Finance Committee

Ninety-ninth Session

Rome, 6 - 10 May 2002

Progress Report on the Implementation of the External Auditor's Recommendations

LONG FORM REPORT

External Auditor's Recommendation

Action taken

External Auditor's Comments

FINANCIAL MATTERS

Specific Financial and Accounting Issues

Staff-related Schemes

I reiterate my previous recommendation to thoroughly review the purpose and operation of the Termination Payments Fund (TPF) with a view to establishing a consolidated mechanism to provide for the funding of all recognised end of service liabilities.

[see paragraph 29 of the 1998-99 report]

In the preparation of the 2000/2001 biennium accounts, the Organization has given full regard to Resolution 10/2001, as adopted by Conference on 13 November 2001, concerning the unfunded Termination Payments liability.

Status: Implemented

Noted.

Tax Equalization Fund

Over US$ 1 million of advances, which should have been posted to the relevant Tax Equalization Fund account, were still recorded in two accounts receivable accounts, namely Account 2800 "Prepayments" for FAO staff and Account 2805 "WFP" for WFP staff.

The problem was being addressed at the time of writing this report.

In view of the recurrent need to speed up the recovery process of the advances, I recommend that some sort of automatic salary recovery be set up and that the corresponding system change be implemented.

[see paragraph 33 of the 1998-99 report]

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

Status: Implemented

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

Accounts Payable and Receivable

Amount receivable from the WFP

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

[see paragraph 35 of the 1998-99 report]

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

Status: Implemented

The review of the WFP interim statements for 2000, which we were provided with in October 2001, showed that discrepancies still existed with FAO books. We, therefore, reiterated our previous recommendation to continue the reconciliation exercise to explain them fully. The progress made will be examined during the audit of the FAO and WFP 2000-01 financial statements.

Clearing and reconciliation of accounts receivable and payable

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

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

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

While the reconciliation work in these areas is ongoing, it is noted that, in respect of a large number of general ledger clearing accounts, the initial work of clearing transactions was completed by the end of the year 2001. Specific responsibilities have been established over these accounts which are now regularly reviewed and monitored on a monthly basis.

Status: In course of implementation

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

Recovery of travel advances

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

[see paragraph 37 of the 1998-99 report]

The system as designed is now fully operational. It is noted that statements of account are issued on a monthly basis so as to advise staff of their balances owing to the Organization and of any up-coming recoveries. The recovery process is now a routine process and is closely monitored on a monthly basis.

Status: Implemented

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

Cash and Investments

Number of bank accounts

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

• A banking relationship to manage Headquarters payments in Lire, Euro and staff accounts held in Italy.
  
  
• A banking relationship with a major international bank to handle international payments outside of Italy.
  
  
• Several banking relationships with other international banks with strong retail presence in particular regions of the world, to operate other field banking requirements.

At the time of writing my report, the first tier of the strategy was in place. Another contract had also been concluded for the second tier but its full implementation was only expected to take place over the next few months. No action had been taken yet with regards to the third tier.

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

A large number of bank accounts were closed at the end of the biennium based on analyses and reconciliations made of old field bank accounts.

Action on the first tier has been taken while action on the other two tiers is ongoing. In this connection, contacts were made with major international banks to provide proposals to restructure the present disbursing functions for both Headquarters and field payments. With respect to the second tier, the new structure for international payments outside of Italy has been discussed with an international financial institution and the relevant contracts, as proposed by the bank, have been submitted to Legal Counsel for review and comment. The observations raised by Legal Counsel have been communicated to the bank and the Organization is now awaiting the bank's clearance. In addition, problems encountered with vendor bank account code data have been largely cleared up and other system changes have been made that will help reduce the cost of banking.

Work is underway on the third tier of the banking structure, which will simplify and streamline the FAO's field banking operations. In this context, while certain major international financial institutions that have extensive retail banking presences in regions, such as Africa, South America and Near East, have been contacted by the Organization, specific relationships have not yet been worked out.

Status: Ongoing

The extent of the progress made in this area will be examined during the audit of the 2000-01 financial statements.

