Review of the Procurement Actions for the 2000-01 Biennium

Background Information on the Procurement for the SCR 986 Programme

98. – During the 2000-01 biennium, 980 Purchase Orders (POs) were raised for a total amount of US$188 million. It should be noted, however, that 450 POs were related to superintendence fees but only accounted for 1% of the total value because of the limited amount of each PO (between US$3,000 to US$4,500). The bulk of the total procurement amount was related to animal feed (31.8%), irrigation equipment (24.6%), farm machinery (13.8%), fertilisers (5.5%), veterinary equipment and vehicles (5.4% each). The audit was based on a detailed review of a judgmental sample of 32 POs over US$600,000 issued in 2000 and 2001 (16 each year). Their cumulated amount reached almost US$80 million and represented 43% of the total procurement actions of the SCR 986 Programme for the 2000-01 biennium. My staff examined the compliance of the procurement actions with established rules and regulations, computed the delays encountered in the procurement process and followed-up on my previous recommendations [paras. 86 and 89 of my report on the 1998-99 biennium].

Applicable Rules and Regulations

99. – According to Article 2.2 of MOU between the UN and the FAO, signed on 19 October and 9 November 1998, respectively, the FAO procures the humanitarian supplies agreed by the UN OIP “following the clearance, in each case, of its application, by the 661 Committee for items which are to be imported to Iraq”. Article 2.3. of the MOU further stipulates that “all services shall be carried out in accordance with the applicable regulations and rules of the FAO”. The rules and regulations applicable to procurement of goods, works and services are defined in Section 502 of the FAO Manual. In paragraph 83 of my 1998-99 report, I pointed out that the procurement process in place for the “Oil for Food” Programme during the biennium diverged from the rules and regulations defined in the above mentioned Section of the FAO Manual on two points.

100. – The first divergence had to do with the fact that when the TCOR prepared a list of items needed, the corresponding Purchase Requisition (PR) was not raised accordingly, contrary to Section 502.31 of the FAO Manual. It was only the list of items needed that was forwarded to the AFSP for processing and submission to the 661 Committee for clearance, respectively. I, therefore, recommended that the issuance of the PRs comply with the existing rules and regulations. The recommendation was implemented with the following procedure put in place in March 2001. The PRs were raised in Oracle and forwarded to AFSP for issuance of the tender. When the results of the tender were available, and a final recommendation was made, the Division concerned revised, as necessary, the PR and approved it in Oracle. It was on this basis that the PO was then issued.

101. – The second divergence from the rules and regulations was related to the Procurement Committee, which consultation was required under certain conditions (direct procurement above US$100,000 in particular). In the case of the “Oil for Food” Programme, however, the Procurement Committee was never consulted beforehand, but only informed post factum. This practice resulted from the application of a so-called “Emergency Procedure”, which I found questionable because of its unclear legal basis. I, therefore, recommended that it be given a sound legal basis by amending the present FAO Manual. My recommendation was indeed implemented. Section 502.24 of the FAO Manual dealing with emergency procurement was modified, on 20 March 2001, with notably the following insertion: “The examination of procurement actions by the Procurement Committee, as provided in this Manual Section, time not permitting, may take place on a post-factum basis”.

Export and Import Clearance

102. - As previously mentioned, the FAO can only procure the goods “following the clearance, in each case, of its application, by the 661 Committee for items which are to be imported to Iraq”. For the 1998-99 biennium, the approval to export goods to Iraq was granted on the basis of the list of items prepared by TCOR. In mid-2000, however, the 661 Committee requested that the POs (signed but not yet issued) be submitted for its clearance instead of the mere list of items. Another change occurred in February 2001 when the GOI implemented the issuance of a systematic import permit prior to the shipment of goods.

103. – In practice, however, the FAO continued to send the POs to the suppliers after obtaining the 661 Committee export clearance but before the granting of the import licence by the GOI. Import permits were then forwarded to the suppliers as soon as they were granted. In some cases, delays in the issuance of the import permits prevented the suppliers from actually shipping the goods as per the agreed delivery terms (within 60 days of the receipt of the PO by fax). In the sample reviewed, such was the case for two POs. As a result, the suppliers concerned submitted claims to AFSP for reimbursement of the costs incurred when shipping was delayed beyond the delivery schedule agreed in the PO. In order to avoid paying these costs, the alternative would be to forward the POs to the suppliers only upon issuance of the import permit. Since, however, the amount paid so far had been limited (less than US$20,000), the FAO decided to continue with its current practice and to closely monitor the issue.

Procurement Process Delays

104. – The changes introduced in the procurement process during the 2000-01 biennium had repercussions, in terms of delays, on the overall procurement process. For the POs reviewed, my staff noted that, on average, 318 days elapsed in 2001 between the opening of the bids and the delivery of the goods in Iraq, compared to 228 days in 2000. The increase resulted from the combination of the following delays:

• An average of 170 days elapsed in 2001 between the opening of the bids and the signature of the POs (compared to 93 days in 2000).
• It took 23 days, on average, to submit the signed POs to the 661 Committee in 2001 and it took 42 days, on average, for the 611 Committee to approve them. In 2000, the Committee was quicker to grant its clearance (31 days on average for the sample of POs selected but for most of them, it used to be on the basis of the mere list since the submission of the POs was only introduced in mid-2000).
• Once the clearance was given by the 661 Committee, a delay of 14 days occurred in 2001, on average, before the POs were actually sent to the suppliers. The delay was not FAO’s fault but due to the late receipt of the clearance, which was not sent immediately after the 661 Committee’s meetings.
• Once the POs were issued to the suppliers, 107 days elapsed in 2001, on average, before the actual delivery in Iraq (compared to 63 days in 2000, this average being computed on only 5 POs though). As previously mentioned, part of the 2001 delays were due, in some cases, to the late issuance of the import permit by the GOI.

105. – The delays relating to export and import clearance were beyond the scope of the FAO. However, most of the delays encountered were generated within the Organization. Although I acknowledge that some of the goods to be procured to Iraq entail specific technical specifications, I consider that the delays encountered between the opening of the bids and the signature of the POs are a source of concern. I recommend that a study be initiated in order to determine precisely when and where delays were generated and investigate their reasons with the objective of re-engineering the procurement process or adjusting the staffing level, if necessary. At the time of writing this report, my staff were informed that the Organization was taking action accordingly.

Criterion of the Best Delivery Factor

106. - In my report on the 1998-99 biennium, I noted that out of four suppliers chosen on the criterion of the best delivery factor, three had not met the agreed deadlines. The penalty clauses were, however, not applied. My staff could not always ascertain whether the waiver was justified since the reasons for the delays were not kept on file. I, therefore, recommended that this information always be kept on file, and that the practice regarding the penalty clause, which was currently left to the discretion of AFSP, be formalised. In the Progress Report on the Implementation of the External Auditor’s Recommendations that was examined by the Finance Committee at its 99^th Session in May 2002⁶, the Organization indicated notably the following: “[...] It is pointed out that this has been an exceptional case in which delivery terms were the prime factor for the award of the offer. It should be noted that, under other circumstances, suppliers are always selected on the basis of lowest price offered. It is not planned to use this procedure again, unless exceptional circumstances arise. With regard to the Auditor’s recommendation that this specific information should be kept on file, it is noted that appropriate measures have been taken to maintain procurement files on a current basis.”

