested that the secretariat prepare, for its next session, an analysis of the change in contribution payment patterns and arrears as well as a plan of action for improving collections. Among the various attempts to improve collection of assessed contributions, the Organization had introduced regular direct follow-up by the Regional Representatives and Country Representatives with the Member Governments which the Committee asked the secretariat to continue.
13. The liquidity of the Organization would continue to be seriously impacted by the General Fund deficit and other pressures including:
14. The funding towards staff related liabilities had improved following the performance of the long-term investment portfolio, which earned 27% in 2003 after three years of losses on the market. Together with the additional partial funding for the After Service Medical Care (ASMC) component of the liabilities approved in 2003 by the Conference, the stage was set for steady accumulation of value in the investment portfolio. However, based on the latest biennial calculations by external actuaries, submitted to the Organization in March 2004, the aggregate total of the Organization’s share of staff related liabilities had increased from US$297 million at the end of 2001 to US$432 million at the end of 2003. The US$135 million increase was mainly due to:
15. The change in methodology for the 2002-03 actuarial valuation had been necessary because prior biennia calculations, based on a single valuation for all the Rome-based UN agencies, carried a notional apportionment of retirees amongst the agencies which did not reflect actual populations, and the Committee recognized that future calculations should not fluctuate so significantly.
16. Recalling that the unrecorded portion of the Organization’s share of staff-related liabilities was being recognized in the accounts since 1998 through amortization over 30 years, the Committee noted that the General Fund would be charged in 2004-05 with biennial amortization of staff related liabilities, which, as most recently calculated, would increase from US$14.3 million recorded in 2002-03 for additional ASMC liability, to US$35 million in 2004-05 to record US$30 million of ASMC liability and US$5 million for the separation payments scheme.
17. Looking forward, the Committee requested the secretariat to prepare scenarios of the net overall equity position as at 31 December 2005 under various assumptions. Reviewing the data, the Committee focused on a most likely scenario based on actual experience of the 2002-03 biennium, i.e. a breakeven result for budgetary performance and the same TCP expenditure as in 2002-03, followed by charges to the General Fund for unbudgeted items, as follows: the same level of unpaid Member Nation contributions as in 2002-03, which would add a net US$32 million to the provision for contributions receivable, plus the above-mentioned US$35 million charge for amortization of staff-related liabilities, less the additional funding of US$14.1 million approved by the Conference towards such liabilities in 2004-05. The sum of these elements would add US$53 million to the General Fund deficit, in which case it would reach a negative US$143 million by end-2005. Assuming that the other reserves maintained their current positive balances, the net overall equity of the Organization would become a negative US$95 million by end-2005.
18. The Committee noted two points emerging from the scenarios:
19. The Committee considered Parts I and II of the Report on Support Costs Expenditure and Related Income Recoveries contained in document FC 107/4.
20. The Committee stressed the importance it assigned to the issue of support costs and related reimbursements. It took note of the progress being made by the secretariat to reduce the shortfall between these expenditures and reimbursements and supported the measures being taken to further reduce the gap. These measures included:
21. The Committee decided that the situation of support costs and related reimbursements should be reviewed again at its session in September 2005. It asked for a comparative study of support costs between FAO and other UN agencies as part of the review. It recognised the methodological difficulties inherent in such a study and was informed of inter-agency efforts to address this issue through the High Level Committee on Management (HLCM) of the United Nations Chief Executives Board for Coordination (CEB).
22. The Committee noted that six of the seven existing Commission trust funds had been established over twenty years ago in line with the support cost policy at the time. It agreed that it would not be cost effective to review the rates for these six existing trust funds.
23. The Committee confirmed the current policy on determining support cost rates for long term trust funds on a case-by-case basis and, therefore, that a standard rate for all Commissions was not recommended. It agreed that this policy should be applied to any new Commission trust funds and not retroactively to pre-existing funds of this nature.
24. The Committee reviewed the Report on Investments for 2003, noting that, overall, 2003 was a positive year for FAO’s investments. The recovery of global equity markets and the strengthening of the US economy, amongst other economic factors, shaped the environment during the year and favourably impacted the long-term portfolios, which experienced significant gains. The short-term portfolios provided low returns due to the prevailing very low interest rates.
