FC 97/12

Finance Committee

Ninety-seventh Session

Rome, 17 - 22 September 2001

Progress Report on the 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.
A number of recommendations brought forward from the previous biennium, which have not been repeated by the External Auditor in the 1998-99 long form audit report, have now been reported under Attachment 1 to this Progress Report.


External Auditor's Recommendation

Action taken

External Auditor's Comments

Specific Financial and Accounting Issues

Staff-related Schemes
I reiterate my previous recommendation to thoroughly review the purpose and operation of the Termination Payments Fund (TPF) with a view to establishing a consolidated mechanism to provide for the funding of all recognised end of service liabilities.
[see paragraph 29 of the 1998-99 report]



In order to find a suitable solution to the question of the underfunding for Terminal Payments, the Organization has addressed this matter in a separate paper (FC 96/12) which was submitted to the May 2001 Session of the Finance Committee. In this context, the Organization invited the views of the Finance Committee on the suggestion to extend the current After Service Medical Coverage (ASMC) mechanism, under Conference Resolution 10/99, to cover the Termination Payments' liability as well once the liability for After Service Medical Coverage has become fully funded. In order to provide for additional time to study the document, a decision on this issue was deferred to the next Session of the Finance Committee planned for September 2001.
Should the Finance Committee endorse this course of action, then a draft Conference Resolution will be submitted to it at the May 2002 Session for endorsement and onforwarding to the Council and Conference for their approval.

Status: Awaiting Finance Committee decision



No comment at this stage as concrete action still has to be taken.

Tax Equalization Fund
Over US$ 1 million of advances, which should have been posted to the relevant Tax Equalization Fund account, were still recorded in two accounts receivable accounts, namely Account 2800 "Prepayments" for FAO staff and Account 2805 "WFP" for WFP staff. The problem was being addressed at the time of writing this report. In view of the recurrent need to speed up the recovery process of the advances, I recommend that some sort of automatic salary recovery be set up and that the corresponding system change be implemented.

[see paragraph 33 of the 1998-99 report]

A system change has been implemented such that tax advances and claims processed by the FAO Liaison Office in Washington are now posted direct to the Oracle Accounts Payable sub-ledger. Any staff member balance outstanding in the sub-ledger can be recovered by salary deduction using the Account Payable to FINSYS Payroll Interface.

Status: Implemented

The impact of the system change will be examined during the audit of the 2000-01 financial statements.

Accounts Payable and Receivable

Amount receivable from the WFP
As already recommended to the WFP, the reconciliation initiated on the account between both organisations should become a routine exercise performed on a monthly basis.

[see paragraph 35 of the 1998-99 report]


Formal reconciliations between the Organisation and the WFP are now carried out on a monthly basis as a routine exercise. In addition, a revised agreement has been reached with the WFP by which each month this Organization now advances the gross instead of the net salary costs.

Status: Implemented


In the absence of WFP interim financial statements for 2000 (whose production was delayed because of SAP implementation), we could not ascertain whether the FAO interim financial statements for 2000 did indeed reconcile with the ones of the WFP. The matter will be investigated as soon as the latter ones are finalised.

Clearing and reconciliation of accounts receivable and payable
In my previous report, I recommended that, in line with the new financial system implementation, 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. This objective has already been partially attained. [...] In addition, a consulting firm had issued several recommendations, with which I concur, to improve internal control and procedures by obtaining contracts and supporting documentation for all prepaid expenses and by strengthening accounting systems for recording of transactions.

[see paragraphs 36 and 37 of the 1998-99 report]


A new clearing account reconciliation module was developed and introduced in April 2001 which has enhanced our ability to monitor and clear transactions posted to these accounts.

Status: In course of implementation


The impact of the new clearing account reconciliation module will be examined during the audit of the 2000-01 financial statements.

Recovery of travel advances
I recommend that automatic recovery of travel advances to staff members, which was put on hold at the end of April 2000 because of travel expense claims backlogs, be re-initiated as soon as possible.

[see paragraph 37 of the 1998-99 report]


In April 2001, the Staff Receivable system was re-activated and statements of account were sent to staff members informing them that by the end of August 2001 the Organization would be initiating automatic recovery action of outstanding amounts. In addition, staff members were asked to take the appropriate action to clear their travel advances, e.g. submission of the travel expense claim or, alternatively, to refund the money due to the Organization.

Status: In course of implementation


The impact of the re-activation of the Staff Receivable system will be examined during the audit of the 2000-01 financial statements.

Cash and Investments

Investment advisory services
Considering the amount of funds that the Organization would eventually receive and disburse in Euro, I recommend that future invitations to bid for the provision of investment advisory services be more geographically open especially towards the Euro zone.

[see paragraph 41 of the 1998-99 report]


With respect to the External Auditor's comments that the Organization should engage in competitive bidding, the issue was discussed at the 27th Session (25 May 2001) of the FAO Advisory Committee on Investments (ACI). The ACI felt that the FAO approach to cash management made sense. By utilizing the services of major international banks, such as Bank of America, Chase or Citibank, the FAO would have access to cash management services it would be unable to obtain from smaller national banks.