107. – Out of the 32 POs examined for the 2000-01 biennium, direct procurement was undertaken for seven of them on the basis of paragraph (iv) of Section 502.91 of the FAO Manual (impracticality of obtaining bids for proprietary articles). For the other 25 for which invitations to bid were issued, the order was awarded to the lowest bidder in 19 cases. In three cases, there was only one bidder, which met the specifications required. In two cases, the order was awarded to a supplier who was not the lowest bidder. In the remaining case, the “best technical solution” was indicated as the reason for the selection of the supplier on the PO. None of the suppliers were, therefore, awarded an order on the criterion of the best delivery factor.

Background Information on the Agro-Industry Sub-Sector

108. – The rehabilitation of agro-industry in the three northern Governorates was included in the DP as of Phase IV. From June 1998 (beginning of Phase IV) up to December 2000 (end of Phase VIII), a cumulative amount of US$76 million had been allocated to this new sub-sector. Additional funds of US$10 million were allocated in Phase IX, but this amount remained to be confirmed at the time of the review. This sub-sector was considered highly strategic by the LAs and most probably some of the projects included in the successive DPs (over 50) had more to do with creation of new units than mere rehabilitation of existing ones. In this regard several documents seemed to indicate that there were few agro-industry units in operation prior to the embargo. Furthermore, the position of the GOI (as reflected in the November-December 2000 reconnaissance report mission) was that “the northern Governorates do not possess the needed capacity nor the fundamental basis for establishing a sustainable agro-industry programme”.

109. – As at the end of 2000, an amount of US$16 million only had been spent or committed for the agro-industry sub-sector. Expenditures were related to the rehabilitation of seven plants: two fruit processing plants, two dairy plants, two oil plants and one jam/sauce plant. However, none of them were operational at the time of my staff’s visit. As already pointed out by AUD in its previous reports, problems ranged from non-existent or inadequate supply source of raw materials to lack of managerial, technical and financial capabilities to operate the plants. Furthermore, concerns were expressed on the market potential in terms of inadequacy of infrastructure and distribution network and customer demand for the final product. Such a situation was the inevitable consequence of the absence of any feasibility studies prior to the rehabilitation. In fact the FAO, which did not have prior experience in managing such projects, just met the requests expressed by the LAs to start immediately and rapidly complete the construction/rehabilitation of the plants.

110. – At the time of my staff’s visit, the FAOR had acknowledged the problems encountered and taken some action in order to prevent their recurrence. A standard form had been designed to identify the projects to be included in the subsequent six-month DPs. Information on project justification, market potential, competition, raw material availability, infrastructure, etc., had to be provided at that stage. However, the complete feasibility study would only be completed (because of the costs involved) upon the DP’s approval. This could lead to a situation whereby projects included in the DP would not in fact be implemented because of negative feasibility studies. Should this happen, and OIP agreement be obtained, the unused funds could be reallocated to other agro-industry projects and/or other priority sub-sectors. In order to prevent excessive allocation of funds to the agro-industry sub-sector, my staff had initially recommended that the Agro-Industrial Master Plan proposed in the reconnaissance mission report be carried out prior to the identification of any new agro-industry projects.

111. – They were, however, subsequently informed that the Agro-Industrial Master Plan mentioned above would not be carried out due to the results of a recent review of FAO’s agro-industry activities in the three northern Governorates, which was conducted by the TC in cooperation with the Agriculture Department (AG). These results, which were communicated to the FAOR, were as follows:

• “establishment of an Agro-Industry Commission (AICOM);
• disengagement by FAO of any managerial responsibility relating to the plants already rehabilitated;
• necessity to undertake comprehensive feasibility studies before any further rehabilitation is undertaken; and
• agreement over capacity-building training programmes by FAO for the Local Authorities”.

112. – Other measures taken by the FAOR were related to the re-organisation of the sub-sector in two separate units. One was put in charge of the feasibility studies, the follow-up and the reporting. The other was responsible for the plant operations (initial start-up, staff training, subsequent operational advice). Teams were arranged for each project. However, apart from the ones involved in the plant start up, all other team members could belong to several teams, which could be problematic in terms of workload. My staff were subsequently informed that a new organisation was being developed in order to address their concern on the workload of the staff.

Review of the Arbat Oil Processing Plant

113. – For the review of the agro-industry, my staff concentrated on the Arbat oil-processing plant, which had been financed under Phase IV DP for an amount of US$0.8 million. It was set up on the premises of a former plant and was meant to have a capacity of 500 kg of sunflower seeds per hour. Like the other plants, it had never been used. The 10-day trial test run that had been conducted in December 1999 for pressing and centrifugation had revealed several deficiencies. Furthermore, the plant was designed to treat cleaned sunflower seeds, a requirement, which could not be met by the local producers. Additional equipment worth US$0.42 million was, therefore, ordered under Phase VI DP. However, its delivery only took place in June 2001. In the meantime LA staff was maintaining the plant. However, since the plant had not been used since the initial December 1999 testing, the state of the equipment could not be ascertained. Another problematic area had to do with the availability of the raw material. Sunflower was a traditional culture in the North but the variety grown was not adequate in terms of quantity or quality. My staff reviewed the actions taken to ensure that the plant would indeed be supplied with adequate raw material. They also examined the set up for the management of the plant.

Review of the Actions Taken to Guarantee the Availability of Raw Material

114. – In the absence of the right quality of sunflower, seeds had to be imported and tested. The review of the stock tracking cards showed that around 22 tons of Perodovic variety were delivered on 17 July 1998 and distributed to farmers and training or research centres between 7 November 1998 to 16 March 1999. My staff could not be provided with any documents on crop production apart from one that indicated that sunflower was ranked amongst the less profitable crop. For the 2000 campaign, 17.5 tons of Flamme variety were delivered on 15 February 2000 and distributed between 3 and 25 April 2000. The documents reviewed only indicated that 875 hectares were cultivated by 1,056 farmers in 233 villages. Yields were not given. Since the plant was not put into use, crops were sold on the local market or in neighbouring countries.

115. – For the 2001 campaign, it was estimated that 2,600 hectares would have to be planted with an expected yield of one ton/hectare the needs to meet the requirements in terms of raw material to operate the factory for 260 days. The amount of seeds required was estimated at 65 tons to be distributed to search centres and secondly to “selected distinguished farmers”. According to the standard contract drafted, the latter would be provided with seeds and fertilisers at reduced prices (to be deducted from the subsequent purchase of the crop), in exchange for which they would commit themselves to deliver their sunflower products to the factory. Failure to do so would lead to legal action such as reimbursement of inputs at market price. Since previous experience had shown there was no guarantee the farmers would actually honour their commitments, the LAs agreed to take all the necessary measures to prevent the product from being exported outside the region where prices were higher.

