FAO - Thirtieth Session of the Conference

My staff audited the accompanying financial statements numbered I to IV, the supporting schedule 1, Annexes 1.1 and 1.2 and the notes numbered 1 to 27 to the financial statements of the Food and Agriculture Organization of the United Nations for the financial period ended 31 December 1997. These financial statements are the responsibility of the Director-General of the Food and Agriculture Organization. My responsibility is to express an opinion on these financial statements based on the audit.

The audit was conducted in accordance with the Common Auditing Standards of the Panel of External Auditors of the United Nations, the Specialized Agencies and the International Atomic Energy Agency. These standards require that the audit be planned and carried out to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and evaluating the overall financial statement presentation.

As a result of this audit, I am of the opinion that the financial statements present fairly the financial position at 31 December 1997 and the results of the operations for the period then ended; that they were prepared in accordance with the Organization's stated accounting policies which were applied on a basis consistent with that of the preceding period, except for the changes, with which I concur, detailed in paragraph 27 of my attached long form report; and that the transactions were in accordance with the Financial Regulations and legislative authority.

Pierre JOXE
Premier Pr�sident de la Cour des Comptes
de la R�publique Fran�aise
External Auditor

CERTIFICATION OF FINANCIAL STATEMENTS


The amounts shown in the statements properly reflect the recorded financial transactions for the period:	Approved:
____________________________________	____________________________
Michael E. Ruddy Director Finance Division	Jacques Diouf Director-General




25 June 1998

STATEMENT OF INCOME AND EXPENDITURE
AND CHANGES IN RESERVES AND FUND BALANCES

STATEMENT OF ASSETS, LIABILITIES, RESERVES AND FUND BALANCES

STATEMENT OF CASH FLOW

STATUS OF REGULAR PROGRAMME APPROPRIATIONS

NOTES TO THE FINANCIAL STATEMENTS

The Food and Agriculture Organization (the Organization), was established on 16 October 1945. Its headquarters are in Rome, Italy. The purpose of the Organization is to raise levels of nutrition and standards of living; secure improvements in the efficiency of the production and distribution of all food and agricultural products; better the condition of rural populations; and thus contribute toward an expanding world economy and ensure humanity's freedom from hunger.

The Organization's Programme of Work (Regular Programme) is approved by the Conference of Member Nations. The related budget appropriations voted are financed by annual contributions based on an assessment on Member Nations and Associate Members by the Conference. Unutilised appropriations at the close of the financial period are cancelled, except for the Technical Cooperation Programme (TCP) appropriation which remains available for obligations during the financial period following that for which the funds were voted.

Voluntary contributions for special purposes, which are consistent with the policies, aims and activities of the Organization, may be accepted by the Director-General and Trust and Special Funds established accordingly. In addition, the Organization receives funds under an inter-organizational arrangement with the United Nations Development Programme (UNDP) to participate as an executing agency for UNDP technical cooperation projects or act as implementing agency for UNDP funded projects executed by other executing agencies. Voluntary contributions and funds received include payment towards recovering certain costs relating to technical, managerial and administrative services (support costs) which are a necessary part of extra-budgetary projects.

In agreement with the main multilateral financing agencies for agriculture, the Organization provides investment support services under jointly financed missions to individual countries, for which it receives reimbursement of an agreed share of costs. The Organization also renders technical, management and administrative services to the UN/FAO World Food Programme (WFP) on a cost reimbursement basis.

Financial Period
The financial period is a biennium consisting of two consecutive calendar years.

Basis of Preparation
The financial statements are prepared under the historical cost convention and in accordance with applicable accounting standards.

Income
Income is recognized when the Organization becomes entitled to it with the exception of (a) the part of the assessment on Member Nations which relates to the appropriation for TCP, which is recorded as deferred income when due and transferred to income as related expenditures are incurred, and (b) voluntary contributions and funds received under inter-organizational arrangement for which income is recognized proportionately with the degree of project activity completed as measured in terms of expenditure.

Expenditure
Expenditure is recognised as costs are incurred except for (a) contracts and purchase orders for which the Organization may, in accordance with its financial rules, recognise expenditure on the basis of the cost of contracts or purchase orders entered into, and (b) certain end of service and retirement benefits which are treated on a cash paid basis.

Equipment, Furniture and Vehicles
The cost of equipment, furniture and vehicles is included in expenditure in the year of purchase.

Foreign currencies
The financial statements are expressed in US dollars. Income and expenditure in currencies other than US dollars are translated into US dollars at the UN operational rates of exchange which approximate the market rate in effect at the date of the underlying transactions. Assets and liabilities in currencies other than US dollars are translated at the UN operational rate of exchange in effect at 31 December 1997. Exchange differences are taken to the income and expenditure account.

Provision for contributions
Contributions which are unreceived at the end of the biennium are fully provided for.

Forward Exchange Contract
The contractual liability and asset under the Organization's forward exchange contract together with the related unrealised exchange difference are disclosed in the related note to the accounts.

Investments
Investments are stated at the lower of cost and market value determined on a total portfolio basis.

In order to follow better the applicable accounting standards the presentation of the accounts of the Organization has been changed as follows:

Contributions towards support costs are credited to the General and Related Funds as Voluntary contributions and Funds received under inter-organizational arrangement. Related expenditures are charged to the General and Related Funds as Regular Programme expenditures. Previously this income and expenditure was credited and charged under the column Trust and UNDP Funds. The opening support costs balance of US$ 1.9 has been transferred to the General Fund. The net effect of the above changes is to increase the General and Related Funds Balance by $1.9 million.

Separation Payments and Compensation Payments
Income earned on investments earmarked for Staff Related Schemes (Separation Payments and Compensation Payments) is credited to Miscellaneous Income. Previously this income was reported as an increase in the respective investments and related fund balances.

Liabilities of the above Staff Related Schemes represent the actuarial liability rather than the book value of the earmarked investments. The reduction in the respective balances is reported as Miscellaneous Income. The net effect of the above changes is to increase the General Fund Balance by $23.9 million.

The Compensation Payments balance is classified under Liabilities as a Staff Related Scheme. Previously this was classified as a Reserve.

Terminal Payments Fund
The Terminal Payments Fund balance, which is included under Liabilities as a Staff Related Scheme, is reported under the column General and Related Funds. Previously this balance was reported under the column Trust and UNDP Funds.

Expenditure amounting to $729.0 million includes $595.4 million in respect of the 1996/97 appropriation (see Statement IV); $44.1 million in respect of 1994/95 TCP appropriation; $25.3 million in respect of Jointly financed activities; $6.0 million in respect of Services rendered; $56.4 million in respect of Support Costs and $1.8 million in respect of the Publication Revolving Fund and is made up as follows:

From this biennium, the Field Imprest accounting returns are closed based on the November Imprest records instead of December Imprest records which was previously the case. It is estimated that the processing of December 1997 Imprest records would have resulted in additional expenditures of approximately $1 million.

On behalf of the Organization, the above investments are held by Northern Trust Company and managed by the Fiduciary Trust Company. The investments of $152.2 million include $13.6 million held on behalf of the UN/FAO World Food Programme in respect of its share of the investments earmarked for its staff related schemes and $40.2 million from the General Fund (1994/95: $8.2 million) and have a market value of $196.5 million. See also note 24.

Unliquidated obligations include liabilities for costs of personal services incurred and the cost of contracts and purchase orders entered into at 31 December 1997.

Inter-fund balances arise mainly from disbursements and reimbursements in the normal course of operations by the General Fund on behalf of Trust and UNDP Funds and vice versa.

The above liabilities include $13.6 million due to the UN/FAO World Food Programme in respect of the investments held on its behalf for its staff related schemes (Separation Payments $13.3 million and Compensation Payments $0.3 million).

Staff fiduciary accounts
Staff fiduciary accounts represent funds related to the operation of the contributory medical and insurance arrangements for staff. The funds are used for related purposes such as settling claims received after the expiry of the medical and insurance contracts.

Separation Payments
The Separation Payments are due to General Service category staff at Headquarters who are entitled to receive a separation payment equivalent to 1/13.5 of yearly salary for each year of service completed after 1 January 1975. Separation Payments are subject to actuarial review to ascertain the liabilities and recommend rates of contribution. The valuation method used is the projected unit cost method. The details of the last actuarial valuation as at 31 December 1997 are as follows:

Compensation Payments
Compensation Payments are due to staff members (and their dependants) in case of death, injury or illness attributable to the performance of official duties and, in certain circumstances, to supplement the disability and survivors' pensions paid by the United Nations Joint Staff Pension Fund. Compensation Payments are subject to actuarial review to ascertain the liabilities and recommend rates of contribution. The valuation method used is the one-year cost method. The details of the last review as at 31 December 1997 are as follows:

After Service Medical Care
After Service Medical Care provides for worldwide coverage for After Service Medical Care for necessary medical expenses of eligible former staff members and their dependants. After Service Medical Care is subject to actuarial review to ascertain the related liabilities and recommend rates of contribution. The valuation method used is the projected unit credit method. The details of the last review as at 31 December 1997 are as follows:

Terminal Payments
Terminal Payments relate to payment of accrued annual leave, repatriation grant, termination indemnity, the cost of repatriation travel and the removal of household goods for all eligible staff. Terminal Payments are subject to actuarial review to ascertain the related liabilities. The valuation method used is the aggregate cost method. The details of the last valuation as at 31 December 1997 are as follows:

Terminal payments liabilities are provided in part ($2 million) under the Terminal Payments Fund referred to above. The Fund is credited with contributions and interest and is subject to review periodically in order to adjust contribution funding rates. The unprovided portion is discussed under note 24 below.

Pensions
The Organization is a member of the United Nations Joint Staff Pension Fund (UNJSPF) established by the General Assembly of the United Nations to provide retirement, death disability and related benefits to staff of member organizations. The scheme is of the defined benefit type and the Organization's obligation is limited to specified contributions to the Fund. The amount recognised as an expense in respect of contributions to the Pension Fund in the biennium was as follows:

The purpose of the Working Capital Fund is to advance moneys on a reimbursable basis to the General Fund in order to finance budgetary expenditures pending receipt of contributions to the budget; finance emergency expenditures not provided for in the current budget; and make loans for such purposes as the Council may authorise in specific cases. The authorized level of the Working Capital Fund is $25 million in accordance with Conference resolution 15/91 of which the amount paid up is $23.7 million.