In addition, the ACI felt that the External Auditor's recommendation to engage in competitive bidding for banking arrangements was inappropriate. Financial markets moved too quickly for this type of process. The Investment Committee review process was a much more appropriate and practical arrangement to assure that a proper vetting process took place. The ACI expressed a general concern that the external auditing process should not drive, or have an undue influence on, the investment process. While the Auditor may have a view, management should make the investment decisions and use those processes that best serve the institution.

Status: Not for implementation


The appointment of a consulting firm to provide investment advisory services was discussed by the ACI at its 24th Session (18 May 1998) on the basis of the Organization's consultant report, which recommended Cambridge Associates. In this regard the ACI meeting minutes mentioned the following: "Cambridge produced excellent research, but similar work could be obtained by FAO from the major investments banks free of charge. In response to a concern raised by the Internal Auditor, the Committee agreed that it would be wise to open the consultant assignment to competitive bidding". No specific names of firms were indicated.

Furthermore, we recall that, according to Section 502.431 of the FAO Manual, invitations to bid for contracts have to be sent to "no less than 3 bidders, representing, to the extent feasible by the nature of the procurement action, a diverse international geographical distribution of firms".

In view of the above, we maintain the recommendation contained in our 1998-99 report.

Number of bank accounts
In my previous report, I had recommended that the number of bank accounts be reduced. [...] The Organization had indeed recognised the need to restructure its banking arrangements and had formulated a three-tiered approach but because of problems in field bank reconciliation and staff shortages notably, only partial implementation had been made to date. The strategy envisaged involved:

  • A banking relationship to manage Headquarters payments in Lire, Euro and staff accounts held in Italy.
  • A banking relationship with a major international bank to handle international payments outside of Italy.
  • Several banking relationships with other international banks with strong retail presence in particular regions of the world, to operate other field banking requirements.
At the time of writing my report, the first tier of the strategy was in place. Another contract had also been concluded for the second tier but its full implementation was only expected to take place over the next few months. No action had been taken yet with regards to the third tier.

[see paragraphs 42 to 44 of the 1998-99 report]

Work in this area is ongoing. It will take the balance of this year, perhaps longer, before the FAO will be in a position to fully implement the second part of the banking strategy. The internal Investment Committee will be involved in evaluating and determining which banks should be selected in particular regions of the world. Once this tier has been put in place, FAO will revisit the first two tiers of the structure and call for proposals from other banks.

Status: Action on the first tier has been taken, action on the other two tiers is in course of implementation

No comment at this stage as concrete action still has to be taken.

Short-term investments

As already mentioned in my previous report, a consultant had recommended in 1998 to "externalise" the management of cash to achieve higher returns at reduced risks and free up Treasury Unit, which spent much of their time placing and tracking three-month deposit certificates placed with the banks, for other tasks. This new strategy was discussed at the 24th Session (18 May 1998) of the FAO Advisory Committee on Investments (ACI), during which the consultant's report was presented. At the time, the ACI concluded that "on the grounds of increased returns, reduced risk and operational efficiency" it made sense to move the Organization's short-term assets to a commingled Short-Term Investment Fund (STIF). This STIF was managed by the same firm that was used for the custody of the Organization's long-term investments, which I found questionable. I found even more questionable the fact that the firm was not chosen through a competitive process. I recall that in my previous report I had specifically recommended that, should the proposal to "externalise" the management of short-term assets be considered, the FAO should call for bids from several international cash managers. [...] At the time of writing this report, my staff was informed that the short term investment strategy would be reviewed by the ACI at its May 2001 Session and that the concerns I raised would be given to the Committee along with management's views on how it should manage this component of liquidity.
[see paragraphs 54 to 59 of the 1998-99 report]


With regard to the Auditor's point on the use of the custodian to place short-term assets in a STIF, this matter was referred to the ACI at its 27th Session held on 25 May 2001. The ACI felt that it was standard practice to have custodian banks invest short-term assets in STIF funds pending investment in another investment vehicle and that the objectives laid out for the short-term assets did not expose the FAO to undue risk, as implied in the Audit Report.

At the same meeting of the ACI held on 25 May 2001, the matter of using a competitive bidding process to select investment managers was also considered. As already mentioned above under "Investment Advisory Services", the ACI felt that the recommendation to engage in competitive bidding for banking arrangements was inappropriate. With regard to the specific instance of the FAO's choice of a manager, it was considered that the independent advice of Cambridge Associates, the Investment Committee's review of the proposals and the Committee's active involvement in the selection process together formed an acceptable vetting process to use when appointing managers.

Cambridge Associates reported that they had participated in the selection process of the short-term fixed income managers. They regarded the process as competitive and similar to that used in most organizations.