116. – According to the documents my staff were provided with, only 37 tons of Perodovic variety (67% of the seed requirements) had been delivered, out of which 22 tons had not been distributed at the time of their visit. Furthermore, all the preparations for the 2001 campaign had not been completed. The team needed to convince the farmers, distribute the seeds and finalise the contracts was only recruited on 27 February 2001, which appeared rather late in view of the tasks to be carried out prior to the planting season. Since all the contracts had not been concluded at the end of their visit, they could not ascertain what would be the area cultivated and expected crop production. They were subsequently informed that the distribution of seeds had in fact been stopped “due to the uncertainty of the availability of funds for the provision of the raw material for the operation of the factory”. At the time of writing this report, my staff were informed that the total pre-contracted planting area for the 2002 planting season amounted to 700 hectares. The expected yield was 725 kg per hectare of land, which was equivalent to 509 metric tons of seeds that would, in turn, produce over 125,000 litres of oil.

Management of the Plant

117. – An MOU had not been concluded with the LAs for the management of the Arbat oil plant at the time of my staff’s visit. They were, however, provided with the one concluded for the Harir tomato paste and fruit juice plant on 7 September 2000, which included the following.

• A “full autonomous management of the plant” with a manager having full command of all contracting, selling of the production and maintaining the equipment.
• The establishment of a Supervisory Board chaired by the FAO Coordinator and composed of FAO and LA members, which would “provide guidelines on strategic operation” and review the monthly performance report submitted by the manager.
• The provision by FAO of “working capital for one year” (out of SCR 986 Programme funds) to be determined on the basis of the feasibility studies and paid on the basis of the submitted budgets.
• The regular audit of the plant accounts by the FAO.

My staff were subsequently informed that, in line with the new Headquarters guidelines, there might not be any autonomous management for the Arbat oil plant, nor any need for an MOU. Instead, after commissioning and start-up, the plant would be handed over to the designated owner as identified by the OIP.

118. – In my staff’s opinion, the conclusion of any MOUs with the LAs for agro-industry plants financed under the SCR 986 Programme raised legal issues relating not only to the undefined status of the LAs (previously addressed) but also to the ownership of humanitarian items procured by the UN organisations under the 13% account. The above-mentioned UNOHCI legal opinion dated 15 January 2001 did not provide any answers to the latter point. It simply indicated that “while the UN Agencies operate the Programme in the three Governorates on behalf of the Government of Iraq, all humanitarian items imported under the 13% account are not, ipso facto, the property of the Government of Iraq and cannot be transferred to it. Relying on a legal opinion from the Office of Legal Affairs concerning vehicles purchased under 13% Account, such humanitarian materials cannot be transferred to the Government of Iraq because this will a breach of Paragraph 4 of Security Council Resolution 661 (1190) which prohibits the transfer of any financial or economical resources to public undertakings in Iraq and Paragraph 11 of Security Council Resolution 670 which affirms that specialised agencies in the United Nations are required to give effect to Security Council Resolution 661.” In view of the above, my staff recommended that the UNOHCI be asked to provide some detailed guidelines on these issues.

119. – They were subsequently informed that the issue of the legal ownership of the agro-industry projects, which was not given due attention in the past, was now under consideration by the OIP, which might seek the opinion of the Security Council. On 6 December 2001, the OIP informed the FAO that “as the lead agency, [it had] a responsibility to ensure that the plants [were] managed properly”. The OIP, however, indicated that it was “prepared to consider with the FAO, any management options, including the subcontracting of the management and operation to other parties, provided that such an option is consistent with the relevant resolutions of the Security Council, the MOU, as well as the relevant Financial Regulations and Rules of the FAO”.

120. – At the time of writing this report, my staff were informed that the various possibilities for leasing rehabilitated units to private sector entities have been discussed with both the GOI and the LAs. As a result the following actions were being taken:

• Long-term measures: As done by other UN agencies in the three northern Governorates, the management of the plants would be sub-contracted to international companies.
• Short-term measures: For the year 2002, and until longer term measures would be in place, the already rehabilitated factories would be used as pilot training plants under FAO management for the provision of such services as technical assistance, transfer of technology, capacity building, management training and entrepreneurship development activities. During these short-term activities, the plant production would be maintained at a minimum level. Funding for the 2002 production season was approved by the OIP, personnel management was sub-contracted to a local company and appropriate measures for health safety control were being taken.

As to the Arbat plant, my staff were informed that the plant, which was handed over to the FAO on 12 May 2002, was fully operational. It entered into production on 27 May 2002. As at the end of June 2002, it had processed 35 metric tons of sunflower seed giving over 9,000 litres of top quality oil and 24 metric tons of cake.

REVIEW OF THE ORGANIZATION’S INTERNAL CONTROLS

Objectives, Scope and Method of the Audit

121. – As indicated in the introduction, a review of the Organization’s internal controls was conducted in view of one of the cases of fraud mentioned in my previous report and because of the recent organisational changes. On that basis, the objectives of the review were two-fold. Firstly, it aimed at determining if the concerns I had on the internal controls on the use of the Organization’s resources had been addressed. Secondly, it intended to determine, more generally, the adequacy, efficiency, economy and effectiveness of the FAO oversight function.

122. – The audit focused on the Office of the Inspector-General (AUD) for which the following was reviewed:

• organisational status, mandate and use of audit committee;
• audit responsibilities, planning and actual coverage;
• professional resources;
• performance of audit work;
• reporting and follow-up of audit findings
• specific report issued following the review of the internal controls over the use of the Organization’s resources.

123. – At the time of the review, AUD was not the only service involved in the oversight of the Organization. As stated in Article 2 of its Charter, issued on 1 February 2000, “the Office of the Inspector-General and the unit dealing with evaluation, together, provide comprehensive internal oversight coverage of the Organisation ». Therefore, my staff also reviewed the organisation and mandate of the Evaluation Service (PBEE) established within the Office of Programme, Budget and Evaluation (PBE). Furthermore, in order to ascertain the exact respective role and functions of AUD and PBEE, they also examined the organisation and mandate of the Controls Branch (AFFS) established within the AFF Division. Last but not least, they reviewed how controls were set up within the Oracle system both by AFFS and the Information Systems and Technology Division (AFI).

124. – The Audit Guideline 202 entitled “Evaluation of Internal Audit Services in United Nations Organizations”, which was initially adopted by the Panel of External Auditors at its 34^th Session (1992) and subsequently modified at its 35^th and 41^st Session (1993 and 2000), was used as audit guidelines for the review of AUD. It should be noted that the audit criteria agreed by the Panel for evaluating internal audit as basic standards were largely similar to the ones adopted by the Internal Auditors of UN organisations. For the review of Oracle, I hired a specialist of this integrated software. The following observations were also based on various publications related to internal controls in particular and oversight function in general, as well as other UN organisations’ experience and practice. The Joint Inspection Unit (JIU) report entitled “Strengthening the investigations functions in United Nations System Organizations” (JIU/REP/2000/9), which was examined by the Finance Committee at its 99^th Session (May 2002) was reviewed, in particular.

Organisation of the Overall Function of Oversight at the FAO

Applicable Rules and Regulations

125. – Financial Regulation X addresses the issue of internal controls. According to paragraph 10.1 (d), the Director-General shall “maintain an internal financial control and internal audit which shall provide an effective current examination and/or review of financial transactions in order to ensure:

(i)     the regularity of the receipt, custody, and disbursement of all funds and other resources of the Organization;

(ii)     the conformity of commitments or obligations and expenditures with the appropriations or other financial provisions voted by the Conference, or with the purposes, rules and provisions relating to the fund concerned; and

(iii)     the economical use of the resources of the Organization”.