The purpose of the Special Reserve Account is to protect the Organization's Programme of Work against the effects of unbudgeted extra costs arising from adverse currency fluctuations and unbudgeted inflationary trends. The authorised level of the Special Reserve Account is set by Conference Resolution 13/81 at 5% of the effective working budget for the respective subsequent biennium. Net gains or losses on exchange in addition to the currency variance on staff standard costs are charged to the Special Reserve Account. The currency variance on staff standard costs represents the difference between staff costs expressed in US Dollars at the budget rate for the biennium (Lire 1600 to $1) and the UN operational rates at the time of payment.

For terminal payments not provided for under the Terminal Payments Fund (commutation of accrued annual leave, repatriation grant, repatriation travel and removal costs, termination indemnities and death grant) and after service medical care, the Organization charges expenditure with the amount of payments made during the biennium. As at 31 December 1997 the estimated unrecorded liabilities for terminal payments and After Service Medical Care Plan amounted to some $20.4 million and $ 195.1 million respectively.

FAO received an assessment for garbage collection tax from the Rome Municipality for 1995 of the Lire equivalent of $1.1 million representing an increase of 425% from the previous year. By Note Verbale of June 1995, FAO informed the Italian Permanent Representation of the impossibility of accepting such a request due to both legal and financial considerations. In 1997 total garbage tax assessed on FAO amounted to $3.2 million which resulted in a contingent liability of $2.3 million since $0.9 million had already been accounted for. FAO has a legal obligation under provisions of relevant treaties to pay that portion of garbage collection tax that corresponds to the cost of the service rendered. Therefore, pending conclusion of an agreement with all parties involved, any amount charged by the Rome Municipality for garbage services rendered constitutes a potential liability for the Organization.

In November 1997, the Organization entered into a forward contract for the purchase of its Italian Lira requirements for the 1998/99 biennium. The total liability under this contract is $288 million payable in instalments of $12 million per month from January 1998 to December 1999. Based on the UN operational rate of exchange prevailing at 31 December 1997 (Lire 1720 to $1), the dollar equivalent of the Italian Lire to be purchased amounted to $282 million.

Equipment, Furniture and Vehicles
The historical cost of fully expended FAO equipment, furniture and vehicles at the end of the biennium was as follows:

Voluntary Contributions-in-kind
The Headquarters premises in Rome are provided rent-free by the Host Country in accordance to the Headquarters agreement. It is estimated that the commercial rental value of the Headquarters property is approximately $16.4 million per year.

Non-convertible Currencies
At 31 December 1997, cash balances held in non-convertible currencies amounted to $5.5 million (1994/95 - $6.7 million).

REPORT OF THE EXTERNAL AUDITOR
ON THE FINANCIAL STATEMENTS OF
THE FOOD AND AGRICULTURE ORGANIZATION OF
THE UNITED NATIONS
FOR THE FINANCIAL PERIOD 1 JANUARY 1996
TO 31 DECEMBER 1997

	*Paragraphs*
Introduction	1
Audit Scope	2 - 5
Review of Management Matters	6 - 7
Previous Recommendations	8
SUMMARY
Financial Matters	9 - 23
Management Matters	24 - 26
LONG FORM REPORT
Financial Matters
Format of Financial Statements	27
Financial Position of the Organization	28 - 37
Cash and Investments	38 - 45
Support Costs	46 - 49
Audit of Field Transactions	50
Payable and Receivable Accounts	51 - 52
Personnel Related Liabilities	53 - 55
Telefood	56 - 57
Management Matters	58
Replacement of Personnel Financial Management Systems	59 - 66
Decentralisation	67 - 72
Acknowledgement	73

REPORT OF THE EXTERNAL AUDITOR
ON THE FINANCIAL STATEMENTS OF
THE FOOD AND AGRICULTURE ORGANIZATION OF
THE UNITED NATIONS
FOR THE FINANCIAL PERIOD 1 JANUARY 1996 TO 31 DECEMBER 1997

1. My staff audited the financial statements of the Food and Agriculture Organization (FAO) for the period 1 January 1996 to 31 December 1997 which were submitted by the Director-General in accordance with Financial Regulations 10.3, 10.4 and 11.5 of the FAO.

2. The scope of the audit was determined in compliance with Article XII of the Financial Regulations of the FAO as well as with the Additional Terms of Reference Governing External Audit appended thereto.

3. The audit was carried out in accordance with the common auditing standards of the Panel of External Auditors of the United Nations, the Specialized Agencies and the International Atomic Energy Agency. These standards require that the audit be planned and carried out so as to obtain reasonable assurance that the financial statements are free of material mis-statement. The Director-General is responsible for preparing these financial statements, and I am responsible for expressing an opinion on them.

4. The audit included an examination, on a test basis, of evidence supporting the disclosures in the financial statements. Also, it included assessing the accounting principles used and the compliance with legal authority as well as evaluating the overall presentation of financial statements.

5. The audit enabled me to issue the audit opinion on the financial statements which is reproduced on page 3.

6. In addition to the audit of the accounts, my staff carried out a management review of the implementation of the two following policies: (a) decentralisation of operations to regional offices and (b) procurement of new personnel and financial management systems to replace the current FINSYS/PERSYS systems. The conclusions of these reviews are incorporated in the present report.

7. In 1997 and 1998, my staff visited four regional offices and five country offices in Latin America, Africa, Europe and Asia where they carried out management and financial audits of the FAO representation and of a selection of projects. Their observations and recommendations were reported separately to the Director-General following the conclusion of the visit. They have been incorporated in the present report when and where appropriate.

8. The present report also includes comments on action taken in response to recommendations contained in previous reports when such matters remain significant enough to be brought to the attention of Member Nations. Such comments have been incorporated in the section where they belong.

SUMMARY

9. In line with my previous recommendations and applicable accounting standards, the FAO introduced a number of changes in their accounting policies and presentation of financial statements which better reflect the nature of the operations and the position of the Organization at the end of the financial period. [para. 27]

10. The financial position of the Organization improved markedly during the biennium. The net excess of income over expenditure amounted to US$96 million as against a net shortfall of US$58 million in 1994-95. This resulted essentially from investment generated income and the improvement in the collection of contributions. [paras 28 and 29]

11. The opportunity cost in revenue lost by the Organization as a result of the application of this scheme increased from US$2.3 million in 1994-95 to US$3.4 million in 1996-97. To limit the impact of this scheme, the Conference adopted the Director-General's proposal to make the discount proportional to the promptitude of payment of contributions at the beginning of each year. [para. 31]

12. Credits to Member Nations from the tax equalisation fund should be reduced by the taxes reimbursed to their nationals by the Organization. This was not always the case. I recommend that the necessary regularization be implemented with the Member Nations concerned. [para. 32]

13. Total savings on vacant posts were estimated at some US$40 million in 1996-97. Out of this amount, some US$12.5 million had been incorporated in the budget through the lapse factor methodology and approximately US$27 million were applied towards funding unbudgeted staff costs. [para. 33]

14. In 1996-97, the FAO correctly continued with their policy of protecting their assessments against currency fluctuations through forward purchase agreements. However, the current methodology for reporting the impact of changes in exchange rates appeared complex, incomplete and biased. I recommend that this policy be reviewed with a view to simplifying it, making it more comprehensive and better differentiating realised and unrealised exchange gains and losses. [paras. 34 to 36]

15. Unliquidated obligations at the end of the biennium were kept under control in 1997. However, the situation could be improved with respect to the expenditure of technical divisions and field offices. I recommend that the Organization consider the implementation of automatic criteria which would greatly simplify the recognition of the validity of undisbursed commitments at the end of the biennium. [para. 37]

16. As at 31 December 1997, the FAO controlled US$992 million held in current and deposit accounts. The reduction in the number of bank accounts at headquarters and in the field was noted. However, bank accounts remained segregated by funds and the outdated manual bank monitoring and reconciliation procedures had not been computerised as planned. Also, current banking conditions were not regularly re-negotiated with the Organization's major banks. [paras. 38 to 41]

17. With respect to short-term investments, the issuance of new guidelines was noted. But it appeared that the FAO was not yet fully organised to manage its cash in a professional manner. The Organization was advised to entrust the management of their short-term investments to an external manager. This proposal should be considered with due diligence and care. [paras. 42 and 43]

18. With respect to long-term investments, the Organization appropriately separated the management from the custodian function in 1997. They were further advised to entrust their long term assets to two fund managers, instead of one as at present, and to establish an effective investment committee to set out policies for short as well as long term assets as well as oversee external managers. I concur with this recommendation. [paras. 44 and 45]

19. In response to financial constraints and the decline in voluntary contributions to field activities which further limited extra-budgetary revenue, the FAO introduced a variety of support cost categories levied on resources allocated to field projects. The proceeds of such levy is credited to the General Fund of the Organization in compensation of services rendered. Twelve different categories of support costs, with different legal bases and different assessment modalities are now in place. This proliferation has resulted in confusion in accounting for such costs and the corresponding revenue. Also, this has blurred the overall purpose and measurability of the policy. I recommend that the Secretariat be requested to prepare a comprehensive but much simplified framework for support cost arrangements, setting out the purpose to be achieved through a limited number of such schemes to be applied in a straightforward manner. [paras. 46 to 49]

20. The FAO decided to have monthly audits of their field expenditure carried out by local external auditors. In 1996-97, seventy eight field offices were covered by such arrangements. However, the implementation of the audit programme suffered from a number of weaknesses, including the fact that the auditors' reports were not adequately exploited. In order for local audits to help in supporting a decentralised accounting structure at a reasonable cost, I recommend that the periodicity of reporting be lengthened and auditors required to provide assurance that local transactions comply with FAO's financial authorisations and procedures. [para. 50]

21 A substantial clean up of receivable and payable accounts was carried out in 1997. However, my staff noted that procedural and systems problems still made it difficult for the Organization to clear their receivable and payable accounts regularly. I recommend that, in the context of the installation of the new financial and accounting software, the accounting and organisational procedures for posting transactions to receivable and payable accounts be reviewed with a view to making them easier to monitor and clear throughout the biennium. [paras. 51 and 52]

22. The Organization started implementing new policies, with which I concur, to account for and report the liabilities they recognised towards staff. Essentially, such policies resulted in reporting accrued liabilities at their actuarial value, reporting the corresponding investments as investments of the Organization and crediting the income generated by such investments to the General Fund. In addition, as from the next biennium, the Organization will start funding the unaccrued portion of their liability in respect of end of service benefits. I recommend that the reporting of the World Food Programme (WFP) share of the Separation Payment Scheme (SPS) be reported in conformity with the stated policy and that the purpose and operation of the Termination Payments Fund (TPF) be reviewed. [paras. 53 to 55]

23. As at 31 December 1997, US$2 million had been collected through the Telefood operation launched in the fall of 1997. The costs of developing and publicising the television programme supporting this operation amounted to US$1.2 million which were funded by private sponsors. [para. 56 and 57]

24. In 1995, the FAO decided to replace their bespoke financial and personnel management systems with a commercially "tried and tested" software package. The new systems were then expected to be operational by 1 January 1998 at a cost of US$8 million. At present, a scaled down version of the original project is expected to be operational in 1999 at a cost of US$17 million (exclusive of FAO staff costs). Expenditure as at 31 December 1997 amounted to US$10.6 million. [para. 59]

(a) The hurried way in which contracts were awarded at the end of 1995 in order not to let budget authorisations lapse resulted in an insufficient definition of business requirements and, more important, in an underestimation of the gap between what the software could achieve and what the FAO required. Therefore, it appeared, with the benefit of hindsight, that the time saved before the signature of the contract to meet the end-1995 budget deadline resulted in adverse consequences on the overall implementation of the project.