25. The Committee was informed of the main advice received from the Advisory Committee on Investments and of key measures taken to further reduce risk, restructure the portfolios and enhance investment monitoring capacity during the year:
26. The Committee debated the issue and noted the actions taken by the secretariat. In order to facilitate its next review of the long-term portfolio, the Committee requested that the secretariat provide some comparative information on the portfolio structures and performance of organizations with similar staff-related liabilities.
27. The Inspector-General introduced the Annual Activity Report of the Office of the Inspector-General, and outlined the various sections of the report with brief explanations.
28. The Committee discussed the report and obtained clarifications from the Inspector-General, the Legal Counsel and the Assistant Director-General, Administration and Finance (AF) Department, where needed. The issues which were discussed were:
29. The Committee discussed the level of detail provided in the Report and requested that future versions provide more substantive information on the findings of the Inspector-General.
30. The Committee thanked the secretariat for the document PC 91/INF/3 – FC 107/7, which had been prepared at the request of the Committee during its 104th session. The Committee stated that the document was clear and precise, and that the exchange of ideas had added to their understanding of the audit regime and the overall framework of controls for the use of extra-budgetary funds currently in place.
31. The Committee noted that the donors of extra-budgetary funds were subject to the audit regimes of their own government or their own organization, and from time to time sought to carry out specific audits of projects they were funding.
32. The secretariat recalled that the Organization had a comprehensive audit regime, specified in FAO’s Basic Texts, comprising External Audit provided by the Auditor-General of a Member Nation and an internal audit function performed by the Office of the Inspector-General (AUD). The External Auditor was selected by the Council and reported back to the Conference.
33. While the secretariat acknowledged that the donors of Trust Funds might have to report to their respective governments, the Organization’s position had always been that reliance must be placed on the official audit regime. At the same time, it was noted that the increase in requests for separate audit had been discussed at a recent meeting of the HLCM’s Finance and Budget Network. That body supported the concept of single audit, i.e. relying on the assurance provided by the official audit regimes of UN bodies.
34. The representative of the External Auditor explained that in accordance with their mandate, they provided an opinion on the financial statements of the Organization, which included the accounts of donor-funded projects and a report on selected management topics. External Audit examinations of project implementation had been carried out in 2002-03, both in the field (four regional offices and several FAO Representatives) and at headquarters (audit of financial statements including extra-budgetary funds, as well as special audits of donor-funded projects at the request of the Committee – Kosovo). They had also examined the transactions of the Iraq Oil-for-Food Programme. In their work they also relied on the work of the Office of Inspector-General for projects.
35. The Committee proposed, and the secretariat agreed, that the question of increasing demand for project-specific audits and associated issues was one that could usefully be raised at the UN Panel of External Auditors.
36. With regard to the evaluation of extra-budgetary programmes and projects, the secretariat informed the Committee that this was handled in a tripartite manner, with participation by FAO (with oversight by the Evaluation Service), representatives of the funding agency and representatives of the recipient country(ies). The three parties to the project jointly agreed when and how the evaluation should take place and its terms of reference. The independence of the evaluation team and of its report were of prime importance. The Organization’s policy was that extra-budgetary projects and programmes should be subject to evaluation and provision for this should be made in the project budget, since the Organization was unable to fund the evaluation of individual projects. Donors agreed on the principle of evaluation, but there was sometimes difficulty in reaching agreement on this budgetary provision.
37. The secretariat noted that the Programme Committee was consulted on the future programme of independent evaluations, including evaluations of strategies, programmes and themes with significant extra-budgetary components. This type of evaluation might also be at the behest of Management. Normally, however, it was not carried out in consultation with the individual donors.
38. The secretariat affirmed the right of donors to evaluate the manner in which their funds were used, noting that usefulness was enhanced if such evaluations were of a consultative nature. In this regard, the secretariat informed the Committee that a pilot programme was being initiated in the next week for a number of countries, under which information would be provided online for the donors and recipients of Trust Fund projects, thus providing a means of indirect control. This FAO Field Programme Management Information System tool would be available through Internet to all Member Countries before the end of summer 2004.
39. The Committee reviewed the progress made in implementing the recommendations of the External Auditor as set out in the Report of the External Auditor on the Financial Statements for the 2000-2001 Biennium.
40. The Committee expressed satisfaction with the Progress Report and noted that the Report represented best practice within the UN system in relation to monitoring progress in implementing External Audit recommendations.
41. The Committee noted that, in accordance with standard practice, the Progress Report included the comments of the current External Auditor and that review of progress in implementing the recommendations would continue to be a standing item on the Committee’s agenda.