126. – Section 202.94 of the Financial Rules gives further details as follows: “The internal audit required by Financial Regulation 10.1 shall be maintained and shall be headed by the Chief, Office of Internal Audit and Inspection. This is an independent appraisal activity within the Organization for the review of accounting, financial and other operations as a basis for service to management. It is a managerial control, which functions by measuring and evaluating the effectiveness of other controls. Hence, the overall objective of the Office of Internal Audit and Inspection is to assist all levels of management in the Organization by furnishing them with periodic, independent and objective appraisals and audits of financial, accounting, administrative and other activities within their respective areas of responsibility, including identifying possible means of improving the efficiency and economy of operations and the use of resources. In carrying out assignments, the Chief, Office of Internal Audit and Inspection and, as appropriate, members of the Internal Auditing staff, have unrestricted access to all FAO records, documents and personnel relevant to the subject under review. ”

127. – No mention is made of PBEE in the Financial Rules for the simple reason that they have not been updated since their issuance on 15 February 1980, while PBEE was created, in its present form, only in 1984. Nevertheless, Section 107 of the FAO Manual, which relates to the Office of the Director-General (ODG), gives a detailed description of the respective mandate and activities of PBEE and AUD.

128. – For the former, paragraph 107.1.5 indicates that “the Service supports and promotes evaluation activities throughout the Organization” and lists the Service’s different activities, among which the following: “(a) Acts as central point for all evaluation activities in FAO, including the provision of guidelines and advice to FAO units on evaluation methodology and procedures, clears the terms of reference of all evaluation missions, reviews all evaluation reports for quality control and maintains the data bank on evaluation findings.”

129. – For AUD, paragraph 107.2.1 indicates the following, while referring to the Office’s Charter appended thereto for further details.

• “The Office of the Inspector-General adheres to the internal auditing standards adopted by the Office for Internal Oversight Services (OIOS) of the United Nations, the Specialised Agencies as well as by the World Bank and other entities within the UN system. In this context the Office’s mandate is defined as an independent function providing assurance to the Director-General and, through him, to the FAO Governing Bodies that the outputs of the Organization are produced with due regard to economy, efficiency and effectiveness.
• Accordingly the scope of the work of the Office not only embraces the role of inspection and managerial control, within the concept of comprehensive auditing embodying financial, compliance and value-for-money features but also includes special investigations and other specific assignments for senior management when required. Emphasis is placed on providing independent advice and assistance to all levels of management in accomplishing on an on-going basis the Organization’s mandate.
• This is accomplished by providing independent and objective appraisals and recommendations concerning the way the Organization undertakes its activities and identifying possible means of improving the efficiency and economy of operations and the effective use of resources while promoting control at reasonable cost; and by providing all levels of management with an advisory service to enable them to discharge their responsibilities in the most effective manner.”

130. – As far as AFFS is concerned, no mention is made of it in Section 108 of the FAO Manual, which relates to the Administration and Finance Department (AF). This is due to the fact that the section has not been updated since its issuance on 1 December 1995 while the Controls Branch was established, within AFF, in August 1999 as recalled in my report on the 1998-99 biennium [paras. 197 to 199].

131. – In view of the above, I recommend that the Financial Rules, which constitute Section 202 of the FAO Manual, and Section 108 that relates to the AF Department be updated as soon as possible in order, notably, to give a comprehensive view of the oversight functions within the Organization. At the time of writing this report, my staff were informed that the Director-General agreed with this recommendation and has already instructed AUD and AF Department to take the appropriate measures.

Overall Organisation and Respective Mandates

132. – As illustrated in the diagram that follows, the internal oversight function was carried out, at the time of the review, by two different services reporting directly to the Director-General (AUD and PBEE). Due to the nature of their respective activities, the usual interlocutor of the former was the Finance Committee while the Programme Committee was the one that reviewed PBEE evaluation reports. In addition, AFFS carried out some specific accounting controls at the level of the Finance Division in addition to its responsibilities in terms of accounting procedures, Oracle access and follow up of audit observations.

133. – As far as the respective mandates of each service were concerned, there was an overlap between AUD and PBEE for one of the oversight functions. As mentioned above, PBEE “acts as central point for all evaluation activities in FAO”, while according to Article 1 of its Charter, “the Office of the Inspector-General has responsibility for internal audit and inspection as well as monitoring and evaluating the adequacy and effectiveness of the Organization’s system of internal control, financial management and use of assets”. It should be noted, however, that the evaluation responsibility entrusted to AUD was limited in scope while that of PBEE was more focused on the assessment of the Regular and Field Programmes results.

134. – Furthermore, both services have taken the following respective commitments to liaise with one another:

• As per paragraph 107.1.52 (j) of the FAO Manual, one of PBEE activities is to liaise “with the Inspector-General to avoid possible duplication and ensure the complementarity of work programmes, in particular those dealing with the assessment of effectiveness of FAO’s substantive field and HQ programmes”.
• Similarly, paragraph 107.2.2. (j) states that the audit function “liaises with the Chief, Evaluation Service in PBE to avoid possible duplication and ensure the complementarity of work programmes, in particular those dealing with the assessment of effectiveness of FAO’s substantive field and HQ programmes.”

My staff were informed that PBEE placed considerable reliance on AUD reports and that its staff participated in AUD annual training sessions and monthly staff meetings. Also, some of PBEE staff were seconded to audit work on numerous occasions.

135. – It should also be pointed out that the evaluation functions, although established as early as 1978, could be improved. This situation was recognised and the Director-General’s Bulletin dated 5 November 2001 entitled “Strengthening the FAO Evaluation System” was supposed to address the problem. While the Bulletin had the merit of setting forth “the principal features of the revised evaluation system” as endorsed by the Programme Committee at its 82^nd session (September 1999)⁷ and the Council at its 117^th Session (November 1999) it did not introduce, though, any changes to the present organisational set up. In particular, no change was made to the status of PBEE.

136. – It should be noted that the trend in other UN organisations went in the opposite direction with the creation of only one office, service and division dedicated to oversight. Such was, for instance, the case for the UN with the establishment, on 7 September 1994, of the Office for Internal Oversight Services following General Assembly resolution 48/218 B (29 July 1994). As defined by the Secretary-General’s Bulletin, “the purpose of this office is to assist the Secretary-General in fulfilling his internal oversight responsibilities in respect of the resources and staff of the Organization through the exercise of the following functions: monitoring, internal audit, inspection and evaluation, investigation [and] implementation of recommendations.” More recently, “for the purpose of strengthening and increasing coordination and synergy between the oversight functions”, the WFP created a new Division of Oversight Services, consolidating the existing offices of evaluation and monitoring, internal audit, and inspection and investigation.