In addition, one ACI member advised strongly that the FAO should not use the competitive bidding process advocated by the External Auditor. In the view of this member, the one time his organization had used this process on portfolio management it had not been very successful. He also noted that competitive bidding had led to a "lowest-common-denominator" approach, with fees becoming the major factor in the final evaluation and that poor competitive bidding processes had failed to make appropriate allowances for differences in quality, service and support. The member concluded by stating that ultimately judgement and review by an investment committee was critical in assessing value for money.

Status: Not for implementation


We would like to recall that, according to Section 502.112 of the FAO Manual, "the principal objective of the procurement activities is the timely acquisition of goods, works or services to ensure the effective and efficient use of resources, in a competitive and transparent manner". As previously recalled, the normal procurement practice is to invite "no less than 3 bidders, representing, to the extent feasible by the nature of the procurement action, a diverse international geographical distribution of firms".

We consider that the objective recalled above also applies to contracts related to the provision of banking and/or investment services. As a matter of fact, such contracts are not mentioned specifically in the exceptions listed in section 502.141 of the FAO Manual. Paragraph (x) only provides that, "special procedures" can be established or authorised by the Director- General or the Assistant Director-General, Administration and Finance Department (AF) "in view of the confidential or particular aspects of such a contract".

Long-term investments

None of the long-term assets had been transferred to new managers at the time of writing my report. While I do acknowledge that the current manager had, overall, exceeded its benchmark in 1999 and 2000, I still reiterate my previous recommendation to review the existing arrangements through a competitive process. [`...] At the time of writing this report, my staff was informed that none of the long-term assets had been transferred to new managers because of lack of staffing and managerial time available to carry out the complex and time intensive processes involved in moving forward on this agenda. They were further informed that the Organization did not intend to move forward until it had: (I) completed the placement of the short-term portfolio; (ii) concluded the agreement with IFAD on investment management support; and (iii) reviewed the issue of long-term investments at the May 2001 Session of the ACI.

[see paragraph 64 of the 1998-99 report]


On the advice of the Finance Committee, the Organization is no longer pursuing the arrangement with IFAD for long-term portfolio management services. The Organization has instead set up a P-5 Senior Treasury Officer post to take on these responsibilities. Until this post has been filled and we are confident that we have adequate control on the management of the long-term portfolio, we do not plan to diversify the management of the long-term investments. The ACI is in agreement with this position.

Status: Ongoing


No comment at this stage as concrete action still has to be taken.

The FAO Advisory Committee on Investments (ACI)

At its 26th Session held on 26 May 2000, the ACI requested that it "be kept abreast of any significant changes of FAO investment activities before meetings". I strongly support this request to keep the ACI regularly informed on investment activities. I further recommend that consideration be given to reinforce the role of the ACI by:

  • reviewing its terms of reference;
  • issuing the meeting records in a timely manner;
  • re-examining the committee's composition and limiting its membership to external members only.

[see paragraphs 66 and 67 of the 1998-99 report]


The terms of reference for the ACI have recently been reviewed and submitted to the Director-General for his approval. Membership of the ACI is limited to external members who have been appointed by the Director-General, as follows:

  • Mr. Gunther Pleines, Deputy Head, Banking Department - Bank for International Settlements, Basel, Switzerland,
  • Mr. Marcus Fedder, Treasurer, European Bank for Reconstruction and Development, London, United Kingdom,
  • Mr. Bernard Holland, Senior Adviser, Strategic Investment Management, Washington D.C., United States of America, and
  • Mr. Kenneth Miranda, Investment Adviser, Office of the Managing Director, International Monetary Fund, Washington D.C., United States of America.

The minutes of the ACI meeting held on 25 May 2001 were distributed to the Committee members in June 2001.

Status: In course of implementation



The internal Investment Committee (IC)

At the first meeting of the internal Investment Committee held on 17 May 1999, a representative from the consulting firm contracted by FAO for treasury matters was also in attendance. Since he also attended the subsequent meetings, I recommend that the committee's composition be formally revised to provide for such. [...] The Investment Committee was meant to meet four times a year, but no meetings took place in 2000, and none so far have been scheduled for 2001. I strongly recommend therefore that it resume its sessions as soon as possible. At the time of writing my report, my staff was informed of the Organization's intentions:

  • to have the internal IC meet at least half yearly to review the treasury plan of operation and take up any monitoring or performance issues;
  • to forward the minutes of its meetings to members of the FAO Advisory Committee on Investments.

[see paragraphs 70 and 71 of the 1998-99 report]


The consulting firm (Cambridge Associates) has been retained by the Organization to provide advice on investment matters. In this capacity, the firm participates in the internal Investment Committee meetings whenever the firm's advice is required.

According to its terms of reference, the internal Investment Committee should meet at least twice a year. A meeting of this Committee was held in March this year and the next meeting is planned for September 2001 to review the minutes of the 25 May 2001 meeting of the ACI as well as to discuss the third tier of the banking strategy. In the future, the Organization will ensure that the internal Investment Committee is called at least twice a year.