(b) Another cause of the difficulties met in implementing the project was that the management structure of the project failed to provide effective guidance. The management team had to be reorganised in February 1997 with a new project director and key staff made accountable for delivering the elements of the systems for which they had responsibility. However, availability of staff remained a major problem until April 1998 when five staff members were assigned full time to the project. Simultaneously, the former steering committee was replaced by a more effective restricted special committee chaired by the Director-General.

(c) Finally, the packaged purchased proved not to have been fully tried and tested and the FAO suffered from delays in the delivery of the upgraded versions of key modules of the software.

Overall, it appeared that, in the case of complex corporate projects like this one, it was essential that responsibility and accountability be well defined from the outset, that competent staff be made fully available to work as a team and that the implementation of the project be based on a fully spelled out strategy for change. [paras. 60 to 66]

26. The decentralisation of operational activities to the regional level was a major undertaking of the biennium which, for the most part, had been accomplished at the time of writing the present report. My staff visited four of the five regional offices in order to review the implementation of this policy. It appeared that there was a gap between the increased responsibility bestowed on the ADG/RR and the authority, the staff and the information and financial systems at their disposal to carry out such responsibility. While decentralisation implied the delegation of a large measure of authority to ADG/RRs, the extent and modalities of this authority had not been clearly defined. I recommend that the Organization finalise and formalise the delegation of authority to the regional representatives. In addition, from an operational point of view, inadequate interfacing of the financial systems in use at headquarters and in regional offices resulted in confusion, time wasted in recording, reconciling and checking entries and an increase in the risks of errors. Such difficulties were compounded by the delays in staffing regional and sub-regional offices adequately. I understood that the situation should improve with the implementation of the new corporate financial systems. [paras. 67 to 72]

LONG FORM REPORT

27. In line with my previous recommendations and applicable accounting standards, the FAO introduced the following changes in their accounting policies and the presentation of 1996-97 financial statements:

- Contributions towards support costs are reported as income of the General and Related Funds and shown under the "Voluntary Contributions" caption (support costs levied on Trust Fund donations) and the "Funds received under inter-organizational arrangement" caption (support costs levied on UNDP contributions); the related expenditure is reported as regular programme expenditure; as a result of these changes the balance of support costs income and expenditure is incorporated into the General and Related Funds balance and no longer reported as a reserve;

- All investments are reported as investments of the Organization, with the appropriate apportionment of such investments being disclosed in the notes to the statements (see note 12);

- Income earned by the FAO on their investments is reported as income of the General and Related Funds and impacts on the net excess of income over expenditure;

- The book value of investments earmarked for funding liabilities accrued under specific staff related schemes is now aligned with the corresponding liability as determined by an actuary. Since this alignment was carried out for the first time in 1996-97, the book value of investments in excess of the actuarial liability impacted on the net excess of income over expenditure as well as on the General Fund balance, as reported in note 3 to the statements. Other consequences of this important change in the policy governing staff related schemes are further commented upon below (see �53, 54 and 55).

28. The financial position of the Organization improved markedly during the biennium: the net excess of income over expenditure amounted to US$96.1 million as against a net shortfall of US$58 million in 1994-95. This resulted essentially from two factors:

- the net increase in miscellaneous income resulting from the change in policy mentioned above (crediting to the General Fund income earned on investment and investments in excess of staff related liabilities), and

29. However, such improvements did not allow for re-funding advances from the Working Capital Fund (WCF) and the Special Reserve Account (SRA) which proved necessary for long periods during the biennium. Both WCF and SRA balances had been brought down to nil as at 31 December 1997. Indebtedness of the General Fund towards the WCF and SRA at that date stood at US$23.7 million and US$32 million, respectively. This represented a deterioration of the situation as it was at the end of 1995, where this indebtedness stood at US$43 million (WCF: US$23 million; SRA: US$20 million). This increase in debt was carried over to the 1998-99 biennium.

30. Even though they remain high and should be a cause for concern, regular programme assessments receivable decreased from US$195.4 million, as at 31 December 1995 to US$136.7 million as at 31 December 1997. This decrease was almost entirely accounted for by the payment of US$58.7 million by a major contributor.

The percentage of current assessments paid in by 31 December of the year increased from 70.8% in 1995 to 93% in 1996 and 96% in 1997. Seventy Member Nations were still in arrears for the payment of their assessed contributions. For eight of them arrears exceeded US$1 million, accounting together for 92.5% of total arrears. The number of Member Nations with potential voting right problems increased from 16 at the end of 1995 to 21 at the end of 1997.

Other contributions were receivable in respect of the WCF (US$1.6 million), the SRA (US$11 million) and Governments Cash Contributions (GCCC) towards the operating costs of FAO representations (US$4.7 million).

31. The incentive scheme to encourage prompt payment of assessed contributions was introduced, on a trial basis, on 1 January 1993. The opportunity cost in revenue lost by the Organization, resulting from the application of this scheme, increased from US$2.3 million in 1994-95 to US$3.4 million in 1996-97. This resulted essentially from the payment of one large contribution by the end of March 1997. In November 1997, the Conference adopted the Director-General's proposal to introduce new modalities for the calculation of the discount for early payment with effect from 1 January 1998. As a result of this revision, the discount applied will be proportional to the promptitude of payment during the first quarter of the year when the contribution is due.

32. National taxation of income earned from FAO is reimbursed to staff members and charged back to the Member Nations concerned through the tax equalisation fund. The audit disclosed that two Member Nations had not been adequately charged back, one of them for several years. Such incorrect charges to the regular budget of the Organization are small. However, I recommend that the necessary agreements be made with the Member Nations concerned with a view to reducing their credits from the tax equalisation fund by the amount of tax reimbursement to their nationals.

33. The 1996-97 Programme of Work and budget (PWB) approved by the Conference was significantly less that the proposed budget and a revised document had to be submitted to the Programme and Finance Committee in May 1996. In that context, the detailed assessment of actuals against estimates proved uneasy. However, the major aspects of budgetary execution might be summarised as follows:

- expenditure in excess of and below budgetary estimates balanced out overall for non-staff costs,

- but, in order to stay within the US$650 million ceiling on expenditure, the Organization had to absorb some US$27 million unbudgeted staff costs mainly through deliberately maintaining vacant regular budgeted posts which, in turn, resulted in postponing, down-sizing or altogether deleting various programme elements.

Unbudgeted staff expenditure included the costs of staff on abolished posts while awaiting re-deployment or other action (US$7.1 million), actual staff costs incurred in excess of budgeted standard costs (US$13 million, including the impact of the International Labour Organization Administrative Tribunal to reinstate the language factor in General Service staff remuneration), higher than expected costs of implementing the new arrangements for publications (US$5.5 million) and decentralising operations to regional offices (US$1 million).

Total 1996-97 savings on vacant posts amounted to some US$40 million, of which some US$12.5 million resulted from the impact of the lapse factor methodology applied to the costing of the PWB.

Other "savings" built in the 1996-97 PWB resulted from the decision of no longer charging one third of the cost of separation payments to General Service staff to the regular budget. In 1996-97, this resulted in a reduction of US$3 million in budgetary expenditure.

34. In 1996-97, the Organization continued with their policy of protecting their assessments against currency fluctuations through forward purchase agreements. Immediately following the Conference approval of the PWB, the FAO entered into a forward purchase contract to obtain its Lira requirements for staff costs at a rate of Lire 1,669 to US$1. Since the average UN operational rate of exchange (which approximates the market rate) was 1,546 to 1 in 1996, the Organization realised an exchange gain which was offset by an exchange loss in 1997 resulting from the weakening of the Lira vis-�-vis the dollar (average UN operational rate was 1,689 to 1). The result of these operations was a gain of US$11.7 million. This gain was netted against unrealised losses on the conversion of non-dollar bank balances at year end and a realised loss on GCCC to be received. The resulting outcome was a net exchange gain of US$9.3 million.

Another exchange transaction relating to staff costs reported by the Organization is that which arises from the budget variance representing the difference between the Lira/Dollar exchange rate adopted for the budget (the market rate at the time the budget is approved) and the UN operational rate at the time of payment of staff expenditure in Lire. This is a notional (i.e. unrealised) exchange difference which, in 1996-97, resulted in a notional exchange gain of US$1.5 million.

Both realised and unrealised exchange gains and losses are transferred to the SRA. In 1996-97 this amounted to a net exchange gain of US$10.8 million.

35. The budget variance representing this difference which results from currency variances on non-dollar non-staff costs is not identified in the financial statements because the Conference resolution on the SRA relates only to staff costs. For this category of expenditure, the Organization experience a reduction of the purchasing power of appropriations which are denominated in dollars when other currencies (essentially the Lira) appreciate vis-�-vis the Dollar (e.g. in 1996) and an increase in this purchasing power when they depreciate (e.g. in 1997). The net effect of these movements is not estimated by the Organization.