137. – In view of the above, I recommend that the FAO examine the possibility of combining AUD and PBEE with the view of creating a single office or division for oversight. The present Controls Branch, which operated at a different level, could remain within the Finance Division. However, working relationships should be formally established in order to avoid any duplication of work. At the time of writing this report, my staff were informed that the recommended organisational change had already been considered several times in the past few years but it had been concluded that the present separation was still the most appropriate for the Organization. Nevertheless, the Director-General agreed to submit various options in this regard to the Joint Meeting of the Programme and Finance Committees to be held in 2003.

Review of the Office of the Inspector-General

Organisational Status, Mandate and Use of Audit Committee

138. – In Audit Guideline 202, the Panel of External Auditors has agreed with the following audit criteria for evaluating internal audit as basic standards for organisation, mandate, use of audit committees and coordination with external audit:

• “Criterion No. 1: The internal audit group should have an organisational status that will permit it to report objectively and effectively on any operation or activity of the entity. Its responsibilities should be clearly communicated in a mandate from the entity’s head that visibly demonstrates his/her support. In order to report objectively and effectively:

-   the head of the internal audit group should ideally report directly to the entity’s head and be organisationally independent of all operations audited;
-  internal audit should be free to communicate fully with the External Auditor;
-  internal audit should receive demonstrated continuing support from the entity’s head and the audit mandate should be given wide distribution;
-  organization managers should always be required to respond to internal audit findings on a timely basis; and
-  all audit activities carried out by or on behalf of the organization should be integrated into a single audit group.

• Criterion No. 7: The internal audit group should have the leadership and support of an audit committee composed of senior management and suitably qualified persons from outside the entity to provide additional objectivity. Preferably, the head or a person of equivalent statute from inside or outside the entity should chair the audit committee.”
• Criterion No. 8: The internal and external audit units should coordinate their efforts to ensure a greater economy in the use of audit resources:”

Organisational Status and Mandate

139. – As far as the first and eighth criteria were concerned, AUD was in line with the agreed standards. More specifically, my staff noted that:

• The head of AUD, namely the Inspector-General, was reporting directly to the Director-General and was, therefore, organisationally independent of all operations and services audited.
• Internal Audit was free to communicate fully with my staff and efforts were coordinated through exchanges of audit programmes and access to audit reports, observations and management letters.
• Internal Audit was receiving support from the Director-General. In several Bulletins, the Director-General had stressed the importance for all staff to “continue to extend full co-operation and assistance to the Inspector-General and staff in carrying out their duties”.
• AUD mandate had been given wide distribution in the form of a Charter issued on 1 February 2000 through a Director-General’s Bulletin and incorporated, as already mentioned above, in the FAO Manual.

140. – The following areas for improvement were, however, identified. Firstly, I regret that, at the time of the issuance of the Charter, the opportunity was not taken to update all the sections of the FAO Manual dealing with internal controls. As previously recommended, the Financial Rules should be updated in line with the new provisions introduced by the Charter. Secondly, I noted that, unlike many of its counterparts in the UN system, AUD did not have a dedicated section on the FAO Intranet site. I recommend that one be established since I am of the opinion that such could further enhance the visibility of AUD and its strategic importance within the Organization. The section should contain the following information: organisational status and mandate, organisational chart, work plan for the current year and annual activity reports for, at least, the past two biennia. Last but not least, in line with the practice of other UN or non-UN organisations, reference could be made to a “hot line” or a confidential fax number to report fraud, abuse of FAO’s resources, mismanagement or theft. Procedures should be established to deal with cases reported. At the time of writing this report, my staff were informed that the Director-General agreed that an Intranet site was desirable and that several potential models were under review. Furthermore, the Director-General endorsed the recommendation made with regard to the setting up of a confidential fax number, which would be operational as of 1 September 2002.

141. – Thirdly, I am of the opinion that the Charter itself calls for the following observations. A draft of the Charter was submitted to the Finance Committee at its 93^rd Session in September 1999. Most of the suggestions made were duly taken into account in the final Charter but the following were not:

• As per the report submitted to the Council⁸, “the Committee felt that independence would be strengthened through consultation with the Director-General on the plan of work, rather than approval”. In this regard, the initial wording of Article 9 was as follows: “The Office of the Inspector-General shall have the ability to allocate assigned resources, set frequencies, select subjects, determine scope of work and apply those techniques required to accomplish its objectives in accordance with a formal plan of work concurred in by the Director-General”. Very little change was, in fact, made to the final version, which reads as follows: “The Office of the Inspector-General [...] in accordance with a formal plan, which has received the concurrence of the Director-General.”
• The Committee also “welcomed the new requirements for consultation with the Finance Committee on the appointment and separation of the Inspector-General and suggested that the mechanism for such consultation process could include the possibility of developing a job description or a vacancy announcement and making it available to member states”. The suggestion was not taken into account in the final Charter.

142. – Since the situation has not yet arisen, the Finance Committee has never been consulted so far on the appointment and separation of the Inspector-General. In fact, the present incumbent was appointed with effect from 11 September 1992 with a three-year fixed term contract, which was subsequently renewed. In line with Staff Rule 302.412, his appointment should normally have come to an end when he reached the mandatory retirement age of 62 in 1997. This age limit was, however, extended by the Director-General “in the interests of the Organization” as provided for by Staff Regulation 301.9.5 “in exceptional cases”. As prescribed, the extension has been done “one year at a time” but repeatedly for five times and the Finance Committee was never consulted. When the issue was raised, the Legal Office (LEG) argued that, according to the Charter, consultation was not provided in the case of renewal of appointment. While this was technically true, it would have been, in my opinion, in the spirit of the Charter to consult the Finance Committee on the renewal of the appointment.

143. – In view of the above, I recommend the following:

• The Finance Committee should be consulted as well before the renewal of the incumbent.
• As suggested by the Finance Committee, and in line with the recent practice for Directors’ posts, future vacancies for the Inspector-General’s post should be posted on the FAO’s Intranet and Internet sites with a job description attached thereto.

144. – At the time of writing this report, my staff were informed that the second recommendation would be implemented and that provisions had already been made to have such announcements published together with the job description on the Organization’s Intranet and Internet. As for the first one, the response of the Organization was as follows: “The provisions of Paragraph 4 of the Charter aim at creating conditions for a measure of independence of the Inspector-General by requiring the Director-General to consult with the Finance Committee prior to the assumption of functions by the Inspector-General and the cessation of those functions. These provisions of the Charter are applied within the framework of the Constitutional provisions relating to the management authority of the Director-General in the administration of the Organization, on the one hand, and a policy decision to the effect that a number of conditions for the independent fulfilment of the duties of the Inspector-General be safeguarded, on the other hand. Requiring that an act of administrative routine such as the renewal of the appointment of the Inspector-General be referred to the Finance Committee would not only run counter to the balance reflected in the Charter, but it would also risk conditioning or otherwise exerting pressure on the Inspector-General. Moreover, it should be noted that the management of an organization such as FAO necessitates that the head of agency, while being accountable to the Governing Bodies, should retain a reasonable sphere of autonomy to administer it and manage the staff, including senior staff provided that this discretion is exercised in a proper manner.”