The Organization fully agrees that the minutes should be circulated to the ACI, for information purposes.

Status: Implemented


We reviewed the proposed new terms of reference for the IC and ACI. Since they do not provide for the minutes of the IC meeting to be sent to the ACI, we would recommend that this requirement be incorporated in the terms of reference.

"Oil for Food" Programme
Emergency Procurement Procedures

Although emergency procurement arrangements were included in the "FAO Emergency Preparedness and Response Manual" issued in 1998, they had not been completely formalised in Manual Section 502 of the FAO Manual. While provisions for emergency Procurement Missions did indeed exist (Manual Section 502.24), the waiver of the Procurement Committee was not provided for. Should the Organization decide to continue with such arrangements, I recommend that they be given a legal basis by amending the present FAO Manual. I further recommend that the issuance of the purchase requisitions comply with the existing rules and regulations.

[see paragraph 86 of the 1998-99 report]


Procurement for countries which have been designated as emergency situations were exempted from prior review by the Procurement Committee based on a proposal submitted by the Chief, AFSP, and approved by the then Deputy Director-General. It should be noted, however, that the practice of "waiving" prior review FOR EMERGENCY situations by the Procurement Committee goes back at least as far as 1986 when waiver of prior review for ECLO emergencies was approved by the then Deputy Director-General. This procedure was then expanded and extended to cover all emergency situations and was implemented to ensure that valuable time would not be lost for the procurement in these countries. In this connection, Manual Section 502 is being amended to incorporate fully the operational practices on emergency procurement and to provide that even procurement under emergency programmes shall be subject, as necessary and time permitting, to prior review. The relevant amendments have already been circulated for the necessary approvals prior to their issuance.

Status: In course of implementation

Manual Section 502.31 provides that " [...] requests for goods [...] are submitted on a Purchase Requisition [...]" . The purpose of this requirement is to ensure that the Procurement Service (AFSP) is not requested to issue tenders when funds have not yet been committed for the procurement actions requested. With respect to emergency procurement in general and the Iraq programme in particular, TCOR is often informed prior to the actual commitment of funds by donors or the UN that the funds will be transferred. However, until the funds are actually transferred to the Organization, TCOR is not able to raise a Purchase Requisition (PR). In these instances, for the purpose of saving valuable time, AFSP has agreed, after ascertaining that the funds had been allocated by the UN to the FAO, to issue a "market research" document which can then be the basis of placing an order once the funds have been committed and the PR raised.

Status: Implemented



Procurement Process

According to the tender specifications applicable to all the purchase orders reviewed, if goods did not reach final destination by the promised date, the FAO would be entitled to apply a penalty clause of 2.5% per week. [...] I would recommend that this information always be kept on file, and that the practice regarding the application of the penalty clause, which was currently left to the discretion of AFSP, be formalised.

[see paragraph 89 of the 1998-99 report]


With regard to the Auditor's comments in relation to purchase orders for which the suppliers had been chosen on the criterion of the best delivery prime factor, it is noted that the purchase orders in question were for the procurement of irrigation equipment and animal feed urgently needed and funded, under phase VI of the programme, by a special allocation made available to the FAO to immediately take action to mitigate the effects of a severe drought in the north of Iraq. To ensure urgent delivery of the irrigation equipment and animal feed, it was decided to exceptionally select suppliers based on best delivery terms. However, none of the delays in delivering the inputs have vitiated the procurement process. In other words, even if the FAO had known that the firms were going to deliver at these late dates, these suppliers would still have won the tenders concerned. Finally, it is pointed out that this has been an exceptional case in which delivery terms were the prime factor for the award of the offer. It should be noted that, under other circumstances, suppliers are always selected on the basis of lowest price offered. It is not planned to use this procedure again, unless exceptional circumstances arise.

As regards the Auditor's recommendation on filing, appropriate measures are being taken to keep all procurement files updated.

Status: Ongoing


We will conduct another review of a sample of purchase orders processed in 2001 in the coming months, which will enable us to ascertain the extent of the choice of suppliers on the criterion of the best delivery factor.


I recommend that income and expenditure for TeleFood projects be reported in the FAO's Books as "Other Funds". I also recommend that a clear distinction be made between true TeleFood proceeds, to be recorded under the above mentioned Special Account, and other proceeds, which considering the special requirements of the donors should be subject to a Trust Fund Agreement.

[see paragraph 96 of the 1998-99 report]


While the Organization initially considered that there was no difficulty with recording the Special Fund under "Other Funds", it now believes that there are technical complications in making the proposed changes that outweigh the benefits of making such changes.

Status: Not for implementation


We will review the extent of the technical complications during the course of the audit of the 2000-01 financial statements.

Non-cash contributions

The expenditure directly supported by the non-cash contributions [...] could be very significant and equivalent to a substantial financial contribution. From a management point of view, the most substantial contributions in-kind, especially when they were associated with cash sponsorship donations to cover the expenditure of an action directly in the FAO's name or guidance, should be valued and retained in the information and reporting system for TeleFood.