42. The Committee, having noted that of the eighteen recommendations made by the External Auditor, thirteen had been implemented and five were in the process of being implemented, requested that future reports include a summary table highlighting the total number of recommendations made and how many of these had been implemented and how many were still under consideration.
43. The Committee confirmed that the report provided useful information and noted that updated reports would be presented at future sessions for discussion by the Finance Committee.
44. The representative of the External Auditor noted that the Programme of Work of the External Auditor for 2004-05 had been presented to the Finance Committee at its 104th Session. This included a proposal to carry out Value-for-Money (VFM) audits on up to four topics from a list of possible topics prepared by the External Auditor. At its 104th Session, the Committee agreed with the selection of two topics (Official Travel and Contracts for Local Services) and had requested the External Auditor to provide further information on the remaining topics in order to understand the underlying rationale for the selection of the audit topics. The paper now presented by the External Auditor was in response to this request.
45. The representative of the External Auditor presented the rationale for carrying out VFM audits on three proposed topics from which he sought the Committee’s guidance in order to select two of them for review in the current biennium 2004-05. The topics presented for selection were:
46. The Committee deliberated over the suggested topics and agreed for inclusion in the biennium 2004-05 the review of Selected Areas of Human Resource Management and Selected Areas of Treasury Operations. The Committee requested that the review of human resource management should specifically consider within its scope the impact of budget reductions on staff morale and management structures and processes. The External Auditor agreed to consider the inclusion of this issue when planning the detailed scope of his review.
47. The Committee noted that the External Auditor would present the proposed topics in future presentations with more details about the scope of issues to be covered in audit.
48. The Committee considered document FC 107/10 “Separate Value-for-Money Reports from the External Auditor”. In this connection, the Committee recalled that the issue of whether the so-called long-form part of the report of the External Auditor could be issued in a sequential manner had been under review and that, in September 2003, it had requested the Legal Counsel to investigate the matter again, in light of the recent experience gained by the World Health Organization (WHO) and the World Food Programme (WFP).
49. The Committee noted that the report of the External Auditor, which in the case of FAO was referred to the Finance Committee, the Council and the Conference, consisted of three parts (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, the so-called Value-for-Money part of the report, 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”. The practice of FAO, followed for more than 30 years, as well as other agencies which had similar provisions in their Financial Regulations, adopted on a UN-wide basis in 1971, had consisted in the issuance of a single, unique report containing these three parts. However, recent changes to this practice had occurred at WFP and WHO, where the External Auditors started issuing report findings as they arose during the biennium, rather than all together at the end.
50. The Committee noted the opinion of the Legal Counsel that, taking into account the recent experience of WHO and WFP, the Committee’s request would not be inconsistent with the Basic Texts, provided that the various Value-for-Money reports issued in a sequential manner, as elements of the long-form part of the External Auditor’s report, were ultimately consolidated into a single end-of-audit report to be submitted to the Conference.
51. The Committee reviewed options regarding the manner in which these Value-for-Money Reports would be consolidated into a single, end-of-audit report, as presented in document FC 107/10, in light of the fact that in FAO the process of review of the External Auditor’s report involved three bodies: the Finance Committee, the Council and the Conference. The Committee agreed with the option that the various separate Value-for-Money reports should be reproduced in toto, and without a covering summary in the single end-of-audit report to be submitted to the Conference.
52. The Committee noted that the new reporting method, as was the case with the present single reporting system, would have to comply with the fundamental requirement that the Director-General must 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 the External Audit (Annex I to the Financial Regulations).
53. The External Auditor confirmed that he was prepared to apply the new reporting method regarding the Value-for-Money part of his report.
54. The Committee decided that the new reporting method should be reassessed in late 2006 in light of the experience gained in its implementation.
55. Bearing in mind best practice in matters of corporate governance, the Committee considered the advantages and disadvantages of limiting the term of office of the External Auditor. The Committee confirmed the appropriateness of the External Auditor being appointed for a period of four years (two biennia) with possible extension for a further two year period (one biennium), following which the contract for external audit must be re-tendered. The Committee also concluded that an incumbent External Auditor should be allowed to bid in any tender process.