36. 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:

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

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

37. Overall, unliquidated obligations (ULO) reported as expenditure for the biennium decreased slightly in 1996-97 (US$59 million) from the preceding biennium (US$65.5 million). However, the importance of the ULO balances continue to be a cause for concern. Past experience shows a high lapse rate of ULO balances: US$6.7 million of ULOs carried over from 1994-95 lapsed in 1996-97, this represented an increase over the preceding biennium (where only US$3.8 million of ULO carried over from 1992-93 had lapsed). In 1996-97, while ULOs accrued to the General Fund decreased from US$46.4 million as at 31 December 1995 to US$28.5 million as at 31 December 1997, ULOs accrued to Trust Fund and UNDP expenditure increased from US$19.1 million to US$30.9 million during the same period. This suggested the need for strict control over the validity of ULO balances, particularly those related to the expenditure of technical divisions and field offices. Therefore, I wish to reiterate my previous recommendation to carry out closer checking of ULO at the end of the biennium. I understand that this is a complex and time consuming exercise with a variety of criteria to be applied across objects of expenditure. In this connection, I would recommend that, for the future, the Organization might consider simplified criteria which could be incorporated into the accounting systems for recognising the validity of undisbursed commitments at the end of a biennium.

38. As at 31 December 1997, the FAO controlled funds amounting to US$992.4 million held in current and deposit bank accounts on behalf of the WFP (US$735.5 million), Trust Fund and UNDP projects (US$194.9 million) and the General fund (US$62 million). The largest portion of these funds was held in bank accounts administered from headquarters by the treasury unit while some US$3.9 million was held in 370 current accounts managed by FAO Representatives in the field.

39. In my previous report, I had recommended that the number of current accounts be reduced. Considerable reduction had been made at the end of 1997, even though there are still 36 headquarters current accounts remaining. However, the Organization informed my staff that they planned to reduce these to 13 accounts in the near future. On the other hand, 87 new bank accounts devoted to Telefood operations were opened in 1997. The FAO treasury has difficulty in keeping track of their bank accounts. At the end of the preceding biennium my staff had been informed that the outdated manual card index system for monitoring bank accounts would be replaced by a computerised system early in 1996. However, the old manual system was still in place at the end of 1997. This resulted from the fact that the treasury system to be implemented in connection with the new financial management and accounting software procured by FAO had not been determined yet. Therefore the reconciliation of bank accounts remained a time-consuming and cumbersome procedure.

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

41. The Organization did not enter into specific written agreements with their banks to detail the banking conditions applied to a major client (the accounts opened in a major bank at headquarters carry average monthly balances of US$100 million). Similarly no competition had been organised, from time to time, for the provision of banking services. Contrary to information communicated to my staff at the end of 1995, no such competition had been organised in 1996 and 1997 although tender documents had been prepared. Therefore, I wish to recommend formally that the Organization call for international bids for the provision of corporate banking services.

42. Short-term assets not held in current accounts are invested in deposit and call accounts with a maximum maturity of one year. Average maturity, however, is between two and six months. At the end of 1997, US$813 million (of which US$625 million for WFP) was invested on a short term basis. In line with my previous recommendations, new guidelines and procedures were established in June 1997 to decentralise investment decisions to the Treasurer, establish two oversight committees and expand allowable assets. However, my staff noted that the authorisation to invest in debt issues of sovereign governments was restricted to the issues of one major contributor while other low-risk countries were not considered.

43. More generally, it appeared that the FAO were not organised to manage their cash in an optimal manner and do not have the system functionalities to do so in FINSYS: cash flow forecasts are not timely and not reliable enough due to the uncertainty in the timing of payment by Members of their contributions; and the treasury staff is not sufficient (both in quantity and quality) to perform the analysis necessary to operate efficiently. Moreover, given the relatively limited amount of short-term assets, it is not evident that this activity should continue to be handled in-house rather than handed over to an external firm managing commingled fund investment vehicles. My staff noted that a consultant had recommended to "externalise" the management of cash to achieve higher returns at reduced risks and free up treasury unit resources for other tasks. I recommend that such proposals be carefully considered by the Organization. If they were to be implemented, the FAO should call for bids from several international cash managers and start revamping and upgrading the treasury unit to allow it to become a professional counterpart to the selected cash manager.

44. Assets earmarked to provide for staff related liabilities (nearly US$200 million at the end of 1997) are invested long term by an external fund manager. The volume of long-term assets will increase when FAO start funding after-service medical costs. In my previous report, I had recommended that the existing arrangements with the fund manager be reviewed and appropriate benchmarks established to assess their performance. In 1997, the Organization have separated the managing function from the custodial function and entrusted the latter to a firm selected upon competitive bidding. Also the Organization have taken a first step towards revising the fees paid to the fund manager. However, because of pressing day to day cash management and other treasury functions and the overall weakness outlined above, the treasury unit have difficulty in overseeing the fund manager. This became particularly evident when the assets were transferred to the new custodian in April 1997 and significant discrepancies in the valuation of investments between the out-going and the in-coming custodian had to be reconciled, which proved a painstaking exercise.

The Organization have considered, for some time now, entrusting their long term assets to two fund managers. This would be a very sensible solution which should be implemented as early as possible through a competitive selection process. As mentioned before, closer monitoring of the fund manager(s) performance, including visits to the manager's office, is necessary and will require substantial re-vamping and upgrading of the treasury.

45. The UN Investment Committee were supposed to oversee FAO long-term investments. But, in 1997, they formally announced their decision not to continue with such responsibility. Therefore, in addition to the need to strengthen the treasury, there is a need to set up an effective investment committee to advise senior management of FAO (and WFP). This investment committee would be responsible for setting investment policies and goals for short-term as well as long-term investments, appointing cash and fund managers and monitoring their performance. I understand that recommendations along these lines were made by the consultant mentioned above and are being considered by senior management.

46. As mentioned above (see �27), I was pleased to note the changes introduced in 1996-97 in the accounting treatment of support costs income and support costs balances. Also, I noted that, at their 113th session, the Council had formally authorised the levying of certain categories of support cost charges on projects pertaining to the Special Programme for Food Security (SPFS).

47. However, the overall support costs arrangements were further complicated with the creation, in 1996, of two new categories of support costs and the new support cost arrangements with UNDP which became effective 1 January 1997. Considering the present situation of support costs, I think that the following comments are in order.

In response to financial constraints and the decline in voluntary contributions to field activities which further limited extra-budgetary revenue, the FAO have introduced, over time, a variety of support cost categories levied on resources allocated to field projects. The proceeds of the levy are credited to the General Fund of the Organization to pay for services rendered in support of projects.

At present, 12 categories of expenditure which have been grouped under the general heading of support costs are in place:

1) Project Servicing Costs (PSC) are levied on Trust Fund projects at a pre-determined rate (usually 13%) applied to project delivery;

2) Administrative and Operational Support (AOS) costs are levied on UNDP projects at a flat rate of 10% applied to project delivery;

3) Services for Policy and Programme Development (SPPD), formerly Technical Support Services (TSS) at the programming stage, were introduced in 1997: they are paid by the UNDP at standard rates per work month agreed with the donor;

4) Support for Technical Services (STS), formerly TSS at the project level, were similarly introduced in 1997: they are paid by UNDP for the technical backstopping of projects and calculated at standard rates per work month agreed with the donor;

- in 1988, for Technical Cooperation Programme (TCP) projects funded by the Regular Programme (RP) of the FAO: they are levied up front as a lump sum based on the size of the project budget;

6) - in 1995, for projects pertaining to the SPFS also funded by the RP: they are levied as a percentage (7%) of project delivery;

7) Advisory Technical Services (ATS) costs were introduced in 1996: they represent the cost of regular staff time devoted to providing technical advice to project implementation; they may be charged to all types of projects;

8) Standard Supervisory Technical Services (SSTS) were introduced in 1996 on TCP projects: they represent the costs of a range of specific standard tasks provided by technical units and are based on a standard work point system;

9) Supervisory Technical Services provided by the Lead Technical Unit (STS-LTU) were introduced in 1996 on TCP projects: they represent the costs of the services rendered by the lead technical unit for the coordination of project inputs and are based on a standard rate per working day;

10) Supervisory Technical Services provided in the form of field visits by technical officers: they represent the non-staff costs of field visits by the technical officers as foreseen in project budgets and are therefore in the nature of project inputs;

11) Terminal Report costs represent the cost of producing such reports or statements: they are charged as inputs to projects for which the terminal report is processed;

12) Thematic Evaluation Missions (TEM) costs are charged to TCP projects included in such missions (they should not exceed US$500 per project).

48. The build up of such a variety of support cost categories with different legal bases and different assessment modalities, resulted in confusion in accounting for such costs as well as in the overall purpose of the support costs policy.

a) From an accounting point of view, the variety of means by which support costs are recovered makes it very difficult to obtain a complete picture of exactly how much is being recovered. Some are charged by applying fixed percentages to expenditure, some by secondment of staff, some by direct charge of time spent. Some are explicitly charged as support costs expenditure while others are identified in the operational budget of projects. As a result, the current accounting system does not recognise all support cost income and all support cost expenditure under the "fund" that was created for that purpose ("fund 41"). Regarding income and expenditure related to TSS rendered to UNDP, they are, in part, accounted for under the support cost fund and, in part, under the regular programme fund. It is, therefore, impossible to estimate the excess or shortfall of income over expenditure. The support cost balance showed a deficit of US$8 million in respect of 1996-97 transactions (excluding WFP-related transactions). But this did not take into account ATS and STS transactions. My staff estimated that the reimbursements of such services from project budgets amounted to US$7 million in 1996-97. But the costs actually incurred by the Organization in that respect were not known. Therefore the overall support costs balance is not known.

My staff noted that a new accounting instruction delineating the nature and detailing the accounting treatment of the various categories of support costs had been issued in January 1998. The implementation of this instruction should allow for consolidating all support cost income and expenditure.

b) From a management standpoint, the multiplication of support cost categories makes it more and more difficult to monitor and measure the effects of the policy pursued. For example, in view of the reluctance of UNDP and most Trust Fund donors to agree to additional support cost charges, the new support cost categories introduced in 1996 (ATS, STS, SSTS, SST-LTU) were mostly applied to the project budgets funded from Regular Programme resources controlled by the Organization (TCP and SPFS). Out of the US$7 million mentioned above, US$4.8 million was charged to such projects. Therefore, the "reimbursement" of such support costs consisted only in moving funds from chapter 4 to chapters 2 and 3 of the budget. But this did not increase the resources at the disposal of the Organization. ATS and STS provided to Trust Fund or UNDP projects for which no reimbursement of such costs had been agreed with the donor were charged to the Regular Programme. As a matter of fact, provisions for technical backstopping of the field programme (TCP and SPFS as well as Trust Fund and UNDP projects) had already been included in the 1996-97 budget approved by the Conference (document C95/3, �97, refers).