Use of Audit Committee

145. – Regarding the second criterion defined by the Panel of External Auditors, the absence of an audit committee was noted. On this point the FAO differed from most of the UN Organisations, which had set up such a committee. When the matter was discussed with the present Inspector-General, he argued that he did not see the added value of a strictly internal audit committee since his independence was already assured by his reporting directly to the Director-General. As far as the possibility of an external audit committee was concerned, he argued that the Finance Committee already played this role.

146. – As far as the first argument is concerned, in my opinion and experience with other UN or non-UN organisations, one of the benefits of an audit committee is notably the additional assurance of the independent role of the audit function. For the second argument, I consider that the existence of an audit committee will not constitute a duplication of the Finance Committee for the following reasons:

• The two committees will have different mandates. Even if the audit committee includes one or two external members, it still operates within the Organization to help the Director-General in maintaining adequate internal controls. The role of the Finance Committee, which is composed of representatives of Member Nations only, has the precise mandate to “assist the Council in exercising control over the financial administration of the Organization”⁹.
• The two committees would not meet at the same frequency and with the same agenda. While the Finance Committee currently meets twice a year, the audit committee would be expected to meet at least once each quarter and would only deal with audit matters.

147. – In view of the above, I recommend that an audit committee be established. According to agreed standards it could be chaired by an external person and also include a representative from another UN organisation. Its mandate should encompass notably the following:

• appraise the adequacy of the audit plans, the scope and the general effectiveness of internal audit services and suggest potential audit areas in which the Organization may benefit;
• co-ordinate with the External Auditor on the scope and approach of internal audits to ensure adequate coverage of all financial statement areas and effective utilisation of audit resources;
• review the reports of the external and internal auditors, assess the implications of their findings on existing policies, systems and procedures and actively oversee and monitor the immediate implementation of their audit recommendations;
• ensure that audits undertaken within the FAO are conducted in accordance with internationally accepted auditing standards including those prescribed by the Panel of External Auditors and the UN Internal Auditors;
• report on a periodic basis to the Director-General and the Finance Committee and make recommendations on matters arising from audits and the implementation of audit recommendations.

At the time of writing this report, my staff were informed that the question of an internal audit committee had already been raised and discussed in the past. However, in view of the recommendations mentioned above, the Director-General has instructed that the matter be reviewed further, taking into consideration, in particular, the experience gathered in other international organisations in this area. The findings of this review will be reported to a future session of the Finance Committee.

Audit Responsibilities, Planning and Actual Coverage

148. – In Audit Guideline 202, the Panel of External Auditors has agreed with the following audit criteria for evaluating internal audit as basic standards for audit responsibilities and planning.

• “Criterion No. 2: Internal audit should provide senior management with a continual independent appraisal of all aspects of an entity’s activities. [It] should examine and evaluate all aspects of an entity’s activities including systems for ensuring: the integrity of financial and other information; controls over property, revenues and expenditures; compliance with objectives, policies, plans, procedures, rules and regulations; [and] management with due regard for economy, efficiency and effectiveness. To summarise, the scope of internal audit should be comprehensive.
• Criterion No. 4: Audit planning should ensure that all activities of the entity are identified, potential audit areas are ranked in order of priority, and appropriate audit objectives are determined for each area selected for audit. In order to achieve this:

-  a model of the entity should be prepared identifying all potential audit areas;
-  the model should be updated at least annually;
-  the audit should be planned to avoid gaps and duplication in coverage;
-  all potential audit should be assessed according to criteria of materiality, importance to management and degree of risk or opportunity; and
-  the objectives, scope and budget of each audit should be established and a time-phased annual work plan prepared.”

Audit Responsibilities

149. – As far as the first criterion was concerned, the standard of comprehensive audit was theoretically met. As stated in Section 107.2.1. of the FAO Manual and Article 11 of the Charter, the responsibilities entrusted to AUD encompassed all aspects of the Organization activities. In order to do so, the Office had organised itself in the following three audit groups with assigned responsibilities and resources:

• Headquarters activities;
• Decentralised activities;
• Special Management Assignments.

150. – It should be further noted that the decentralised activities were carried out mainly by the four outposted auditors based in the ROs in addition to the ones posted to Headquarters. Also, an auditor has been based in Iraq since late 2000 to audit, on a permanent basis, the “Oil for Food” Programme. It should also be noted that, in addition to these audit activities, AUD was also involved in a substantial number of other activities regrouped under the heading of “operational services”. Apart from overseeing tender panel operations as provided for by Section 502 of the FAO Manual, AUD had an observer status in several committees such as the Procurement Committee and the Board of Directors of the FAO Credit Union.

151. – Still on the organisation level, my staff noted, however, that there was no clear distinction between audit and investigation functions. As previously noted by the JIU in its report mentioned above, “all FAO internal auditors are expected to conduct investigations of fraud, waste, malfeasance, misconduct and other irregular activities, and all posts in AUD are considered to have an investigation component”. However, it was acknowledged that the “investigations involving very sensitive issues are usually conducted by the more senior staff, including the Inspector-General”. The JIU report also pointed out that “separate investigation units, staffed by professional trained and experienced investigators are the exception rather than the rule in the organization of the United Nations system”.

152. – According to the Organization, this issue was discussed at length with the JIU and the conclusion was that the present set up was satisfactory given the level of investigations needed. It was also noted that the FAO had an established mechanism for conducting investigations utilising the requisite skills and competence available in various units within the Organization in addition to AUD staff. The Organization also argued that the establishment of a specific unit for investigation would undoubtedly require substantial funding. Based on my own experience, I consider, however, that the existence of a separate unit, as established in particular by the WFP, addresses more adequately the specificity of investigation functions, which cannot be planned like audit work. Therefore, I recommend that a specific unit for investigation be established at the FAO and staffed with persons with appropriate competence and skills (lawyers, certified fraud examiners, ex policemen, etc.).

Audit Planning

153. – Regarding audit planning, the review of AUD Programme of Work (POW) for the 2000-01 biennium together with the working papers, which supported the document, showed that it was an area where AUD had not kept pace with developments in internal auditing field. The following areas for improvement were noted:

• To start with, the POW was prepared for the entire biennium and not an annual basis. It was subject to an on-going process adjustment to take into account any new developments, however, the changes were not formalised in a new document.
• The POW had not been finalised prior to the commencement of the biennium. It was submitted on 22 February 2000 only to the Director-General for “consideration”. On 6 April 2000, the Inspector-General was informed by ODG that “the proposals [he] made relating to the 2000-01 Programme of Work of AUD have been considered and approved by the Director-General”.

154. – According to Section 6010 of AUD manual and as recalled in the memorandum accompanying the POW for the Director-General’s consideration, “a top-down/bottom-up approach as outlined by AUD in various fora and also published in the International Journal of Government Auditing in April 1999” was adopted. The following was also explained: “Based on our experience, this approach has worked well in the past and continues to remain the cornerstone for our programme development strategy for the future. In essence, through this process we make an assessment of the main priorities of the Organization, take into account the prevailing management concerns and determine the risks that might have a bearing on operations and best management practices. Armed with this overview, we establish the framework for the “right things to audit” and then proceed to establish the process of how, when and by whom these functions or entities are audited.”

