FC 97/12 |
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.
LONG FORM REPORT | ||
External Auditor's Recommendation |
Action taken |
External Auditor's Comments |
FINANCIAL MATTERS
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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.
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No comment at this stage as concrete action still has to be taken. |
Tax Equalization Fund
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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 |
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. |
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
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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.
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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
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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. |
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 |
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. |
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". |
Number of bank accounts
[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. |
No comment at this stage as concrete action still has to be taken. |
Short-term investments |
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 [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. |
No comment at this stage as concrete action still has to be taken. |
The FAO Advisory Committee on Investments (ACI)
[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:
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 |
Noted. |
The internal Investment Committee (IC)
[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
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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 |
Noted. |
Procurement Process |
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. |
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. |
TeleFood
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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. |
We will review the extent of the technical complications during the course of the audit of the 2000-01 financial statements. |
Non-cash contributions |
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. |
Noted. |
MANAGEMENT MATTERS
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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:
Status: To be implemented over the course of the Medium Term Plan period |
Noted. |
The use of other human resources |
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. |
No comment at this stage as concrete action still has to be taken. |
Geographical mobility of FAO staff |
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. |
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 |
The Organization has the following comments:
Status: Implemented |
Noted. |
Appraisal System |
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 |
Noted. |
Special Programme for Food Security (SPFS) [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.
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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. |
Decentralisation |
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.
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No comment at this stage as concrete action still has to be taken. |
New Financial System Implementation |
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.
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.
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. |
OTHER MATTERS |
The matter will be covered in the AUD's Activity Report that will be submitted to the Finance Committee early next year.
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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. |
APPENDIX 1 LONG FORM REPORT
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External Auditor's Recommendation |
Action taken |
External Auditor's Comments |
FINANCIAL MATTERS
[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.
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.
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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
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. |
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 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.
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Noted. 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. |