56. The Committee considered a number of other matters relating to the process of selecting and appointing the External Auditor and requested that background information on the rationale of Financial Regulation 12.1 and a comparative study of the practices of other UN agencies be provided by the secretariat in order that such matters could be discussed in more detail at the September 2004 session of the Finance Committee.
57. The Committee considered the information provided in document FC 107/12, Status Report on HLCM Working Group on Accounting Standards, and noted the importance of the work being performed by a Task Force within the UN system in relation to accounting standards. In view of the timetable foreseen for presentation of recommendations on accounting standards, the Committee proposed that updated information on the matter be included in the agenda for the May 2005 Session of the Finance Committee.
58. The Committee considered the document on FAO’s Medical Scheme (FC 107/13) which presented an extract from a study on the terms of the After-Service Medical Care Scheme benefits including the extent to which the scheme was managed in accordance with best practice.
59. The study - carried out in 2000 by independent consultants - reviewed the competitiveness of the benefits provided by the FAO Medical Insurance Scheme in comparison to other After-Service Medical Care arrangements in five UN system organizations.
60. The Committee noted that, according to the study, the FAO After-Service Medical Coverage was comparable to other UN organizations in benefits and cost-sharing arrangements.
61. Questions were raised as to how the insurer’s selection process was conducted and which companies were used for comparison purposes. The tendering process adhered to prior to the issuance of the contract with Vanbreda, the selected firm, was explained and the Committee was assured that several international companies had been invited to participate in the process.
62. The Committee was informed that in addition to the comparability in benefits and cost-sharing arrangements, the FAO After-Service Medical Scheme was similar to other UN system schemes in their eligibility criteria for staff.
63. The Committee recalled its discussion of the financial implications for the Organization arising from the biennial actuarial study of staff-related liabilities, in particular the After-Service Medical Care component and requested that documents presented previously to the Finance Committee on the subject be compiled and distributed for reference and future debate.
64. The Committee considered the Adjustments to the Programme of Work and Budget 2004-05, contained in document FC 107/14. The Committee recalled that this document responded to the second operative paragraph of Resolution 7/2003 which “requests the Director-General to make proposals to adjust the approved Programme of Work, bearing in mind the expression of priorities by Council and Conference as well as the criteria for priority setting .... to the next meetings of the Programme and Finance Committees and to their Joint Meeting for their approval.”
65. The Committee recalled that, despite efforts by Members to reduce the impact of the significant exchange rate effect and cost increases on the Organization’s programmes, a reduction of 6.4% (US$51.2 million) to the Programme of Work was required. The Committee noted that the starting point for the exercise was the Zero Real Growth (ZRG) scenario, for which the Programme of Work had been developed at the disaggregated level in C 2003/3, adjusted in the current document for the budget rate of €1=US$1.19.
66. The Committee noted that, in addition to the efficiency savings which had already been taken into account in the current document, additional efficiency savings had been tentatively put forward for further review and eventual action. The Committee looked forward to receiving a document, at its next Session, on efficiency savings including updated information on progress, issues and options and comparisons to the experience of other Organizations including, where possible, other UN agencies. The secretariat indicated that it would welcome ideas from the Committee on possible sources of comparative data and on areas in which efficiency savings might be made.
67. The Committee requested details on the financial aspects of staff emoluments including, in addition to salaries, all the other benefits for the next session.
68. The Committee noted the proposed reduction of 232 posts and recognized that it preferred that savings had been sought to the extent possible from vacant posts and posts whose incumbents were reaching mandatory retirement, so as to minimize redeployment and separation costs.
69. The Committee reiterated the importance of appropriate internal control within the Organization and recalled that the External Auditor had recommended increased staffing for the Finance Division (AFF) in the previous audit report. In response to the question whether the reduction in the level of resources allocated to AFF would result in an unacceptable level of internal control risk, the Committee was advised as follows:
70. The Committee concluded by expressing its concern that the abolition of the five general service posts in AFF could put the Organization’s internal control at risk and requested that these posts be restored as the first call against additional efficiency savings if and when they became available.
71. Some Members believed that any further savings arising during the biennium from efficiencies should be redirected to the implementation of the Human Resources Action Plan, while other Members believed that restoring the capacity of the decentralized offices should be considered a top priority. In this regard, the Committee stressed the importance of a balanced utilization of international and national professional staff in the FAO Representations.