[see paragraph 102 of the 1998-99 report]


As referred to by the Auditor, Telefood expenditure that is directly supported by contributions in kind is not at present recorded in the FAO's books nor does it appear in the financial statements. While the Auditor recommends that this expenditure should be valued and retained in the reporting system, it should be mentioned that, in practice, the fair value of such contributions would be extremely difficult to estimate. As a result, the value to the governing bodies and to the member nations of a report in the financial statements of the estimated fair value of such contributions, if such an estimate could reasonably be arrived at, would appear to be limited. However, every effort will be made to retain the information in a memorandum form.

Status: In course of implementation



Human Resources Management
Evolution of the number of FAO staff

As disclosed in the financial statements, redeployment and separation costs amounted to US$ 10,576,000 for the biennium. To avoid the renewal of such additional costs in an insecure financial environment, and with the prospect of the foreseen replacement of most of Headquarters workforce in the coming years, I recommend that the Organization use all the tools available such as human resources planning, managing recruitment levels and types of contracts to allow more flexibility.

[see paragraph 112 of the 1998-99 report]



As indicated in the Medium Term Plan 2002-2007, given the expected turnover of FAO's staff over the Plan period, measures are required for orderly replacement of current staff departing on retirement with new staff, both professional and general service who have the skills and competencies identified by the Organization as critical for its future work. These measures are in line with the Auditor's recommendations and include the following which are specifically mentioned in the Medium Term Plan:

  • Effective workforce planning systems to address aspects such as: replacement of skills being lost; development of workforce structures to take account of new ways of working; improvements in gender and geographical balance;
  • Targeted recruitment programmes for young professionals, supported by identified skills and core competencies within their first years of service;
  • Continuing review of jobs in the general service category to ensure that they match the future needs and requirements of the Organization, also taking into account the impact of office technology and the need to identify higher-level skills and competencies and training requirements for increased flexibility in the deployment of staff;
  • System of core organizational competencies for professional and managerial staff, and associated development programmes which will allow them to acquire the necessary competencies and skills; and
  • Due attention to measures aimed at retention of competent junior staff.

Status: To be implemented over the course of the Medium Term Plan period




The use of other human resources

The complexity of FAO's contractual arrangements and the practice of their regular renewing generated a significant amount of administrative work and costs. It is my opinion that to limit costs and side effects, the Organization should implement, without delay, the streamlining it has been pursuing for the past five years. I recommend that the conditions of services and contracts be standardised and that a control and monitoring system over the corporate use of external collaborators be put in place.

[see paragraph 119 of the 1998-99 report]


The existing procedures for non-staff human resources are by their very nature complex and comprise diverse groups of personnel. The Report correctly assesses the situation with regard to the number of contractual instruments in use by the Organization and rightly notes that the different needs and characteristics specific to each group necessitated different contractual arrangements. The Organization itself has long recognised this complexity and agrees that additional savings can accrue through simplification of the contractual arrangements. Accordingly, the Organization has embarked on a streamlining exercise to ensure enhanced cost effectiveness and is pursuing the introduction of new provisions.

The proposed text of the new Manual Section has been developed and most recently has been reviewed by the Legal Counsel. In the meantime it has been decided to make use of the capabilities of the Oracle system to generate the contract forms automatically. This work has begun and is currently in the testing stage. It is expected that the new system will be implemented by the end of the year 2001.

Status: In course of implementation


No comment at this stage as concrete action still has to be taken.

Geographical mobility of FAO staff

I recommend that the development of a staff rotation system be looked into and that a cost and benefit analysis be carried out.
[see paragraph 121 of the 1998-99 report]


With regard to the Auditor's recommendation that a formal rotation policy be implemented in the FAO, it is noted that this is an issue which has been examined in both 1994 and 1997. The conclusion was that it was unnecessary to proceed with such a formal policy in the circumstances. In a context in which the Organization has been able to move posts and staff to the field effectively, the development of a more systematic and regular rotation (apart from that which occurs through normal transfers and promotions) represents significant costs to the Organization which in current budgetary circumstances is difficult to justify. In fact, the cost of moving such a large number of staff has been a major hindrance to the introduction of systematic rotation by other UN organizations currently experiencing budgetary constraints including the United Nations Secretariat. As noted by the External Auditor, it would therefore be necessary to carry out a cost benefit analysis of this proposal. In addition, the Auditor's recommendation does not take into account the changed nature of professional work at Headquarters which is normative in focus as distinct from the more operational nature of work in the field. For this reason, rotation is difficult and is not at present an Organisational priority.

Status: Not for implementation


We still consider that a development of a staff rotation system would be worth looked into especially in view of the decentralization process.