Long-term investments

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

[see paragraph 64 of the 1998-99 report]

On the advice of the Finance Committee, the Organization is no longer pursuing the arrangement with IFAD for long-term portfolio management services. The Organization has instead set up a P-5 Senior Treasury Officer post to take on these and other Treasury functions and responsibilities. This Officer is now being recruited, and as soon as we are confident that we have adequate controls in place, we plan to implement the recommendations of the ACI on the long-term portfolio, namely:

• move the fixed income component of the long-term portfolio to specialised fixed income portfolio managers, and
  
  
• split the equity portfolio between a growth manager and a value manager.

Status: Ongoing

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

The FAO Advisory Committee on Investments (ACI)

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

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

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

The terms of reference for the ACI have been reviewed and submitted to the Director-General for his approval.

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

Membership of the ACI is limited to external members who have been appointed by the Director-General, as follows:

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

Status: In course of implementation

Noted.

"Oil for Food" Programme

Emergency Procurement Procedures

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

[see paragraph 86 of the 1998-99 report]

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

Status: Implemented

The amendment to paragraph 502.24 of the FAO Manual was noted.

Procurement Process

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

[see paragraph 89 of the 1998-99 report]

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

Status: Implemented

During the month of March 2002, we will conduct another review of a sample of purchase orders processed in 2001, which will enable us to ascertain the extent of the choice of suppliers on the criterion of the best delivery factor.

TeleFood

Reporting

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

[see paragraph 96 of the 1998-99 report]

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

Status: Not for implementation

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

Non-cash contributions

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

[see paragraph 102 of the 1998-99 report]

As referred to by the Auditor, Telefood expenditure that is directly supported by contributions in kind is not at present recorded in the FAO's books nor does it appear in the financial statements. While the Auditor recommends that this expenditure should be valued and retained in the reporting system, it should be mentioned that, in practice, the fair value of such contributions would be extremely difficult to estimate. As a result, the value to the Governing Bodies and to the Member Nations of a report in the financial statements of the estimated fair value of such contributions, if such an estimate could reasonably be arrived at, would appear to be limited. However, this information is being retained in the form of the FAOR records, which are now submitted to Headquarters.

Status: Implemented

Noted.

MANAGEMENT MATTERS

Human Resources Management

Evolution of the number of FAO staff

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

[see paragraph 112 of the 1998-99 report]

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

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

The Human Resources Division is undertaking a cycle of meetings with Departmental Heads for support in developing departmental plans for their human resources and, in particular, to review the current overall staffing situation and to anticipate any changes that are likely to occur within the next two to five years.

Status: Ongoing

Noted.

The use of other human resources

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

[see paragraph 119 of the 1998-99 report]

The existing procedures for non-staff human resources are by their very nature complex and comprise diverse groups of personnel. The Auditor's Report correctly assessed the situation with regard to the number of contractual instruments in use by the Organization and rightly noted that the different needs and characteristics specific to each group necessitated different contractual arrangements. The Organization itself has long recognised this complexity and agrees that additional savings can accrue through simplification of the contractual arrangements.

A new contractual arrangement called "Personal Services Agreement" which replaces the previous four types of contracts (Reimbursable Loan Agreements, Special Services Agreements, Employment of National Professional Project Personnel and Authors' Contracts) has been developed for implementation in 2002.

Status: In course of implementation

No comment at this stage as concrete action still has to be taken (notably the issuance of the new section of the FAO Manual for the envisaged "Personal Services Agreement").

Special Programme for Food Security (SPFS)

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

[see paragraph 164 of the 1998-99 report]

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

[see paragraph 165 of the 1998-99 report]

The Organization is pleased to note the Auditor's overall assessment of the SPFS, as indicated under the conclusions set out in paragraphs 164 to 166 of the Long Form Report. It also agrees with the importance of participating countries' commitment in the success of the SPFS, as referred to by the Auditor. It is for this reason that, upon receipt of country requests for the SPFS, exploratory missions are fielded which, inter alia, ensure the commitment of the countries concerned prior to commencement of activities. Therefore, the pragmatic approach of the SPFS, to commence field activities as quickly as possible without losing time, is in line with the Auditor's recommendation.