49. 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:

i) either tailor support costs to the requirements of individual projects and clearly identify support costs in project budgets;

ii) 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.

50. In view of the difficulties experienced in verifying field expenditure from headquarters, the Organization decided, in 1995, to have monthly audits of imprest expenditure carried out by local audit firms. This was conceived as an interim solution until the time when systems and procedures would be in place to support a fully decentralised accounting structure. The first contracts with local audit firms were signed at the end of 1995, but the programme really started in 1996. It was pursued in 1997 and in the current biennium. Contracts were awarded through a competitive bidding procedure. In 1996-97, 78 field offices, including some sub-regional and liaison offices, were covered by such local audit contracts. The examination of these arrangements brought up the following findings.

a) Local auditors were required to check the reconciliation of bank accounts and the agreement of local disbursements with FAO procedures, in particular for locally recoverable items (LRI). But they were not required to provide the Organization with the assurance that statements of local transactions were true and fair in all material respects. In addition local audits were restricted to regular programme expenditure since the Organization needed the agreement of donors, which they were unable to give, to incur the attending costs in respect of Trust Funds and UNDP projects imprest accounts. As far as we could ascertain, only one project was audited under this programme. Finally, the scope was limited by the fact that many contracts were signed late due to unavoidably long fee negotiation and the tender process implemented (contracts covering the second half of 1997 were signed between September 1997 and April 1998). Moreover, the audit reports were of varying quality.

b) Until January 1998, i.e. for the entirety of the 1996-97 biennium, the local audit reports were not forwarded to the decentralised accounting group who were the main users of such information. Another cause for the lack of exploitation was that the monthly reporting period resulted in too many reports being produced. I understand that steps have been taken to ensure closer monitoring and effective exploitation of local audit reports in the current biennium. Since the re-organisation of the finance division, the responsibility for the local audit programme has been assigned to the decentralised accounting group.

c) The cost of the local audit programme was high. Total expenditure in respect of 1996 and 1997 amounted to US$1.8 million. Although there has been an improvement in the presentation of imprest returns, considering the limited impact of the reports, steps need to be taken to improve the cost-benefit ratio of the programme.

In view of the above, 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.

51. As I had recommended in my previous report, the Secretariat undertook a substantial clean up of receivable and payable accounts in 1996-97. However, this effort should be pursued as long outstanding transactions, particularly staff transactions such as travel and other advances, and field transactions such as LRI, continue to build up and encumber accounts receivable and payable at the end of the biennium. Such transactions should be regularly monitored and cleared. My staff noted that "Accounts Receivable" and "Accounts Payable" units were being set up in the accounting service and I consider this to be a step in the right direction.

52. The difficulties experienced by the Organization in monitoring their accounts receivable and payable and regularly clearing them also result from procedural and systems problems which make such monitoring cumbersome, time-consuming and, therefore, not very effective. Cases in point include the clearing of travel advances, the automatic posting of certain transactions as payables and the difficulties in cancelling them as and when necessary, the posting of offsetting receivables and payables to different "funds" which results in difficulties to identify such offsetting transactions and clearing them, and the difficulties in identifying offsetting transactions when they are handled through field offices. As a result, at least in part, of such difficulties receivables from staff increased in 1996-97 (US$18.7 million) over the amount recorded at the end of 1995 (US$16.4 million). The balance as at 31 December 1997 may be overstated, although it is difficult to find out by exactly how much. Similarly the accounts payable balance relating to field transaction, which increased from US$3.7 million at the end of 1995 to US$7.9 million at the end of 1997, may also be overstated in a proportion which is not easy to identify as a result of the difficulties mentioned above.

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

(c) Termination of service benefits (accrued annual leave, repatriation grant, termination indemnity, repatriation travel, removal of personal goods),

In my previous report, I had recommended a number of changes in the way the Organization accounted for and reported the liabilities they recognised towards their staff.

54. In 1996-97, further to the review of the matter carried out with the assistance of an actuary, the Organization started implementing new policies with which I concur. Such policies consist in:

- reporting the accrued liability in respect of staff as a consolidated amount, with details of the Organization's future obligations provided in notes to the financial statements,

- reporting the accrued liabilities at their actuarial value supported by regular actuarial reviews (the latest one was carried out during the first semester of 1998 and supported the actuarial value as at 31 December 1997 disclosed in the financial statements);

- distributing the investments held by the Organization between the various schemes providing for the funding of certain liabilities, on the one hand, and the General Fund of the Organization, on the other hand;

- crediting the income generated by such investments to the Income and Expenditure Statement (General Fund column).

55. While I agree with such changes, I think further comments on the reporting, funding and accounting for staff related liabilities are in order:

a) For historical reasons, the FAO has been managing the separation payments scheme (SPS) and the compensation payments revolving fund (CPRF) not only for their own staff but also on behalf of the WFP under tacit arrangements whereby the FAO collected contributions, paid the benefits due and reported the liability and the investments held under the schemes for the two organisations. In 1996-97, the introduction of the new policy for FAO, but not WFP, resulted in an inconsistency in the presentation of the consolidated accrued liability related to the SPS. Whereas, in the case of FAO, this liability is shown at its actuarial value (US$80.5 million), in the case of WFP it is shown as the addition of the actuarial value (US$10.8 million) plus the share of 1996-97 investment and investment income accruing to the WFP (US$2.6 million). This share was calculated pro rata the share of each organisation in the total actuarial liability and resulted in the distribution of investments shown in notes 12 and 20 to the financial statements. However, over time, the inconsistent reporting method outlined above would result in substantially distorting the representation of the liability. Therefore, I recommend that, in the future, the liability relating to the SPS be reported in conformity with stated policy (actuarial value) and that an agreement be reached with the WFP to implement such policy.

b) Reporting the liabilities recognised under the SPS and CPRF at their actuarial value resulted in showing the substantial excess of investment over liabilities held by the General Fund of the FAO. As disclosed in note 12 to the financial statements, this excess amounted to US$40.2 million at the end of 1997.

c) With respect to termination of service benefits, only FAO staff's benefit obligation is reported in the financial statements (note 20). This obligation is funded, in part, by the TPF, the other part is not funded. The Organization account for the expenditure related to the latter on a "pay as you go basis" as explained in note 24 to the financial statements. The operation of the TPF has become extremely complex as a result of successive modifications in contributions, eligible staff and eligible benefits since its creation in 1972. The result of such modifications was that, as at the end of 1997, the assets of the TPF covered only US$2 million of the US$22.4 million actuarial liability in respect of termination of service benefits. In other words, the TPF no longer served the purpose for which it was established. I recommend that the purpose and operation of this fund be thoroughly reviewed with a view to establishing a consolidated mechanism to provide for the funding of all recognised end of service liabilities.

d) The actuary estimated the consolidated unaccrued liability in respect of the after service medical coverage plan at US$254.3 million as at 31.12.1997. In addition to FAO, a number of parent organisations (including WFP) are participating in this plan. There was no formal agreement on the distribution of the consolidated liability between these organisations. The actuary estimated that the FAO share in the consolidated liability stood at US$195.1 million. This was not provided for as explained in note 24 to the financial statements. The stated policy of the FAO is to start amortising the unaccrued portion of their liability in respect of end of service benefits (medical and otherwise) over a thirty year period in 1998. This will result in regular allowances being charged to the Income and Expenditure Statement of the Organization during the forthcoming biennia. The funding of the unaccrued portion of the liability towards employees of other parent organisations (among which WFP) will be provided for by each responsible organisation.

56. In 1997, the FAO decided to launch, within the framework of the World Food Day, an initiative to raise public awareness on food security and appeal for financial contributions in support of a programme of grassroots-level projects against world hunger and malnutrition. This initiative was publicised through a world-wide television programme known as Telefood.

Eighty seven bank accounts were opened by the FAO Treasury to collect contributions in 53 countries, and another seven accounts were opened in the name of local Telefood National Committees. As at 31 December 1997, US$2 million had been collected, of which 91% in two Member Nations, and transferred to a special Trust Fund account opened in the Organization's books.

The costs of developing and publicising the television programme amounted to US$1.2 million which were funded by private sponsors. Additional related costs incurred by FAO amounted to some US$150,000, exclusive of the cost of regular staff time devoted to this operation.

57. The development of the television programme was handled by a private foundation which was required to submit to the FAO, by the end of 1997, a statement of receipts and expenditures certified by an international audit firm. However, such statements had not been submitted at the time of writing the present report.

Other special audit arrangements, implying local external auditors and the internal audit office, had been made in respect of the collection of private contributions. However, the effectiveness of such arrangements was limited since only US$77,443 collected in a number of countries were covered by this procedure. But I understood that the remainder of the accounts will be subject to audit during the course of the year.

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

58. My staff's review of procurement activities in FAO was focused on the awarding and implementation of a number of major contracts. The following paragraphs detail the findings resulting from the review of the five contracts related to the procurement and implementation of new financial and personnel management systems.

59. From 1985 to 1991, the FAO developed bespoke financial and personnel management systems at a cost of US$30.2 million, including US$18.6 million of FAO staff costs (Report of the External Auditor on 1990-91 financial statements, refers). Early on, it became apparent that these systems, known as FINSYS and PERSYS, could not meet some of the basic requirements of the Organization. In 1994, the Finance Committee endorsed the proposal to replace FINSYS/PERSYS with either a system developed by a sister organisation or a commercial software package. In June 1995, the Director-General decided to purchase a "tried and tested" package. The deadline for the signature of the software package contract was set at 31 December 1995. The new systems were required to be operational by 1 January 1998 at a cost estimated at US$8 million (exclusive of FAO staff costs). Cost estimates were based on the assumption that a commercial package could be more or less readily adapted to FAO requirements. However, Electronic Data Processing (EDP) systems have a track record for not being delivered on time and exceeding costs and the personnel and financial management systems of FAO were no exception. A partial implementation of the original plan is expected to be achieved at the end of 1999 at a cost of US$17 million, including equipment, software and development/implementation costs, but excluding FAO staff costs. The following paragraphs analyse how this came about with a view to identifying the causes for such developments.