Recruitment Process

It is my opinion that the current distribution of responsibilities should be further streamlined. For posts funded in the PWB, I recommend that the decision to recruit general service staff at all levels (from GS1 to GS7) be delegated to the Regional and Country Representatives. Should the present freeze on recruitment of general service staff be lifted for Headquarters, the authority for the final decision on the recommendation of the General Service Staff Selection Committee should be delegated to the Department Head.
[see paragraph 127 of the 1998-99 report]


The Organization has the following comments:

  • For the professional category, the Director-General has a special responsibility not only to ensure that all appointments meet the highest standards of competence and integrity, but also that at the same time ensure that the Organization maintains a fair and equitable geographical representation. In addition, the Conference has requested within this context that the Organization do more to improve the number of women within the professional and higher categories of the Organization. In this context, the Director-General has recently granted delegations to the Deputy Director-General and to Assistant Director-Generals for decisions on appointments of professional staff already endorsed for selection from a roster advertisement and for the selection and appointment of short-term professional staff and for professional field project staff below the P-5 level.
  • For the general service category, the Director-General has also taken decisions to delegate authority for the recruitment, selection and appointment of general service staff to the Director of Personnel at Headquarters and to Regional Representatives at Regional Offices. In the case of GS staff in FAOR country offices, Sub-regional Offices and Liaison Offices, authority for appointments and extensions is to be delegated from the Deputy Director-General to the Director, OCD, rather than to the heads of these offices. The rationale for this is that appointments and extensions should be checked and monitored by a unit with personnel capability, which resides in OCD but not in FAOR country offices, Sub-regional Offices or Liaison Offices. These delegations will be accompanied by a regular, timely and comprehensive reporting system to the Director-General on such decisions.

Status: Implemented



Appraisal System

The establishment of a performance appraisal system remained one of the objectives in the AFP's work plan. I recommend that priority be given for the system to be implemented as soon as possible.
[see paragraph 134 of the 1998-99 report]


The existing Performance Appraisal and Achievements Record (PAAR) system provides that the PAAR will be taken into account when determining career development in general and, in particular, in the extension of appointment or assignment, the granting of within-grade salary increment (WIGSI), conversion to continuing appointment, transfer, promotion and other related administrative actions. Accordingly, provisions do exist that would permit managers to distinguish among different levels of performance. In this regard, it is noted that where a division director has given an unsatisfactory rating to a fixed-term staff member, the latter's appointment has not been extended. It is further noted that the Terms of Reference of the Human Resources Committee include the development of human resources management policies on performance management. These policies will be developed over the course of the 2002-03 biennium.

Status: The auditor's recommendation has been implemented while the development of further policies on performance management is ongoing



Special Programme for Food Security (SPFS)

Overall, the review conducted by my staff led to positive achievements of the SPFS Phase I as far as they were able to observe in the countries visited. One of the lessons to be learned though was that the commitment of the participating country was a fundamental key success factor. Although it would inevitably vary from country to country, FAO should always make sure that the recipient country was clearly aware of its responsibilities. As a rule, I recommend that SPFS activities never start before the finalisation of all negotiations and the signing of the SPFS National Programme Document (NPD). The tendency, noted in some cases to start some activities before the finalisation of the NPD in order not to miss the agricultural season, should be avoided.

[see paragraph 164 of the 1998-99 report]

Other key success factors proved to be related to the level of the participatory involvement of farmers (individually and collectively) and to the mobilisation of field technicians able to convince farmers to participate, as well as to support them. Because of the importance of these factors, I recommend that a panel of experts be established to evaluate them in the first 15 countries where the SPFS has been initially launched.

[see paragraph 165 of the 1998-99 report]


The Organization is pleased to note the Auditor's overall assessment of the SPFS, as indicated under the conclusions set out in paragraphs 164 to 166 of the Long Form Report. It also agrees with the importance of participating countries' commitment in the success of the SPFS, as referred to by the Auditor. It is for this reason that, upon receipt of country requests for the SPFS, exploratory missions are fielded which, inter alia, ensure the commitment of the countries concerned prior to commencement of activities. Therefore, the pragmatic approach of the SPFS to commence field activities as quickly as possible without losing time is in line with the Auditor's recommendation. Moreover, the NPD, even though a very important document, is not the project document and/or plan of operations. It is the latter documents which are signed, and not the NPD.

The Organization fully agrees with the Auditor's comments on the importance of people's participation in the success of the SPFS. The Auditor also recommends the establishment of a Panel of Experts to evaluate the SPFS in the first group of 15 countries. In this connection, the Director-General, in line with the request of Governing Bodies, has directed PBE to carry out an evaluation of the SPFS using a team of independent experts. The subject evaluation is underway with the first field visit planned for July 2001 and the expected date of completion of the process is the end of December 2001.
Status: In course of implementation


The review of the implementation of the SPFS has been pursued in 2000 with four additional countries visited and will be continued with the 2001 field visit missions. The results will be included in the report of the 2000-01 biennium.

We look forward to receiving the results of the evaluation.