72. Although some Members were concerned that IPPC and Codex had not been granted the same absolute protection as the Technical Cooperation Programme (TCP) in the revised budget, the Committee was advised that these two programmes had nonetheless received programme increases of 33% (IPPC) and 16% (Codex Alimentarius) when compared to the 2002-03 Programme of Work and Budget versus a zero increase applied to TCP. In this context, some Members pointed out the strong linkage and equal importance between the normative and operational activities of the Organization.
73. While many Members reiterated their view that TCP was of the highest priority, some Members sought additional financial information. It was noted that the distinction between TCP and policy assistance was not clear. The secretariat agreed to address this point in the document on TCP already requested by the Programme Committee.
74. The Committee reiterated the importance of timely and accurate translations of all documents in the five official languages of the Organizations.
75. The Committee was informed of an error in Annex III “Revised List of Scheduled Sessions for 2004-05” which showed Session GIL 804-3, Third Consultation on Agricultural Information Management (COAIM), as remaining in the programme although it had, in fact, been cancelled. One region expressed concern at the cancellation and requested reinstatement of the meeting, noting that, had the document been correct, they would have raised it much earlier in the process, given the importance that they placed on this activity.
76. Following the deliberations of the Joint Meeting of the Programme and Finance Committees, the latter approved the transfers between budgetary chapters necessary to arrive at the budget proposal approved by the Joint Meeting as follows:
Approved Budget Level (US$000)
|Chapter||Conference Resolution||Revised Budget approved
by Joint Meeting
|1. General Policy and Direction||60 521||67 355||6 834|
|2. Technical and Economic Programmes||332 762||329 137||(3 625)|
|3. Cooperation and Partnerships||147 155||140 772||(6 383)|
|4. Technical Cooperation Programme||101 310||103 027||1 717|
|5. Support Services||60 465||59 415||(1 050)|
|6. Common Services||46 287||48 794||2 507|
|Total||749 100||749 100||0|
77. The Committee reviewed the Report on the Use of Arrears, which it had requested at its 104th Session. The Committee recalled that in approving the Budget Resolution 7/2003, the Conference had invited the Director-General to make proposals to the Finance Committee for the reallocation of arrears, the use of which was subject to Conference Resolution 6/2001, to cover one-time redeployment and separation costs associated with the implementation of the adjusted budget. It was informed that every effort had been made to take advantage of vacancies and retirements and that these redeployment and separation costs were currently estimated at US$3.5 million.
78. The Committee was also informed that the Organization faced additional one-time security expenditures in 2004-05 estimated at just over US$4.0 million. It noted that the secretariat had chosen to reduce the allotments to all programmes in order to accommodate this essential one-time expenditure in the biennium.
79. The Committee approved the setting aside of an amount of US$4.1 million, being 10% of the unexpended balance of arrears at the end of 2003, for possible use in covering one-time costs related to redeployment and separation costs and one-time security costs, on the understanding that the Organization would make every effort to absorb these costs within the Regular Programme.
80. The Committee welcomed the application of the remaining balance of arrears to the eight areas originally foreseen in Resolution 6/2001. It also noted that some resources, particularly those related to the Human Resources Management Systems project, would most likely not be fully spent by the end of 2005 given the current timeframe for that project and was informed that the secretariat intended to propose the transfer of any balance remaining from Resolution 6/2001 to the Capital Expenditure Facility.
81. The Committee welcomed the report and the efforts made by the secretariat to address issues of non- and under-representation of Member States.
82. The Committee made a number of enquiries on spouse employment related issues, the status of gender balance in the Organization, the position of the Organization vis-à-vis the recruitment of young professionals, the employment of retirees and the impact of post reductions on the geographical representation. The secretariat explained that the scope of the report was limited to actions for redressing non- and under-representation of Member States. A Progress Report on Human Resources Issues would be submitted to the Committee in September and would address many of the points raised. Details on the current spouse employment policy and issues were provided. The Committee requested the secretariat to raise the issue of work permits for spouses with the Government of Italy with a view to facilitate easier access to spousal employment.
83. The secretariat took note of the Committee’s requests for more comprehensive statistics which would include a breakdown of professional and general service staff by region, nationality, gender and grade level for submission to the Committee at its September 2004 session.
84. The Committee confirmed that the report provided useful information and noted that an updated report would be presented at its next session.
85. The Finance Committee was presented with the Statistics on Human Resources, namely graphs and tables on posts approved by the Conference in the Programme of Work and Budget (PWB), posts established outside the PWB with a duration of more than one year, temporary posts with a duration of less than one year, statistics on demographics over the period 1995 to 2003 and information on the number of contracts of short-term staff and non-staff human resources during the past year.