155. – In practice, however, the following was noted. The POW did not list the major risks identified. Furthermore, my staff could not be provided with any documents substantiating the existence of a real risk assessment process in line with current best practices. In addition, contrary to what was announced, the POW did not provide any details on “how, when and by whom” the functions or entities identified for audit would indeed be audited. For instance, in the section dealing with “details of programme of work”, the following information was all that was provided for some specific controls:

• “Payroll and entitlements – AUD plans to review the payroll process, paying particular attention to payroll disbursements and accounting, and compliance with the relevant rules and regulations”.
• Travel transactions processing and accounting – travel is an important part of FAO’s expenditures and AUD plans to review the internal control over the travel processing and accounting system.”

In fact, the POW resembled more a document with general considerations and declarations of intention than a detailed work plan supported by a thorough and documented risk assessment.

156. – In view of the above, I recommend that AUD revise and improve its entire approach to audit planning taking into account the following specific recommendations.

• Audit planning should be carried out at three different levels:

-  on a long and medium term basis in line with the priorities identified in the 15-year Strategic Framework and the five-year Medium Term Plan, respectively;
-  on a biennium basis in order to provide the necessary information for inclusion in the Organization Programme of Work and Budget (PWB);
-  on an annual basis to provide detailed work plans for each audit group, giving indications, for each audit assignment, of the financial importance, timeframe, methodology, resources committed and estimated costs. Individual audit plans for each auditor, which would also serve as the basis of the appraisal of the individuals concerned, should then be prepared as a complement.

• A risk assessment process should be conducted and updated on a regular basis (at least once per biennium). Its overall objective would be to collect and analyse data, both quantitative and qualitative, to describe the form, dimension, and characteristics of the risks faced by the Organization.

At the time of writing this report, my staff were informed that the Director-General agreed that there was room for improvement in AUD’s overall approach to planning, while noting that the level of detail recommended would impact on resources applied to audit execution, reporting and follow-up. Nonetheless, AUD has been instructed to undertake a thorough review of its planning process, including the risk assessment element, and take into account the specific recommendations presented here.

Actual Audit Coverage

157. – As far as the actual audit coverage was concerned, the review was based on the examination of the audit reports produced for the 2000-01 biennium. As recapitulated in table 6 that follows, most of the reports were related to the decentralised activities. It should be noted, however, that the number of reports was not a very reliable indicator of AUD activities for the following reasons:

• As detailed in the section relating to reporting, a report was not always formalised for each audit assignment.
• For existing reports, the length and scope of each report varied greatly from one audit group to another. Furthermore, within the same audit group, in the absence of a standard audit report format, reports also varied greatly from one to the other.
• For the Headquarters activities, the increase in the number of reports produced in 2001 was partly due to the fact that the corresponding unit was fully staffed for most of the year, while one professional post out of three was vacant for most of 2000. My staff also noted that several reports were issued for one given area. For instance, the review of the Credit Union led to the production of four different reports, in 2001, and the same applied to the review of the Accounts Payable Unit.

158. – My staff tried to evaluate the financial importance of the areas covered. In the absence of information given in more than 40% of the reports (especially for Headquarters activities), the task proved, however, difficult. My staff also reviewed the Daily Time Sheet (DTS) system, which was used to record the time devoted by each audit staff on respective assignments on the basis of the actual time available for audit. Although it was a useful tool for the management of AUD, it had, however, the following limitations:

• The data were inputted into the system on the basis of the Daily Time Summary Report filled in by each audit staff on a monthly basis. In my opinion, a bi-weekly or weekly frequency would be more appropriate.
• The system reported on total time spent on each activity and sub-activity and how a particular audit staff member had spent his/her time. However, because of the limitations mentioned above at the audit planning stage, no comparison was made between planned and actual until it reached the monthly cumulative level.

159. – Because of the difficulties encountered in filling up the vacancies in a timely manner (see section on professional resources below) and auditors seconded to other divisions, actual time available was much lower than expected. Compared to an approved staffing of 22, actual staffing only amounted to 20 from January to July 2000, 19 from August to December 2000, 19 from January to September 2001 and 18 from October to December 2001. The shortcomings were compensated only partly by the use of external resources (consultants). Besides, a relatively high amount of sick leave was noted for the 2000-01 biennium (notably related to one staff member who was currently in the process of being separated with a disability pension).

160. – As recapitulated in table 7 that follows, AUD dedicated most of its resources to decentralised activities: 36% for the 2000-01 biennium broken down almost equally into projects, FAORs and ROs or Sub-regional Offices (SROs). However, activities not directly linked to audit assignments represented 26.5% of the time spent by AUD staff, with, in particular, more than 13% and 5% devoted, respectively, to “office management” and “tender panel operations”. Altogether, only 21.5% of the time spent was devoted to Headquarters activities for the biennium, out of which Credit Union and Commissary accounted for 5%.

161. – In my opinion, the very limited time devoted to Headquarters activities is a source of concern since the bulk of the expenditures is incurred at that level. On the basis of the comparison between the work plan and the actual audit reports produced, I noted that most of the areas, for which I had issued either very critical observations or specific recommendations in the past, were not covered by AUD. The following areas in particular, although included in the work plan, had not been covered during the 2000-01 biennium:

• investments, for which AUD planned to review “investment practices in the light of recent developments and decision taken by the investment committee”;
• financial statements process, for which AUD planned to review “the process followed in the production of financial statements, working from the raw data in Oracle to the finished product, whether the monthly reports to management or the biennial accounts for external audit”;
• biennial closure process, for which AUD planned to perform “a review of the biennial closure process for the 2001 closure”.

162. – Furthermore, my staff noted that when the audit was indeed carried out, its scope had been limited compared to the one initially planned in the 2000-01 work plan. This was especially the case for treasury functions and Oracle reporting and information process. For the former, AUD planned “to review the internal control regime and transaction flow for treasury-related transactions in Oracle”. In fact, only bank reconciliation for Headquarters accounts was examined in 2001. For the latter, only some “aspects of information security” were examined in September 2001 while the intention was to review Oracle reporting and information access according to the work plan. On the issue of Oracle as a whole, AUD provided staff resources on secondment but never conducted a review of how the system was being implemented in 1996-97 and 1998-99. In view of the problems encountered (delays and surge in costs), in my opinion that would have been more than appropriate.

163. – In view of the above, I recommend the following:

• The time dedicated to Headquarters activities should be increased significantly and areas such as Oracle implementation, investments and other treasury functions should be addressed as soon as possible in view of the risks and shortcomings already identified. On the contrary, considerably less time could be spent on Commissary and Credit Union, which had to be reviewed on a regular basis by the External Auditor because of the necessity of issuing an audit opinion on the yearly accounts. Furthermore, in my opinion both non-stream activities were well managed.
• The following improvements should be made to the DTS system. Audit staff should be asked to report on a bi-weekly or weekly basis and the reporting by sub-activities should be made more consistent. Reporting should provide a comparison between planned and actual.

At the time of writing this report, my staff were informed that the first recommendation would be taken into consideration at the next planning session. Regarding the second, the Organization argued that, to have any managerial value, the consolidated monthly report had to be 100% complete, a difficult task to do on a more frequent basis especially with auditors away on field missions.