60. A major factor was the hurried way in which the more important and complex contracts were awarded at the end of 1995 in order not to let available budget authorisations lapse. This required that budgetary funds be committed, which could only be done against contracts signed before 31 December 1995. Cases in point included the contract with the vendor of the software package (US$2.9 million), the amendment (US$0.9 million) to the contract with a major consulting firm to provide assistance in the implementation of the software package and the contract with the vendor of the necessary hardware equipment (US$1.1 million). All three were signed on 29 December 1995. In the last two cases, the contracts were signed without resorting to competition, on the basis of waivers issued by the Deputy Director General, but not reviewed beforehand by the Procurement Committee. Also, the US$2.9 million software package contract mentioned above included a substantial addition, amounting to 50% of the original amount, made on 28 December 1995 (i.e. one day before the signature of the contract) for unspecified "technical services to assist in the customisation of the packages". In view of the circumstances, this addition was also made under a waiver of competition.

61. The conditions under which these contracts were negotiated resulted in an insufficient or inadequate definition of the business requirements of the Organization and, more important, in an underestimation of the gap existing between what the software could achieve and what the FAO required (the "functionality gap"). As a matter of fact, this gap analysis went on for the most part until the end of 1997 (although some of it was still going on in mid-1998) and led to substituting some of the functionalities of the original package with other solutions and postponing the deadline for such implementation which, in any case, was optimistic for a large project of this nature.

Therefore, it appeared, with the benefit of hindsight, that the time saved before the signature of the contract to meet the end-1995 budget deadline resulted in adverse consequences on the overall implementation of the project.

62. Another cause of the difficulties met in implementing this project was that the initial management structure proved inadequate and had to be thoroughly reorganised in February 1997. For most practical purposes, the work done in 1996 had to be reconsidered with revised instructions and revised objectives. This resulted, in part, from the fact that there was no project director and the project manager failed to provide accurate reports to the steering committee and its core group which could not provide effective guidance. It resulted also from the fact that the contract signed with a major consulting firm to help the internal project team in the implementation of the software package was not for the provision of any specific deliverables, but only for the provision of advisory services as and when considered appropriate. In the end, this contract which went on until February 1997, at a total cost of US$2.4 million, proved to be of little value to the Organization in delivering a fully configured system. However the implementation of this contract contributed to the documentation of business processes and the transfer of experience to staff. In February 1997, a new management team, with a new project director, took over with key FAO staff being made accountable for delivering the elements of the systems for which they had responsibility. However, the actual availability of staff remained a major problem well into 1998 either as a result of vacancy (e.g. vacancy of the post of Director of Personnel from July 1997 to June 1998), involvement in other priorities, lack of the required expertise (the consultant had not trained staff who could have taken over) or difficulties in finding replacement for the staff assigned to the project. I understand that, in April 1998, the former steering committee was replaced by a restricted special committee chaired by the Director-General, that five staff members were assigned to the project full time and a new contract for consultancy services was signed with another consulting firm.

63. Finally, the systems procured proved not to have been "tried and tested" in organisations "with comparable requirements to those of FAO" as was originally required. To a certain extent, this must also be related to the tight deadlines imposed on the selection of the software. At that time, no comparable organisation had tried and tested the version of the software package that the FAO was about to purchase and it was not possible to organise a visit to another international organisation which was using the personnel management systems. When FAO staff could visit this organisation in April 1996 (i.e. after the procurement contract had been signed), it appeared that they were considering purchasing another software. As a matter of fact, the vendor experienced difficulties in delivering the upgraded version of key modules of the software. Several of these (e.g. accounting, payroll) were not delivered before mid-1998. This impacted on the functionality gap analysis and, as a result, on the implementation of the whole project and the deadline. Similarly, because of uncertainty on the time when the web-enabled versions of the applications procured would be available from the vendor, FAO had to purchase a buffer system at the end of 1997 as an interim solution, pending the release of the web-enabled version.

64. As at 31 December 1997, US$10.6 million had been spent for the implementation of new financial and personnel management systems. This figure did not include the cost of regular staff time devoted to the project (estimated at US$3.1 million as at 31 December 1997). A further US$6 million was allotted to the project in 1998-99. Total external costs were thus estimated at US$17 million at the time of writing the present report. The present allocation of resources should allow for completing the reduced configuration of the project now being implemented, it being understood that the human resources and payroll components would be implemented in a second phase.

65. In the software package configuration being implemented at present, only the core modules of the package procured by FAO would be used (general ledger, accounts payable and receivable, procurement and fixed assets). Interfaces will have to be designed and implemented between the core modules (general ledger and payables/receivables, in particular) and a number of sub-systems: the payroll system will continue to be run on FINSYS/PERSYS, investment management transactions on a different software, field transactions on a software to be adapted from the one in use in another UN organisation and travel transactions on a software developed for another UN organisation. In addition a data warehouse and a management information system would be put in place.

An informal implementation plan, replacing the outdated project charter of April 1996, was issued in May 1998. The new deadline for the implementation of the reduced configuration contemplated in this plan is 1 January 1999.

66. For the future, the conclusion which may be drawn from this review, is that the management structure adopted by the Organization for the conception and implementation of this project was not strong and effective enough. Decisions taken tended to be based on optimistic assumptions on the resources (human and otherwise) and time needed to accomplish what was expected. For complex corporate projects like the one under review that cut across organisational lines, horizontally as well as vertically, it is essential that responsibility and accountability be well defined from the outset, that staff be made fully available to work as a team and that the implementation of the project be based on a fully spelled out strategy for change (including reasonable assessment of the time necessary to implement change).

67. The policy for decentralising operations, particularly policy assistance, field programme and technical support, to regional offices started being implemented in mid-1996. Implementation was extended to all regional offices in 1997, it is being pursued in 1998. My staff visited four of the five regional offices and one sub-regional office in July 1997 and in the spring of 1998 with a view to reviewing the implementation of this policy. The visits took place between one year and eighteen months after the initial steps to implement the policy. One regional office where the importance and nature of the difficulties met reflected specific circumstances was left out of the scope of the review. The findings and conclusions drawn from these visits were detailed in Management Letters addressed to the Director-General. The following paragraphs summarise my staff's findings and my recommendations.

68. The decentralisation of operational activities to the regional level was a major undertaking which, for the most part had been accomplished at the time of writing the present report. However, the present stage of the implementation of the policy showed that there was a gap between the increased responsibility bestowed on the Assistant Director General/Regional Representatives (ADG/RR) and the authority, the staff, and the information and financial systems at their disposal to carry out such responsibility.

69. Decentralisation implied the delegation of a large measure of authority to ADG/RRs. However, the precise delineation of this authority is a matter of debate within the Organization. Such basic subjects as the responsibility for identifying regional priorities, the role of technical officers in respect of the field programme or the supervision of regional officers were still under discussion. A revised circular on responsibilities and relationships between regional offices and headquarters had been in preparation since August 1997, but it had not been issued at the time of writing the present report.

70. Budgetary matters offer an illuminating example of the current problems. My staff noted that, in addition to the regular allotment issued to the ADG/RR, regional officers did receive, direct from their technical departments at headquarters and unbeknownst to the ADG/RR, authorisations to spend in the form of "field authorisations" which were charged against headquarters budget entities. This clearly undermined the capacity of the ADG/RR to coordinate and monitor the implementation of the Organisation's regional programme and rendered the monitoring of budgetary execution and accounting for expenditure needlessly complicated. In addition, it ran against the principle of the decentralisation policy set out in the FAO Manual to the effect that "the regional technical groups work under the managerial authority of the Regional Representative" (Section 116, issued 30.5.1996).

As a matter of fact, the authority delegated to the ADG/RRs was even curtailed in certain areas when, for example, they were requested, at the end of 1996, to no longer liquidate and settle education grants in order to avoid the possibility of double payments which resulted from the lack of connection with the central system (see �71, below).

The Organization agreed that there was a need to finalise and formalise the extent and modalities of the authority delegated to ADG/RRs.

71. The decentralisation of operations implied the abolition of a large number of posts, the creation of new posts, the redeployment and transfer of staff to the regional offices as well as the recruitment of new staff, particularly at the general service level. This exercise proved difficult and regional offices experienced substantial staff vacancy during the biennium, both in technical and administrative posts. Cases in point included the chiefs of two management support units (MSU) who were not appointed before the end of 1997, the chief of a third MSU who, although he had been appointed in November 1996, was absent from his post for about half of the period reviewed (1.11.96 - 31.7.97), personnel officer or information technology officer posts left vacant for long periods of time. Another difficulty was the number of cases where the high turnover of professional staff impaired the build up of an adequate capability, particularly in the MSUs. In several cases, gaps had to be filled or training provided by assigning headquarters staff to regional posts for long periods of time, at the high cost implied by such missions. Finally, it appeared that the consultation, at an appropriate stage, of the ADG/RRs in the selection of technical and administrative professional staff was often a cause for friction between headquarters and the regional offices. To a certain extent such difficulties were to be expected as they are part and parcel of such exercises and, hopefully, the situation should improve with the passage of time. However, the present complex recruitment and transfer procedures in FAO, resulting in long delays, which have long been identified as problematic in normal circumstances, are even more of an obstacle to the successful implementation of decentralisation. In this regard, it should be mentioned that a review of the recruitment procedures has been carried out recent and recommendations are under consideration by senior management.

72. Interfacing of the systems in use at headquarters and in regional offices has been a problem from the start of the decentralisation policy. This resulted from a variety of reasons related to policy (e.g. until the summer of 1997, it had been decided that regional officers would not have a direct access to the central information systems FINSYS and PERSYS), costs, the upcoming implementation of a new organisation-wide financial management software and the development of a number of "temporary" solutions to fill the gap. At present the systems in use in regional offices and at headquarters are not properly interfacing with one another. Cases in point include the imprest return information system (IRIS), the periodic budget report system (PBR), the project operation information system (POIS), and the central FINSYS/PERSYS systems. This results in confusion, time wasted in recording, reconciling and checking entries and an increase in the risks of errors. Such difficulties are compounded by the staffing problems experienced at the regional level. I understand that the situation should improve with the introduction of the structured and integrated system, including the field information system, now being contemplated, but the implementation of this system will take time.

73. I wish to record my appreciation of the cooperation and assistance extended by the Director-General and his staff during the audit.