86. The Committee was presented with information on the work of the International Civil Service Commission (ICSC) and the UN Joint Staff Pension Board (UNJSPB), in particular of the progress made in the review of the pay and benefit system for staff in the professional and higher categories, and of the changes in conditions of service for both categories of staff that had financial implications for FAO.
87. The Committee reviewed the report on progress with administrative information systems that covered Oracle Financials, Programme Planning Implementation Reporting and Evaluation Support System (PIRES) and Oracle Human Resources Management System (HRMS).
88. The Committee enquired what efficiency savings could be achieved by the implementation of the administrative information systems. The secretariat replied that the systems support major programmes of the Organization, such as the human resources reform, in addition to efficiency savings. Furthermore, the HRMS project was starting its improvement phase which would seek to achieve efficiency savings through the streamlining of processes and procedures.
89. In reply to an inquiry on the status of other UN agencies with regard to their package solution implementation, the secretariat reported close collaboration and sharing of experience with other UN agencies, in particular with the International Labour Organization (ILO) which was using the same package and was in the midst of implementation.
90. The Committee enquired how the secretariat was planning to overcome the coverage aspect of the HRMS project to cope with insufficient funding. The Committee was informed that reduction of unit costs was being sought through such means as executing some of the systems development tasks from a lower geographic cost base. It was stressed that the original scope of work would have to be maintained since a reduction of scope would limit the benefits that the project could realize.
91. The Committee noted that the HRMS project would most likely not spend its full arrears allocation by the end of 2005. It was informed that the secretariat intended to propose the transfer of the balance remaining from Resolution 6/2001 to the Capital Expenditure Facility, which could provide for the carry forward of unspent arrears funding for the HRMS project to 2006.
92. The Committee noted the importance of the administrative information systems and the need for results that reflected efforts and investment made. It welcomed the secretariat’s proposal to provide more information for the September session of the Finance Committee, including new estimates for the HRMS project.
93. The secretariat introduced the agenda item and explained that the audited Biennial Accounts for 2002–2003 consisted of three sections:
94. The secretariat highlighted the contents of Section I, the Executive Director’s report, as follows:
95. The secretariat thanked the External Auditor for responding to the Executive Director’s call for an early audit and also thanked the WFP staff for a tremendous job of closing the accounts much earlier than usual.
96. The secretariat explained that the transparency provided by the WFP Information Network and Global System (WINGS) revealed certain shortcomings that were in the system before, among them the cross-charging of expenditures highlighted in the long-form report of the External Auditor. The secretariat would address these issues in detail in the Executive Board’s meeting in October 2004.
97. The representative of the External Auditor presented the External Auditor’s report for 2002–2003. He noted the secretariat’s achievements in producing earlier financial reporting, which External Audit had assisted and supported. The External Auditor had undertaken to provide the WFP Executive Board with separate reports on several management topics in addition to the audit of the financial statements. He noted that this commitment had been met.
98. The overall audit report on the financial statements confirmed an unqualified audit opinion and brought to attention significant findings, including:
99. The representative of the External Auditor also drew attention to the additional reports on management issues, which would be before the Executive Board as part of the External Auditor’s work for the biennium. He mentioned the report on WFP’s Human Resources Strategy, already presented to the Board in October 2003; and the report on Air Operations, where External Audit review had noted inconsistent and ad hoc application of controls, with audit recommendations to improve budgetary control, financial and operational management, and risk management. He concluded that WFP had substantial business risks with respect to air operations that needed management attention. On vulnerability analysis and mapping, the External Auditor’s report referred to recommendations directed at improving the cost effectiveness and benefits of vulnerability analysis. Finally, on corporate governance, the External Auditor had identified three areas of immediate concern: the composition, independence and terms of reference of the Audit Committee; the roles and responsibilities of field offices; and the need to make better use of oversight mechanisms through improved accountability arrangements.
100. The comments and questions raised by the Committee on the report touched on the following:
101. The External Auditor responded to questions from the Committee members. He confirmed:
102. The Committee expressed satisfaction with the reports submitted. The Committee noted the accounting changes that had been implemented in 2002–2003, that the External Auditor had rendered an unqualified opinion, and that the long form report contained a detailed report by the External Auditor. The Committee discussed the substantive issues embodied in the recommendations of the External Auditor and recommended that the secretariat address the audit observations provided by the External Auditor, especially with respect to the accounting inconsistencies resulting from WINGS between programmes and projects and support cost accounts.