Professional Resources

164. – In Audit Guideline 202, the Panel of External Auditors has agreed with the following audit criterion for evaluating internal audit as a basic standard for professional resources.

• “Criterion No. 3: The internal audit group should have sufficient professionally competent staff and other resources to carry out its responsibilities. To achieve this end:

-  the internal audit group requires strong leadership by a thoroughly competent professional and a staff of auditors technically proficient on the variety of disciplines necessary for carrying out comprehensive audits; and
-  internal auditors should maintain their technical competence through continuing education.”

Staffing

165. – For the 2000-01 biennium, the approved staffing amounted to 22 in total broken-down as follows:

• two posts at the Director-level: one D-2 for the Inspector-General post and one D-1 for the Principal Auditor post;
• 13 professional posts: two P-5 (senior auditors), six P-4 (four regional auditors and two auditors), three P-3 and two P-2 (auditors).
• seven general service posts: three for para-professional audit posts (one G-6, one G-5 and one G-4) and four as support staff (one Director’s secretary at G-6 level, one record clerk at G-4 level and two G-3.

In addition, a temporary post was created for the Resident Auditor based in Iraq. It was converted to a fixed post as of 1 January 2002, bringing the total approved staffing to 23 posts for the 2002-03 biennium.

166. – As far as the actual staffing was concerned, a relatively high number of vacancies was noted. As disclosed in the annual activity report for 1999, two posts of auditors were vacant as at January 2000 at P-2 and P-4 levels, respectively. Two vacancies also existed as at January 2001 (one P-4 and one P-5 auditors) as per the annual activity report for 2000. The situation even deteriorated in the course of the year 2001 since four vacancies were existing as at December 2001 (one P-3 and three P-4 auditors) as per the annual activity report for 2001. According to the minutes of the AUD meeting held on 2 July 2002, no progress had been made at that date since the following was reported: “the situation with regard to personnel issues was essentially the same: there were still unfilled posts at P-4, P-3 and P-2 levels. Staffing was proceeding on all fronts on a priority basis.” In my opinion, this relatively high number of vacancies, which has been in fact a recurrent problem since 1999, was a source of concern. I recommend that top priority be given to recruitment and that, in the meantime, external resources be contracted in order to address the issues not covered as planned in the 2000-01 work plan.

Professional Qualifications

167. – As far as staff qualifications were concerned, all but one professional staff were either Chartered (or Certified Public) Accountants (or equivalent qualification) or had a Masters degree in Business Administration (MBA), three staff members in fact holding both qualifications. As far as other professional qualifications were concerned, two staff members were certified internal auditors and one was a certified fraud examiner. There were, however, no Certified Information System Auditors (CISAs) but two had a degree and work experience related to Information or Communication Technology (ICT). Prior to joining the FAO, nearly all auditors had previous audit work experience with Supreme Audit Institutions or in the private sector. In view of the growing importance of ICT in the field of auditing, I recommend that priority be given to candidates with a strong background in this area. Furthermore, I recommend that recruitment be more diversified than at present in order to obtain proficiency in a variety of technical disciplines. In view of the FAO activities, auditors with agronomic, statistic or economic background would be a welcome addition.

Training

168. – In line with the agreed standard, a training plan was developed to address staff development needs. For 2001, training focused on language, communication skills and use of the Oracle software. Furthermore, all the auditors maintained their technical competence through further education (notably in fraud detection). There was indeed a commitment to training. However, as per the results of the DTS system, less than 3% of the overall audit staff time was devoted to training for the 2000-01 biennium while a minimum of ten days per year was considered a good practice (the equivalent of 5% for the AUD DTS system). As a complement to my previous recommendation, I recommend that training be intensified and focused, in particular, on information system audit. In addition, some existing auditors should be encouraged to become CISAs or Oracle “Certified Professionals”.

Performance of Audit Work

169. – In Audit Guideline 202, the Panel of External Auditors has agreed with the following audit criterion for evaluating internal audit as a basic standard for the performance of audit work.

• “Criterion No. 5: The internal audit group should define appropriate standards of performance and apply them in each audit assignment. To achieve this end standards developed by the Internal Auditors of United Nations Organizations should be followed and more particularly:

-  the adequacy of procedures for the review and supervision of all audit assignments;
-  appropriate audit methods and procedures should be established and documented in an audit manual;
-  decisions on the nature, extent and timing of tests should be based on an evaluation of the systems of internal controls;
-  audit working papers should clearly document the audit process and substantiate findings; and
-  costs and completion dates should be compared against budget and original schedule.”

170. – Regarding audit procedures and methods, they had indeed been established and duly documented in an audit manual. However, compared to audit manuals of other UN organisations, the one of AUD left much to be desired for the following reasons:

• Even in its most recent version, the manual remained too general to constitute an adequate tool for the auditors. Volume I only gave, as announced, an “audit overview” covering the following aspects: background on the FAO, internal audit mandate, audit strategy, auditing standards, AUD programme and staffing structure, planning and development and reference material. Volume II was supposed to detail operating procedures and methods for the different audits conducted. However, if the section on “value for money” audit gave a useful general approach and the ones for decentralised activities and special management assignments were quite detailed, the one on Headquarters activities was particularly lacking. Only three areas insignificant in terms of financial importance were covered, namely: Commissary stock count; fellowships and TeleFood operations.
• The issue of tests was not covered in the manual. Fundamental issues in the field of auditing, such as statistical sampling and materiality, were not addressed either. Also, the manual did not cover the issue of financial statements audit and computer assisted audit techniques.

171. – It was only for working papers that my staff found that AUD was in line with the agreed standards. The review they conducted on the basis of a random sample of 11 reports issued showed that working papers were properly filed and well organised. It should be noted, however, that the working papers on all audits conducted by the regional auditors were not sent to Headquarters for review. In their absence, the quality control could only be very limited though. Furthermore, my staff noted that the “Audit Summary File”, which was supposed to recapitulate the audit process was completed in seven cases only. In addition, the standard format was not always properly followed. The section relating to the “budgeted and actual time record summary” was notably the one for which a lot of information was missing: indication on the budgeted time was given in one case only and indication of the time actually spent was given in three cases only. As a result, it was not surprising that AUD was not in the position to conduct an overall comparison between planned and actual schedule and budgeted and actual costs.

172. – In view of the above, I recommend the following:

• Dramatic improvements should be made to the audit manual to turn it into a useful tool for the auditors. Priority should be given to include sections on risk assessment, statistical sampling and materiality. The section dedicated to Headquarters should be expanded to cover the information system, treasury functions and investments, procurement and human resources audits.
• For the working papers, the prescribed format for the “Audit Summary File” should be followed in all cases and the information regarding planned/budgeted schedule and costs versus actual should be duly completed. In addition, working papers of audits conducted in the field should be repatriated to Headquarters.
• On an annual basis, an overall comparison should be made between the work plan and the actual audit conducted and duly reported in the annual activity report.

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⁶ Cf. document FC99/7.

⁷ Cf. Document PC 82/4 entitled "Evaluation in the Context of the Strategic Framework and New Programme Model".

⁸ Cf. Document CL/117/4 – paragraphs 46 to 48.

⁹ Cf. General Rule XXVII.7.