Pierre JOXE
Premier Pr�sident de la Cour des Comptes
de la R�publique Fran�aise
External Auditor

	Notes	Funds			Total
		General and Related	Trust and UNDP	1996-97	1994-95
INCOME
Assessment on Member Nations	4	629.4	-	629.4	612.1
Voluntary contributions	5	32.1	326.6	358.7	363.1
Funds received under inter-organizational arrangement	6	16.3	84.8	101.1	167.8
Jointly financed activities	7	25.3	-	25.3	28.0
Services rendered		5.6	-	5.6	7.1
Miscellaneous	8	42.4	21.6	64.0	26.3
Sundry	9	13.4	-	13.4	25.5
		764.5	433.0	1,197.5	1,229.9

EXPENDITURE
Regular Programme		729.0	-	729.0	680.0
Projects		-	433.0	433.0	544.3
	10	729.0	433.0	1,162.0	1,224.3

EXCESS (SHORTFALL) OF INCOME OVER EXPENDITURE		35.5	-	35.5	5.6
Transfer of Support Costs balance	3	1.9	-	1.9	0.6
Provision for contributions	11	58.7	-	58.7	(64.2)

NET EXCESS (SHORTFALL) OF INCOME OVER EXPENDITURE		96.1	-	96.1	(58.0)
Net transfers from/(to): Working Capital Fund	21	0.7	-	0.7	19.0
Special Reserve Account	22	1.4	-	1.4	6.6
Fund balances, beginning of period		(70.6)	-	(70.6)	(38.2)

FUND BALANCES, END OF PERIOD	23	27.6	-	27.6	(70.6)

	Notes	Funds			Total
		General and Related	Trust and UNDP	1996-97	1994-95
ASSETS
Cash and term deposits		62.0	194.9	256.9	204.4
Investments	12	152.2	-	152.2	133.7
Contributions receivable	13	154.0	-	154.0	213.2
Less: Provision for contributions	11	(154.0)	-	(154.0)	(213.2)
Accounts receivable	14	27.9	11.6	39.5	37.3
		242.1	206.5	448.6	375.4

LIABILITIES
Contributions received in advance	15	2.3	157.9	160.2	159.8
Unliquidated obligations	16	28.5	30.9	59.4	65.5
Inter-fund balances	17	(6.3)	6.3	-	-
Accounts payable	18	14.6	11.4	26.0	20.5
Deferred income	19	50.2	-	50.2	44.1
Staff related schemes	20	125.4	-	125.4	144.8
Bank loan		-	-	-	8.0
		214.7	206.5	421.2	442.7

RESERVES AND FUND BALANCES
Working Capital Fund	21	-	-	-	0.7
Special Reserve Account	22	(0.2)	-	(0.2)	0.7
Fund Balances, end of period	23	27.6	-	27.6	(70.6)
		27.4	-	27.4	(69.2)
Support Costs	3	-	-	-	1.9
		27.4	-	27.4	(67.3)
		242.1	206.5	448.6	375.4

	1996-97	1994-95
CASH FLOWS FROM OPERATING ACTIVITIES
Net excess (shortfall) of income over expenditure (Statement I)	96.1	(58.6)
Adjustment for interest receivable	(26.5)	(17.8)
	69.6	(76.4)
Decrease in contributions receivable	59.3	(61.8)
Decrease in provision for contributions	(59.3)	61.8
Increase in accounts receivable	(4.8)	8.1
Increase in contributions received in advance	0.4	(2.5)
Decrease in unliquidated obligations	(6.1)	2.6
Increase in deferred income	6.1	8.7
Increase in accounts payable	5.5	(0.8)
Decrease in staff related schemes	(5.9)	5.3
	64.8	(55.0)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in investments	(18.5)	(25.8)
	(18.5)	(25.8)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in Working Capital Fund	0	0.5
Increase in Special Reserve Account	0.5	1.5
Decrease in Support Costs	(1.9)	0
Decrease in Compensation Plan Reserve Fund	(13.5)	1.7
Decrease in loans	(8.0)	8.0
Interest received	29.5	18.9
Interest paid	(0.4)	(0.1)
	6.2	30.5
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	52.5	(50.3)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	204.4	254.7
CASH AND CASH EQUIVALENTS AT END OF PERIOD	256.9	204.4

	Original Budget	Transfers	Modified Budget	Expenditure	Deferred Income (Note 19)	Unutilized Balance
CHAPTER
1 General Policy and Direction	46.2	2.9	49.1	48.7	-	0.4
2 Technical and Economic Programmes	298.8	(9.1)	289.7	286.0	-	3.7
3 Development Support Programmes	113.5	(4.2)	109.3	110.6	-	(1.3)
4 Technical Cooperation Programme	87.6	-	87.6	37.4	50.2	-
5 Support Services	63.5	4.1	67.6	68.2	-	(0.6)
6 Common Services	39.8	6.3	46.1	46.0	-	0.1
7 Contingencies	0.6	-	0.6		-	0.6

TOTAL EFFECTIVE WORKING BUDGET	650.0	-	650.0	596.9	50.2	2.9
8 Transfer to Tax Equalization Fund	90.8	(90.8)	-	-	-	0
Currency variance (Note 22)	-	-	-	(1.5)	-	1.5

TOTAL APPROPRIATIONS (GROSS)	740.8	(90.8)	650.0	595.4	50.2	4.4

4. ASSESSMENT ON MEMBER NATIONS	1996/97	1994/95
1996/97 Regular Programme assessments	641.2	622.9
less: Amount in respect of Tax Equalisation Fund(2.2)	(2.2)	(2.1)
TCP appropriation	(85.5)	(82.3)
	553.5	538.5
Add: Amount transferred from deferred income in respect of expenditures against:
(i) 1994/95 TCP appropriation	44.1	35.4
(ii) 1996/97 TCP appropriation	35.2	38.2
	632.8	612.1
Less: Discounts on Contributions received	(3.4)	-
	629.4	612.1

5. VOLUNTARY CONTRIBUTIONS	1996/97	1994/95
(a) General and Related Funds
Support Costs	32.1	-
(b) Trust Funds and UNDP
Government sponsored schemes	232.3	279.0
Non-Government sponsored schemes	65.4	64.3
Jointly-Financed (Government and non-Government) schemes	21.8	13.0
Multidonor projects	7.1	6.8
	326.6	363.1
	358.7	363.1

CONFERENCE

Thirtieth Session

Rome, 12 - 23 November 1999

AUDITED ACCOUNTS
FAO 1996-97

Table of contents

FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS
FINANCIAL STATEMENTS 1996-97

OPINION OF THE EXTERNAL AUDITOR

CERTIFICATION OF FINANCIAL STATEMENTS

STATEMENT OF INCOME AND EXPENDITURE
AND CHANGES IN RESERVES AND FUND BALANCES

STATEMENT OF ASSETS, LIABILITIES, RESERVES AND FUND BALANCES

STATEMENT OF CASH FLOW

STATUS OF REGULAR PROGRAMME APPROPRIATIONS

NOTES TO THE FINANCIAL STATEMENTS

SCHEDULE OF ASSESSED CONTRIBUTIONS OUTSTANDING FOR THE REGULAR PROGRAMME

STATUS OF PROJECTS FUNDED UNDER
THE TECHNICAL COOPERATION PROGRAMME
AGAINST 1996-97 PROJECT APPROPRIATION

STATUS OF PROJECTS FUNDED UNDER
THE TECHNICAL COOPERATION PROGRAMME
AGAINST 1994-95 PROJECT APPROPRIATION

REPORT OF THE EXTERNAL AUDITOR
ON THE FINANCIAL STATEMENTS OF
THE FOOD AND AGRICULTURE ORGANIZATION OF
THE UNITED NATIONS
FOR THE FINANCIAL PERIOD 1 JANUARY 1996
TO 31 DECEMBER 1997

SUMMARY

LONG FORM REPORT

6. FUNDS RECEIVED UNDER INTER-ORGANIZATIONAL ARRANGEMENT	1996/97	1994/95
(a) General and Related Funds
Support Costs	16.3	-
(b) Trust Funds and UNDP
Funds received under inter-organizational arrangement	84.8	167.8
	101.1	167.8

7. JOINTLY FINANCED ACTIVITIES	1996/97	1994/95
FAO/World Bank Cooperative Programme	19.3	19.4
African Development Bank	1.9	2.7
Asian Development Bank	1.6	1.4
International Fund for Agricultural Development	1.6	3.2
United Nations Capital Development Fund	0.3	0.5
Others	0.6	0.8
	25.3	28.0

8. MISCELLANEOUS	1996/97	1994/95
(a)General and Related Funds:
Investment income	15.8	-
Bank interest	4.9	6.8
Bank interest payable	(0.4)	(0.1)
Lapse of Accrued liabilities	6.7	3.8
Discounts on Contributions Received	-	(2.3)
Other	15.4	4.7
	42.4	12.9
(b)Trust Funds and UNDP:
Bank interest	21.6	13.4
	64.0	26.3
9. SUNDRY	1996/97	1994/95
Government cash contributions	2.6	3.2
Publications Revolving Fund	1.7	2.2
Gains/(Losses) on exchange	9.1	20.1
	13.4	25.5

Staff salaries	482.3	417.6
Other human resources	78.1	68.9
Official travel	29.2	36.7
Publications	23.3	36.1
General operating expenses	66.1	73.5
Purchase of equipment	29.5	28.4
Sundries	20.5	18.8
	729.0	680.0

(b)Trust Funds and UNDP
Staff salaries	186.2	226.1
Other human resources	17.6	17.4
Official travel	26.3	29.2
General operating expenses	27.9	38.6
Purchase of equipment	97.6	100.5
Support costs	-	51.2
Training	43.3	49.6
Contracts	33.0	30.3
Sundries	1.1	1.4
	433.0	544.3
	1,162.0	1,224.3

11. PROVISION FOR CONTRIBUTIONS		1996/97		1994/95
At 1 January 1996		213.2		151.4
Assessment on Member Nations	(58.7)		62.9
Government Cash Contributions	-		1.3
		(58.7)		64.2
Provision no longer required		(0.5)		(2.4)
At 31 December 1997		154.0		213.2

12. INVESTMENTS	1996/97	1994/95
General and Related Funds:
Compensation Plan Reserve Fund	18.1	37.1
Separation Payments Scheme	93.9	96.6
General Fund	40.2	-
	152.2	133.7

13. CONTRIBUTIONS RECEIVABLE	1996/97	1994/95
Assessment on Member Nations	136.7	195.4
Government cash contributions	4.7	4.7
Working Capital Fund	1.6	1.6
Special Reserve Account	11.0	11.5
	154.0	213.2

14. ACCOUNTS RECEIVABLE
	General and Trust Funds		1996-97	1994-95
	Related Funds	and UNDP

Salary and other advances	14.7	4.0	18.7	16.4
Deposits and prepayments	0.8	0.0	0.8	0.9
Other UN and non UN organizations	8.2	0.6	8.8	9.3
Accrued interest	1.7	4.4	6.1	3.5
Others	2.5	2.6	5.1	7.2
	27.9	11.6	39.5	37.3