Moreover, it is noted that the NPD, even though a very important document, is not the project document and/or plan of operations. It is the latter documents which are signed, and not the NPD.

The Organization fully agrees with the Auditor's comments on the importance of people's participation in the success of the SPFS. The Auditor also recommends the establishment of a Panel of Experts to evaluate the SPFS in the first group of 15 countries. In this context, the Director-General, in line with the request of the Governing Bodies, has directed that an evaluation be carried out of the SPFS using a team of independent experts. The subject external evaluation team visited twelve countries during the second half of 2001 and completed the process in early 2002.

Status: Implemented

The review of the implementation of the SPFS has been pursued in 2001 with four additional countries visited (three in Africa and one in Asia) and will be continued with the five 2002 field visit missions (three in Asia and two in Latin America). The results will be included in the report of the 2000-01 biennium.

Decentralisation

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

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

As regards the evaluation proposed by the External Auditor, it is noted that, in consultation with the Programme Committee, the Director-General has decided to include this evaluation in the current evaluation plan. It is planned to be carried out by the Evaluation Service during the biennium 2002-2003; the findings and recommendations of which will be reported to the Council through the Programme Committee in 2003.

Status: To be implemented over the course of the biennium 2002-2003

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

New Financial System Implementation

Overall Conclusion

Oracle upgrade to version 11i

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

[see paragraph 210 of the 1998-99 report]

In May 2000, the Finance Committee supported the Director-General's request to allocate additional funding to the project in order to resolve initial implementation problems, set the stage for the first upgrade of the Oracle Financial Systems and start work on Phase II (Payroll and Human Resources). The work programme to resolve Phase I start up problems and set the stage for the next Oracle upgrade has been largely completed.

As a result of this work, substantial progress has been made in resolving the agenda of issues noted by the External Auditor. More specifically, by the end of December 2001, the Organization had made the following progress:

• a new version of the field office accounting system (including the use of a more simplified communication scheme) was in operation and the FAO has had no further problems with the field component of the system;
  
  
• the data warehouse component of the system had been implemented to support Headquarters and field budget managers and it is working well;
  
  
• all business office software had been revised to resolve initial shortcomings and these systems (Accounts Payable, Accounts Receivable, Project Accounting, Travel) are working properly;
  
  
• all system interfaces have been revised to resolve issues of data transfer between Oracle and non-Oracle components of the financial system;
  
  
• all major legacy data migration problems have been cleared up, as necessary, for the system to operate properly; and,
  
  
• new specifications are available to enhance the component parts of the financial architecture as the upgrade to Oracle 11i is implemented in 2002.

Supplemental staffing for AFF and AFI has made the Phase I clean up work possible. While the main implementation issues of Oracle have been resolved, the continuation of work on the completion of Phase I and on Phase II in the biennium 2002-03 is only partially funded under the Regular Programme appropriation with a substantial amount being dependant upon the receipt of arrears particularly in the case of Phase II.. It is noted that work will not be undertaken until adequate resources can be made available.

It is noted that Oracle Corporation announced an extension of support from December 2001 to December 2002 in respect of the current version of its software (which is the version in use by the FAO) given the large customer base that has still to convert to version 11i. The Organization originally planned to introduce the 11i version of Oracle software by Easter 2002 and this software has been installed and technically tested by an internal FAO team. However, staffing resource problems within Finance Division have delayed full user acceptance testing that must precede the introduction of this software and the planned implementation date has been put back to August 2002 to allow more time to carry out and complete acceptance testing.

Status: Ongoing

The results of the follow-up review of Oracle implementation and AFF staffing situation will be included in the report of the 2000-01 biennium.

The postponement of the introduction of version 11i of Oracle was noted.

OTHER MATTERS

Cases of fraud

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

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

The Office of the Inspector-General conducted a review of the use of the Organization's resources during the second half of 2001. The results of the review were contained in an internal audit report issued in December 2001, distributed to the External Auditor early in January 2002 and summarized in the Annual Activity Report of the Inspector-General for the year 2001, which was made available to the Finance Committee for its May 2002 Session.

