Finance Committee

LONG FORM REPORT

External Auditor’s Recommendation

Priority

External Auditor’s Suggested Timetable

Action taken and status

Auditor’s Comments

FINANCIAL MATTERS

Format of the Financial Statements

Manual Adjustments

I recommend that the Organization critically review the chart of accounts to identify further possibilities of reducing manual adjustments (See paragraph 12).

Significant

Before the 2002-03 closure

A review of the chart of accounts is under way with a view to streamlining the interim and financial period-end accounting closures. This task is expected to be completed by the end of the current biennium.

Status: In course of implementation

Progress on this matter will be verified during the audit of the 2002-2003 accounts.

Presentation of Statement I

I recommend the following disclosure more in line with the presentation prescribed by Annex II to the UN Accounting Standards (UNAS) and the respective importance of the financial amounts concerned:

•  The gains or losses on exchange would be disclosed separately in one line entitled “Currency exchange adjustments”;
• The proceeds of sales of information products and the revenue from advertising in and sponsoring of such products would be disclosed separately in one line entitled “Revenue producing activities”;
• The GCC would also be disclosed separately under the line “Government cash contributions for local costs”;

The line entitled “Miscellaneous income” would regroup, as prescribed by Financial Regulations 4.4. and 7.1., lapse of accrued liabilities and other miscellaneous income. [paragraph 15]

Merits attention

For the 2002-03 accounts

The interim accounts for the period ended 31 December 2002 already include separate disclosures for the items shown below, as follows:

1. Gains/losses on exchange;
2. Information Products Revolving Fund;
3. Government Cash Contributions; and
4. Miscellaneous income.

Status: Implemented

Verified.

Rounding Policy

I recommend that, starting with the 2002-03 financial statements, a note relating to the rounding policy be included clearly indicating the level of rounding off. [paragraph 18]

Merits attention

For the 2002-03 accounts

The rounding policy applicable to the Organization’s financial statements will be stated in a note to the 2002-03 biennial accounts.

Status: In course of implementation

Progress on this matter will be verified during the audit of the 2002-2003 accounts.

Financial Position of the Organization

Applicable Rules and Regulations for Employment of Retirees

I recommend the following:

• The existing guidelines and practices for the re-employment of former staff members who have been separated should be consolidated into a comprehensive policy, which should address, in particular, the following issues: minimum time lapse between termination and re-employment, maximum time of employment, nature of the assignment, financial and other conditions of employment.
• As far as the first point is concerned, I consider the UN standard rule of three years minimum to be a good practice. It should be duly recalled in all termination agreements. The Director-General could, of course, always grant a waiver to this rule on the basis of detailed justifications. The maximum time of employment could be based on the one for retirees (six months).
• Once defined, the rules governing re-employment of separated staff should be incorporated into the FAO Manual under Section 300 [paragraph 31].

Significant

Early in 2003

The Organization maintains that the current practice, as described in the internal administrative document (Key Information Circular – KIC 99/7 dated 1 July 1999), should continue to apply, i.e., no re-employment of a former staff member can be considered during the period covered by the indemnity of an agreed termination. Amendments are being made to the relevant Manual Section.

Status: In course of implementation, except as indicated above.

Noted.

MANAGEMENT MATTERS

Implementation of the “Oil for Food” Programme

Security of Cash and Valuables

I recommend that detailed rules and guidelines on the safe handling of cash and valuables be issued as soon as possible for all FAORs and that the specific case of Iraq also be addressed. [paragraph 56]

Significant

By mid-2003

Detailed guidelines concerning the safe handling of cash and valuables at field offices have been prepared and issued. In the specific case of Iraq, action has been taken to implement the recommendation.

Status: Implemented

Progress in this area will be verified during the audit of the field accounts records in Iraq.

Management of the Locally Generated Funds

I recommend that the Organization continue to make the necessary efforts to solve all pending matters regarding LGF [Locally Generated Funds] procedures and that LGF income and expenditure be duly included in the FAO’s financial statements for the 2002-03 biennium. [paragraph 97]

Fundamental

Before the 2002-03 closure

Guidelines for Locally Generated Funds (LGFs) have been issued by the Office of the Iraq Programme and transmitted to the FAO office in Iraq. The pending matters referred to by the External Auditor have now been resolved. LGF income and expenditure will be included in the FAO’s financial statements for the 2002-03 biennium.

Status: In course of implementation, except as indicated above

Progress in this area will be verified during the audit of the field accounts records in Iraq.