103. The Committee recommended that the External Auditor prioritize the audit observations and establish deadlines for completion of each.
104. The Committee recommended that the Executive Board approve the 2003–2003 Biennial Financial Statements of WFP together with the Report of the External Auditor, pursuant to General Regulation XIV.6 (b).
105. The Committee further recommended that the Executive Board approve the following recommendations of the Executive Director contained in paragraph 56 of the document:
106. The Committee also congratulated the secretariat on completion of the biennial accounts and external audit within 90 days after the financial period through their combined efforts with the External Auditor, as well as the initiatives taken by the secretariat to strengthen the financial management of the Programme.
107. The secretariat introduced the document and explained that it contained information on three separate financial issues. The first section contained the report on the utilization of contributions for the purchase of commodities and on waivers of the Indirect Support Costs (ISC). The second section provided an analysis of WFP’s cash balances and information on the management of cash and short-term balances; it included information on the performance of WFP’s investments. The third section presented the Budgetary Performance Report for the
2002–2003 biennium showing the significant increase in actual operational income and expenditures, particularly in emergencies, compared to the original budget estimates.
108. With respect to the utilization of contributions to purchase commodities, the Committee noted the percentage spent in developed (59 percent) and developing (41 percent) countries and requested information on the percentage breakdown for the previous year. The secretariat explained that the amount spent in developing countries had increased, although the percentage of total purchases was lower. In deciding on the appropriate source of commodity purchase, the secretariat took account of price (including up to a 15-20% price advantage for developing countries) and availability and potential impacts on local markets.
109. Having regard to the overriding importance of programme delivery, WFP should pay continuous attention to the level of cash balances. The Committee noted the positive developments in operating cash balances having reduced in absolute terms and as a percentage of operating expenditures over the previous year.
110. In response to a question on the policy of including global equities in WFP’s investment policy, the secretariat explained that these were related only to the long-term after-service staff benefits fund. An assets-liability study had been carried out to establish the appropriate asset mix of this fund to ensure diversification and lower plan contributions as a result of higher yield. The study recommended an allocation of 40 percent of the investment of US$64m in global equities, which were subject to strict guidelines including investment in companies having a minimum capitalization of US$1 billion and registered in recognized stock exchanges. Furthermore, the investment portfolio was closely monitored by the custodian and the secretariat.
111. Responding to a question on the investment performance benchmark, the secretariat explained that the target of 50 basis points above the benchmark took account of the priority for security and liquidity over return.
112. The Committee requested information on the risk to WFP of the electronic banking initiatives being undertaken. It was explained that risk was being managed carefully through gradual implementation of the system in country offices, ensuring sound controls including restricted access, segregation of duties and close monitoring by WFP Headquarters. The system had the advantage of eliminating cheque forgeries and facilitated the disbursement of cash in countries where there were no banks.
113. The Committee took note of the information provided and concluded that the document adequately presented important financial information.
114. The secretariat introduced the document and explained that it provided an update of the implementation of the Management Plan as requested by the Executive Board in October 2003. The secretariat explained measures and procedures that WFP had introduced to monitor implementation of the Management Plan.
115. The Committee took note of the document, which indicated that the secretariat was currently operating at 90 percent of the updated 2004–2005 Budget, which was currently US$1 billion higher than the original Management Plan level, which reflected estimated donation levels.
116. The Director, Oversight Services and Inspector-General introduced his report, which was presented in accordance with Article VI (2) (b) (viii) of the WFP General Regulations. The first part of the report indicated the actions taken on the previous Board’s decisions and recommendations. For the first time, the Inspector-General's report also included an outline of the work performed by the internal audit unit. This was in accordance with the Executive Director’s initiative for greater transparency and to give the Committee and the Executive Board a flavour of this important work. The report also presented trends in oversight issues both for audit and investigations as requested by the Executive Board; however, the methodology for such presentation needed to be further refined. A preview of the initiatives for 2004–2005 was also outlined in the report.