While I do acknowledge that decentralisation is also a cultural process which takes time to take root and produce the desired results, I still recommend that a thorough evaluation be promptly carried out to provide a better view of the main effects and results so far. This evaluation should take the full view of all FAO's decentralised structures and, as much as possible, measure progress against all the objectives adopted by the Council at its 106th Session. [...] and should be conducted before taking any new steps in the decentralisation process.

[see paragraphs 174 and 175 of the 1998-99 report]


As regards the evaluation proposed by the External Auditor, it is noted that all programmes of the Organization are, sooner or later, subject to an evaluation by PBEE. The timing of this evaluation is dependent upon the completion of the current phase of decentralization to country offices. As it is not immediately clear when the current exercise will be considered complete, it is not yet possible to programme this evaluation. However, consideration will be given to scheduling it as early as possible in consultation with the parties involved and the Programme Committee as per current procedures for the selection of subjects for evaluation.
The planned evaluation will consist in the review of progress in all decentralised structures, including Regional, Subregional and Liaison Offices as well as FAORs, against the objectives adopted by the Council at its 106th Session.

Status: Ongoing


No comment at this stage as concrete action still has to be taken.

New Financial System Implementation

Overall Conclusion

Oracle upgrade to version 11i

In addition to the remaining implementation problems, which still need to be solved, a major Oracle upgrade would have to be carried out in order to replace the current version of Oracle Financials (version 10.7), which should not be maintained by the editor beyond 2001, with a more recent one (version 11i). Based on what my staff could observe so far, progress appeared limited at this stage. I therefore urge the Organization to duly take into account the lessons learned from the experience of the implementation of the Oracle Financials 10.7 version to prevent history repeating itself. In particular, the fact that "the project had been understaffed and under-funded from the outset and that the struggle for adequate resources had played a major role in FAO's inability to address and resolve the problems quickly", duly mentioned in the documents provided to the Joint Session of the Programme and Finance Committees in May 2000, should be meditated.
[see paragraph 210 of the 1998-99 report]




The question of AFF resources and staffing levels for the Oracle project are linked. Furthermore, they had to be put in the context of the overall resources available to the Organization. It is an issue that cannot be resolved overnight, but positive steps have already been taken to address the problem.
In this connection, the Director-General himself had taken the initiative and reported comprehensively to the Joint Session of the Finance and Programme Committees. In particular, he reported that:

  • FAO has been obliged to operate under a ZNG budget for the several past biennia, resulting in severe financial constraints for the Organization;
  • It was not possible to find sufficient resources to implement the Oracle Project. In this respect, the Director-General had proposed, in additional to the US$ 4 million under Chapter 5 of the Programme of Work and Budget 1996-97, a supplementary appropriation of US$ 20 million to finance the costs of replacing the Organization's financial administrative systems (FINSYS/PERSYS). The Conference did not act on the proposed Resolution and the Organization also suffered a budget reduction of US$ 56.9 million or 8.5% in the PWB 1996-97 with the consequence that finding funds from within the Regular Programme budget for this essential project proved to be an impossible task;
  • The allocated budget for a given biennium represented what could be made available in that biennium and "was never a realistic nor plausible figure to carry out a job of this magnitude and complexity, involving as it does, a complete restructuring of all FAO's administrative and financial processes"; and
  • The project "had been understaffed from the outset and that the struggle for adequate resources had played a major role in FAO's inability to address and resolve problems ...".

It is noted that candidates have now been selected for the nine AFF posts that were approved by the Director-General in June 2000, as temporary posts, and which will be included in the PWB 2002-03 as established posts. In this connection, a staffing review of AFF and AFI is being initiated to provide an independent assessment of the quantity and quality of resources required to successfully support the financial and information technology programmes of the Organization. In addition, appropriate funding has been made available to provide for external functional and technical assistance. A contract for this support was finalised at the end of April 2001.
Within the context of the Oracle 11i project, it is noted that, while the Plan of Work seems realistic, there is a funding issue relating to this project. Expenditure for the upgrade planned in 2001 is unlikely to match the budget allocation because, notwithstanding the current human resources constraints, the Organization is attempting to overcome some problems with the current system as a precursor to the upgrade to the new version. This is, however, causing delays in the upgrade project. In addition, there is at present no provision for carrying forward the unspent 2001 budget to the next biennium when any unspent balance of funding would be required to cover anticipated expenditure in the year 2002.

It is noted that Oracle Corporation has recently announced an extension of support from December 2001 to June 2002 in respect of the current version of its software, which is in use by the FAO, given the large customer base that has still to convert to version 11i. The Organization's conversion plans, however, call for the introduction of version 11i by Easter 2002 at the latest.

Status: Ongoing




A follow-up review of AFF' s staffing situation as well as of the progress made for the Oracle upgrade will be carried out in November 2002. The results will be included in the report of the 2000-01 biennium.