The recommendations of the Inspector-General are being implemented by AF Department.

Status: Implemented

We were indeed provided, on 11 January 2002, with the internal audit report of the use of the Organization's resources. The results of our own review will be included in the report of the 2000-01 biennium.

APPENDIX 1

LONG FORM REPORT

FOR THE FINANCIAL PERIOD FROM 1 JANUARY 1996 TO 31 DECEMBER 1997

External Auditor's Recommendation

Action taken

External Auditor's Comments

FINANCIAL MATTERS

Currency Exchange Arrangements

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

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.

[see paragraph 36 of the 1996-97 report]

a) As already mentioned in the progress report FC 93/11, the only one of these rates which is an accounting rate is the UN operational rate because this is the one which is used exclusively for recording all non-dollar transactions and balances. This practice complies with UN Accounting Standards. The other two rates referred to in the Auditor's Report (budget and forward rates) are not accounting rates because they are not used for converting non-dollar transactions or balances and they do not give rise to exchange rate differences requiring to be recognised as income or as expenses.

With respect of the biennium 2002-03, the budget rate has been set at the same rate as the forward rate that has been used in the forward purchase contract. The United Nations Treasury Division is now setting the UN operational rates equal to market rates applicable on the last day of each month with amendments made during the course of the month, whenever appropriate.

Status: Implemented

b) The matter was reviewed by the FAO Advisory Committee on Investments (ACI) at its meeting held on 25 May 2001. The ACI felt that the Organization's plans for Euro conversion were appropriate and that for the time being the Organization should continue to use the simplest hedging techniques.

Status: Not for implementation

The changes introduced for the 2002-03 biennium were noted.

The results of our follow-up review of currency exchange arrangements, together with a comparison with other UN organisations, will be included in the report of the 2000-01 biennium.

Support Costs

The support cost policy implemented in 1996 and 1997 was carried out pursuant to broad policy objectives to effect "efficiency savings ... [including] increased recovery of the cost of technical support to field activities" (CL110/REP, §24.a) and to "more closely align charges in proportion to the services provided" (CL113/4, §34). However in view of the current proliferation of support costs of various types which obscure the purpose and the measurability of the policy, I recommend that the Secretariat be requested to prepare a comprehensive but much simplified framework for support cost arrangements. In my opinion there are two possible approaches to this question:

1. either tailor support costs to the requirements of individual projects and clearly identify support costs in project budgets;
   
   
2. or limit support cost to broad but well defined activities and charge such support costs to projects by applying a pre-agreed recovery percentages to expenditure.

Of course a combination of the two approaches may also be implemented, provided that the resulting policy document submitted to the Governing Bodies is kept both comprehensive and simple to apply.

[see paragraph 49 of the 1996-97 report]

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

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

Status: Implemented

The results of our follow-up review of support costs will be included in the report of the 2000-01 biennium.

Audit of Field Transactions

In order for local audits of field expenditure to support a decentralised accounting structure at a reasonable cost, I recommend that the periodicity of reporting be lengthened (one or two reports a year), the number of contracting auditors reduced and the auditors required to provide audit assurance that imprest reports convey a true and fair view of field transactions.

[see paragraph 50 of the 1996-97 report]

In accordance with the External Auditor's recommendation, 1999 audits and beyond have been performed on a six-monthly basis. This approach has lead to a reduction in the cost of local audits.

In addition, the Organization wishes to consolidate the local audit programme with three or four international audit firms. However, before consolidation can take place, the cost aspects of this exercise have to be carefully studied. As a first step in this direction, AFF has collected information from all the major international auditing firms including data pertaining to their service availability at the field offices. The information collected will be used in deciding the next steps to be taken with a view to reducing the number of contracting auditors.

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

Status: In course of implementation

The field missions we carried out showed that audits have indeed been performed on a six-monthly or yearly basis. However, it still did not seem that the Organization was getting value for the money spent. High costs, delays in submitting reports and absence of audit assurance in the reports were notably noted. Should our observations be confirmed in 2002 field missions, we would recommend alternative solutions.