15. CONTRIBUTIONS RECEIVED IN ADVANCE	1996/971	994/95
(a) General and Related Funds:
Assessment on Member Nations	2.3	1.8
(b) Trust and UNDP Funds:
(i) Voluntary contributions	158.3	155.5
(ii) Funds received under inter-organizational arrangement	(0.4)	2.5
	157.9	158.0
	160.2	159.8

18. ACCOUNTS PAYABLE
	General and Trust Funds		1996-97	1994-95
	Related Funds	and UNDP
Payroll accrual	6.0	1.1	7.1	6.4
Field disbursements	3.9	4.0	7.9	3.7
Pension and medical schemes	1.8	0.4	2.2	2.0
Others	2.9	5.9	8.8	8.4
	14.6	11.4	26.0	20.5

19. DEFERRED INCOME	1996/97	1994/95
At 1 January 1996	44.1	35.4
Add: 1996/97 Regular Programme assessment relating to TCP appropriation	85.5	82.3
Less: Transferred to income in respect of expenditures incurred against:
(i) 1994/95 TCP appropriation	(44.1)	(35.4)
(ii) 1996/97 TCP appropriation	(35.3)	(38.2)
At 31 December 1997	50.2	44.1
20. STAFF RELATED SCHEMES	1996/97	1994/95
General and Related Funds
Staff fiduciary accounts	11.4	10.9
Separation Payments	93.9	93.9
Compensation Payments	18.1	31.6
Terminal Payments Fund	2.0	8.4
	125.4	144.8

	1996-97	1994-95
Principal actuarial assumptions to determine cost of expected claims:
(i) Annual interest rate	8.5%	9%
(ii) Annual cost-of-living increases in benefits	5.5%	6%
(iii) Annual increases in pensionable remuneration	6.5%	6.5%
Actuarial present value of expected claims	17.9	19.6

Schedule 1
SCHEDULE OF ASSESSED CONTRIBUTIONS OUTSTANDING FOR THE REGULAR PROGRAMME As At 31 December 1997 (US$)

Member Nation	1994 and prior	1995	1996	1997	Due under instalment plan		Grand Total
Afghanistan	-	-	18,513	31,950		75,517	125,980
Albania	-	261	31,950	31,950			64,161
Angola	-	-	-	31,950			31,950
Antigua and Barbuda	216,411	37,191	31,950	31,950			317,502
Argentina	-	-	1	1,661,400			1,661,401
Armenia	584,393	465,600	191,700	159,750			1,401,443
Azerbaijan	-	100,880	415,350	383,400			899,630
Bahrain	-	-	3,256	63,900			67,156
Bangladesh	-	-	-	350			350
Barbados	-	-	-	7,041			7,041
Belize	-	-	-	31,488			31,488
Bolivia	7,333	12,308	43,348	31,950		98,463	193,402
Bosnia and Herzegovina	194,798	155,200	31,950	31,950			413,898
Brazil	-	-	-	314,857			314,857
Bulgaria	-	-	285,615	287,550			573,165
Burkina Faso	-	-	-	24,535			24,535
Burundi	48,470	31,040	31,950	31,950			143,410
Cambodia	-	-	25,695	-		247,168	272,863
Cameroon	-	-	-	31,950			31,950
Central African Republic	62,717	31,040	31,950	31,950			157,657
Chad	98,707	31,040	31,950	31,950			193,647
Chile	-	-	-	270,000			270,000
China	-	-	-	30			30
Comoros	145,315	31,040	31,950	31,950			240,255
Congo	-	-	4,053	31,950			36,003
Cook Islands	32,718	31,040	-	31,950			95,708
Croatia	-	-	242,450	319,500			561,950
Cuba	-	303,563	191,700	159,750			655,013
D.P.R. of Korea	316,621	186,240	159,750	159,750			822,361
Djibouti	70,957	31,040	31,950	31,950			165,897
Dominica	-	30,130	31,950	31,950			94,030
Dominican Republic	-	135,128	104,998	31,950		584,384	856,460
Ecuador	50,408	93,120	63,900	63,900			271,328
Equatorial Guinea	57,710	43,754	44,664	-		50,855	196,983
Estonia	-	-	-	41,608			41,608
Gambia	-	-	8,451	31,950		97,476	137,877

Annex 1.1
STATUS OF PROJECTS FUNDED UNDER THE TECHNICAL COOPERATION PROGRAMME AGAINST 1996-97 PROJECT APPROPRIATION AT 31 DECEMBER 1997

Country	Number of Projects	Project Budgets		Expenditure including Outstanding Obligations		Unobligated Balance of Budget
		(US$'000)		(US$'000)		(US$'000)
AFRICA
Africa Regional	9		2,075		700		1,375
Angola	3		976		475		501
Benin	2		504		120		384
Botswana	2		226		88		138
Burkina Faso	5		1,039		389		650
Burundi	3		749		685		64
Cameroon	3		678		180		498
Cape Verde	1		167		115		52
Central African Republic	2		534		175		359
Chad	3		854		330		524
Comoros	1		322		123		199
Congo	3		485		159		326
Congo Dem. Rep.	3		367		34		333
Cote d'Ivoire	2		537		165		372
Equatorial Guinea	1		137		68		69
Eritrea	5		981		354		627
Ethiopia	2		94		26		68
Gabon	1		0		13		(13)
Gambia	5		1,072		533		539
Ghana	4		864		502		362
Guinea	2		538		328		210
Kenya	6		1,785		1,091		694
Lesotho	1		176		22		154
Liberia	2		101		62		39
Madagascar	5		1,244		1,091		153
Malawi	5		817		369		448
Mali	4		906		508		398
Mauritania	2		431		162		269
Mauritius	2		351		78		273
Mozambique	1		225		166		59
Namibia	3		983		482		501
Niger	3		533		237		296
Nigeria	2		475		256		219
Rwanda	6		1,933		1,578		355

Annex 1.2
STATUS OF PROJECTS FUNDED UNDER THE TECHNICAL COOPERATION PROGRAMME AGAINST 1994-95 PROJECT APPROPRIATION AT 31 DECEMBER 1997

Country	Number of Projects	Expenditure including Outstanding Obligations
		(US$'000)
AFRICA
Africa Regional	15	2,698
Angola	5	1,416
Benin	6	808
Botswana	2	337
Burkina Faso	5	876
Burundi	3	465
Cameroon	7	660
Cape Verde	4	549
Central African Rep.	3	391
Chad	2	369
Comoros	1	86
Congo	5	884
Cote d'Ivoire	5	700
Djibouti	3	396
Eritrea	5	921
Ethiopia	6	1,173
Gabon	2	378
Ghana	4	516
Guinea	6	957
Guinea-Bissau	3	517
Kenya	1	286
Lesotho	5	460
Liberia	5	1,076
Madagascar	4	590
Malawi	3	638
Mali	8	1,197
Mauritania	4	1,046
Mauritius	1	291
Mozambique	10	1,916
Namibia	7	843
Niger	7	1,244
Nigeria	5	752
Rwanda	4	990
Senegal	4	608

		1996-97
(i) Interest rate		8.5%
(ii) Salary Inflation rate		5.5%
(iii) Medical Inflation rate		7%
Actuarial present value of expected claims		195.1

21. WORKING CAPITAL FUND	1996-97	1994-95
At 1 January 1996	0.7	19.2
Receipts from Member Nations	-	0.5
Net Transfers from/(to) General Fund	(0.7)	(19.0)
At 31 December 1997	-	0.7

22. SPECIAL RESERVE ACCOUNT
		1996-97		1994-95
At 1 January 1996		0.7		5.8
Receipts from Member Nations		0.5		1.5
Net Transfers from/(to) General Fund	(12.0)		(20.0)
Exchange differences on translation of foreign currencies	9.1		20.1
Currency variance on staff standard costs	1.5		(6.7)
		(1.4)		(6.6)
At 31 December 1997		(0.2)		0.7

23. FUND BALANCES, END OF PERIOD	1996-97	1994-95
General Fund	27.6	(70.8)
Publications Revolving Fund	-	0.2
	27.6	(70.6)

CONFERENCE

Thirtieth Session

Rome, 12 - 23 November 1999

AUDITED ACCOUNTS FAO 1996-97

Table of contents

FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS FINANCIAL STATEMENTS 1996-97

OPINION OF THE EXTERNAL AUDITOR

CERTIFICATION OF FINANCIAL STATEMENTS

STATEMENT OF INCOME AND EXPENDITURE AND CHANGES IN RESERVES AND FUND BALANCES

STATEMENT OF ASSETS, LIABILITIES, RESERVES AND FUND BALANCES

STATEMENT OF CASH FLOW

STATUS OF REGULAR PROGRAMME APPROPRIATIONS

NOTES TO THE FINANCIAL STATEMENTS

SCHEDULE OF ASSESSED CONTRIBUTIONS OUTSTANDING FOR THE REGULAR PROGRAMME

STATUS OF PROJECTS FUNDED UNDER THE TECHNICAL COOPERATION PROGRAMME AGAINST 1996-97 PROJECT APPROPRIATION

STATUS OF PROJECTS FUNDED UNDER THE TECHNICAL COOPERATION PROGRAMME AGAINST 1994-95 PROJECT APPROPRIATION

REPORT OF THE EXTERNAL AUDITOR ON THE FINANCIAL STATEMENTS OF THE FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS FOR THE FINANCIAL PERIOD 1 JANUARY 1996 TO 31 DECEMBER 1997

SUMMARY

LONG FORM REPORT

AUDITED ACCOUNTS
FAO 1996-97

FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS
FINANCIAL STATEMENTS 1996-97

STATEMENT OF INCOME AND EXPENDITURE
AND CHANGES IN RESERVES AND FUND BALANCES

STATUS OF PROJECTS FUNDED UNDER
THE TECHNICAL COOPERATION PROGRAMME
AGAINST 1996-97 PROJECT APPROPRIATION

STATUS OF PROJECTS FUNDED UNDER
THE TECHNICAL COOPERATION PROGRAMME
AGAINST 1994-95 PROJECT APPROPRIATION

REPORT OF THE EXTERNAL AUDITOR
ON THE FINANCIAL STATEMENTS OF
THE FOOD AND AGRICULTURE ORGANIZATION OF
THE UNITED NATIONS
FOR THE FINANCIAL PERIOD 1 JANUARY 1996
TO 31 DECEMBER 1997