Cases of fraud

In two cases, however, the use of the Organization's resources was demonstrated. [...] The above-mentioned cases raised, in my opinion, the issue of internal control on the use of the Organization's resources. I considered that the announcement by the Director-General in March 2000 of an internal investigation on the matter to be a necessary step. At the time of writing this report, my staff had been provided with the terms of reference for the investigation and I look forward to receiving the results.

[see paragraphs 218 and 219 of the 1998-99 report]



The matter will be covered in the AUD's Activity Report that will be submitted to the Finance Committee early next year.
Status: Ongoing



A review of the Organization' s internal controls has been initiated in July 2001. The results will be included in the report of the 2000-01 biennium.



External Auditor's Recommendation

Action taken

External Auditor's Comments


Currency Exchange Arrangements

Overall, the reporting of the impact of changes in currency exchange rates appears complex (four exchange rates are used concomitantly: the budget rate, the UN operational rate, the forward rate and the market rate) and results in netting notional and real gains/losses. This situation did not change in 1996-97 from what it was in the preceding biennium where my staff had noted it without making specific recommendations. As a result of the audit of the 1996-97 accounts, I wish to put forward the two following recommendations:

  1. 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;

  2. 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.

[see paragraph 36 of the 1996-97 report]



a) As already mentioned in the progress report FC 93/11, the only one of these rates which is an accounting rate is the UN operational rate because this is the one which is used exclusively for recording all non-dollar transactions and balances. This practice complies with UN Accounting Standards. The other two rates referred to in the Auditor's Report (budget and forward rates) 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 promulgation of IAS 39 provides us with the opportunity to introduce hedge accounting, which should simplify/rationalise our accounting practices. However, it is noted that this accounting standard became effective for financial statements covering financial years beginning on or after 1 January 2001 and retrospective application is not permitted. Therefore, this standard would be considered for application in respect of the 2002-03 biennium. As part of our work we would also consider developments in the UN Accounting Standards as endorsed by the General Assembly and the UN Board of Auditors.

b) The subject of the protection of the Organization's Programme of Work against exchange rate fluctuations was addressed at the 95th Session of the Finance Committee in September 2000 where the Secretariat made a presentation of the problems to be addressed and the possible solutions. The Committee agreed to defer any decision on this issue to the 96th Session in May 2001 pending the opportunity for Members to consult their capitals.
At its 96th session, the Committee was informed that, under current market conditions, the present hedging methodology as applied through forward purchases would entail minor cost and, therefore, the search for an alternative method was no longer as urgent as had previously been the case. Furthermore, given the complexity of the matter, the Organization advised the Committee that it wished to seek expert advice before inviting the Finance Committee to express its final views on the subject. The Committee agreed to re-visit the matter at its 97th Session.
The matter was also reviewed by the FAO Advisory Committee on Investments (ACI) at its meeting held on 25 May 2001. The ACI felt that the Organization's plans for Euro conversions were appropriate and that for the time being the Organization should continue to use the simplest hedging techniques.

Status: Ongoing



Details on the approaches followed by other United Nations organisations were provided to the Finance Committee on 8 December 2000 and 20 June 2001.

Support Costs

The support cost policy implemented in 1996 and 1997 was carried out pursuant to broad policy objectives to effect "efficiency savings ... [including] increased recovery of the cost of technical support to field activities" (CL110/REP, §24.a) and to "more closely align charges in proportion to the services provided" (CL113/4, §34). However 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:

  1. either tailor support costs to the requirements of individual projects and clearly identify support costs in project budgets;
  2. 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.

[see paragraph 49 of the 1996-97 report]


It is noted that the Council took a decision on a revised support cost recovery policy. In this connection, reference is made to the relevant paragraph of Council document CL 119/REP, which reads as follows:

"70. The Council took note of the considerable discussion on this topic at the Ninety-fourth and Ninety-fifth Sessions of the Finance Committee in May and September 2000, respectively. It endorsed the proposed policy on reimbursement rates as summarized in Annex II of the Report of the Ninety-fifth Session of the Finance Committee."

Status: Implemented


A follow-up review of the support costs policy will be carried out in November 2001. The results will be included in the report of the 2000-01 biennium.

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.

[see paragraph 50 of the 1996-97 report]


In accordance with the External Auditor's recommendation, 1999 audits and beyond have been performed on a six-monthly basis. This approach has lead to a reduction in the cost of local audits.
With regard to the reduction in the number of contracting auditors, our plan is still to identify a suitable firm in each region with correspondents in countries where the FAO has Representations. Efforts to complete this process have, however, been delayed due to the priority that was given to the implementation of the Field Accounting System (FAS). Currently, we are holding proposals, which we will pursue as soon as the work of stabilising the arrangements in support of a decentralised accounting structure is complete.

The Auditor's recommendation concerning audit assurance will also be taken into consideration as part of the revision to current contractual arrangements.

Status: In course of implementation



A follow up review of the audit of field transactions will be carried out as part of the general review of the Organization' s internal controls. The results will be included in the report of the 2000-01 biennium.