117. The Committee welcomed the report and noted the improvement in its format, particularly the inclusion of a section on the internal audit function. It further drew attention to the several path-breaking initiatives in governance contained in the report. The Committee members sought further elaboration on: (i) the Executive Director’s commitment to introduce a Statement on Internal Control, (ii) best practices against which the Division of Oversight Services (OEDO) was benchmarked, (iii) the progress in strengthening the Internal Audit Committee and its cost implications, (iv) presentation of trends, (v) seizure of personal assets, (vi) difficulties in hiring qualified national staff and gender balance, (vii) implementation plan for recommendations, (viii) resource requirements for implementing various initiatives, and (ix) the definition of high-risk countries.
118. Responding to the questions the Inspector General indicated that the Executive Director was committed to producing a Statement on Internal Control and that as a first step the Office of Internal Audit (OEDA) was carrying out an internal control audit to determine the present status of control in WFP. Upon completion of this audit, WFP would be in a better position to discuss a timeline and other related issues and would keep the Board informed. He indicated that the processes and procedures of OEDO were benchmarked against best practices in the public and private sectors as well as United Nations agencies and had resulted in recommendations for which OEDO had prepared an implementation plan. Regarding the Internal Audit Committee, he stated that it was envisaged to consist of five members, three external and two internal; the external members were expected to perform on a pro bono basis, with WFP bearing the actual cost of participation only for the non-Rome-based members, if any. He explained that trends were based on the nature of cases and findings over the previous biennia; in the Southern African region in particular the country offices faced problems in recruiting qualified local staff. The Inspector General indicated that most costs of implementation had been met by the substantial increase in OEDO budget in the Management Plan. Finally, he explained that the size of the operations, and last visit of the oversight function were the main constituents in calculating the level of risk of a country office.
119. The Finance Committee expressed satisfaction with the report and looked forward to future updates on governance initiatives and to the next biennial report of the Inspector-General in 2006.
120. The secretariat made an oral presentation of the status of the Business Process Review highlighting the original objective, current actions, including pilot implementation in five countries, and a plan either to make a final proposal for the consideration of the Executive Board in October 2004 or to continue the pilot programmes into 2005.
121. The Committee appreciated the update, and looked forward to the final proposals.
122. The Committee was informed that the Hundred and eighth Session was tentatively scheduled to be held in Rome from 27 September to 1 October 2004. The final dates of the session would be decided in consultation with the Chairperson.
123. The Committee welcomed the proposed evolution of the Programme Implementation Report (PIR) towards a more results-based format as part of the series of corporate programming and accountability documents. The Committee noted that the reporting innovations would be implemented over several biennia and that it would have the opportunity to suggest improvements to the format as the PIR evolved. It was informed that consultations had been held with other UN agencies on the format for implementation reporting and requested that a comparative study on how other United Nations technical agencies approached implementation reporting be presented at a future session.
124. The Committee appreciated the proposed extensions of financial analysis to address cost efficiencies and looked forward to receiving such analyses in future reports.
125. The Committee received the latest information available on (i) the UN investigation of the Oil-For-Food Programme, (ii) the complete withdrawal by FAO from the Programme as of 31 March 2004 (iii) the new activities being implemented by FAO in Iraq under donor funded projects for agricultural relief activities (currently implemented through local staff and NGO partners), (iv) the Organization’s responsibilities as lead UN agency for the Agriculture, Water Resources and Environment cluster in the UN strategy for assistance to Iraq for which a UNDG trust fund was established for channelling donor funding.
126. The Committee noted that to date the only FAO involvement in the UN investigation had been to provide information requested.
127. The Committee was informed that, having considered recent best practice developments in the area of corporate reporting on internal controls, the Organization would in principle have no objection to introducing formal internal control reporting upon issuing the audited financial statements of the Organization. The secretariat explained that prior to introducing such reporting, it would need to study what other organizations in the UN system were doing in relation to internal control reporting and review this in the context of FAO Financial Regulations to ensure any action proposed was in accordance with current provisions.
128. The Committee noted that this was consistent with actions being taken by the World Food Programme and expressed satisfaction with such position.
129. The Committee recognised that much preparatory work would be required before the Organization was in a position to confirm the exact nature of such reporting and noted that a significant initial investment would be required on the part of the Organization in order to introduce formal internal control reporting.
130. The Committee requested that a paper outlining current best practice in internal control reporting, the issues involved in introducing such reporting within the Organization, based also on the results of the study mentioned above, and likely costs and potential timetable of such introduction be presented to a future session of the Finance Committee.