Procurement Process Delays

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. [paragraph 105]

Significant

By mid-2003

A study was carried out in line with the External Auditor’s recommendation. Most of the delays that were identified in the procurement process were caused by significant shortages in staff in the relevant units during the period under review. However, the causes of these delays had already been addressed in the first half of 2002 through the strengthening in staffing levels.

Status: Implemented

Noted.

REVIEW OF THE ORGANIZATION’S INTERNAL CONTROLS

Organization of the Overall Function of Oversight at the FAO

Applicable Rules and Regulations

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. [paragraph 131]

Merits attention

Before the end of 2002

The Functional Statement concerning Finance Division (Manual Section 108) is being updated as part of the 2004-05 PWB cycle while Manual Section 202 is currently under revision as part of a broader revision of accounting policies and procedures and financial rules. This exercise is expected to continue throughout 2004.

Status: In course of implementation

Progress in this area will be verified after implementation is reported.

Overall Organization and Respective Mandates

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. [paragraph 137]

Merits attention

Before the end of 2003

A document entitled “The Independence and Location of the Evaluation Service” was presented to the Joint Meeting of the Programme and Finance Committees in May 2003. The matter remains open as the Joint Meeting has requested that a further document on this item be presented at the September 2003 Session.

Status: In course of implementation

Progress in this area will be verified after implementation is reported.

Review of the Office of the Inspector-General

Audit Planning

I recommend that 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. [paragraph 156]

Significant

By mid-2003

AUD has made a fundamental change in its approach to the audit planning process by using risk-based assessments to identify the critical areas and activities to be audited. This approach will result in better targeted reviews and more effective use of staff resources. In this regard, AUD has already engaged a senior consultant to assist the Office of the Inspector- General to develop the necessary risk assessment and audit planning application. The study will be finalised by October 2003 and the AUD audit plan for the 2004-05 biennium will be prepared based on this revised approach.

Status: In course of implementation

Progress in this area will be verified after implementation is reported.

Training

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 [Certified Information System Auditors] or Oracle “Certified Professionals”. [paragraph 168]

Significant

For the 2003 training plan

Training and development continue to be important aspects of the overall management of the Office of the Inspector-General. Such training comprises three elements:

• professional audit training,
• language training, and
• training in the use of office technology.

Status: In course of implementation

Noted.

Performance of Audit Work

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 [paragraph 172].

Significant

By mid-2003

AUD has started work on updating the audit manual. A section on risk assessment methodology has been developed for incorporating in Volume 1 (Audit Overview) of the audit manual, together with:

(a) the new standards for the professional practice of internal auditing, which were adopted in June 2002, and

(b) the guide on statistical sampling and materiality.

In addition, Volume 2 (Audit Programmes) of the manual is under constant review as AUD updates it with revised or new audit work programmes, as applicable, whenever audits or reviews are carried out. In this regard, with the implementation of Oracle, it became necessary to develop new audit programmes for financial areas and procurement. Several of these have already been prepared and others will be developed in conjunction with the audits of the particular areas.

Status: In course of implementation

Progress in this area will be verified after implementation is reported.

Reporting and Follow-up of Audit Findings

I recommend the following:

For each type of audit assignment a standard report should be developed. Compliance to the agreed content and format should be closely monitored [paragraph 175].

Significant

Immediate effect

AUD has completed a comparative review of the practices of other agencies and will consider the merits of standardizing certain aspects of the report. However, this issue needs further study before a final decision can be taken.

Status: In course of implementation

Progress in this area will be verified after implementation is reported.

Review of the Internal Controls over the Use of the Organization’s Resources

In view of the deficiencies of the review conducted and the unreliability of the results, I recommend that another review be conducted as soon as possible with an appropriate methodology, namely a risk assessment. The assessment should first look back at past cases of fraud and misuse of the Organization’s resources in order to determine the factors that facilitated their occurrence. On the basis of how existing rules, regulations and procedures were indeed applied, the assessment should then look ahead and try to predict the possible risks of misuse of the Organization’s resources and recommend ways of preventing them [paragraph 187].

Fundamental

In 2003

AUD has discussed its approach to the referred review with the present External Auditor and has started work in this area during the second quarter of 2003. This review is expected to be completed before the end of 2003.

Status: In course of implementation

Progress in this area will be verified after implementation is reported.

Review of the Set-up of Controls in Oracle

Systems-development Process

I recommend that priority be given to the following:

• an overall strategy should be formalised;
• a well-proven project methodology should be adopted for the Human Resources and Budget projects and any other future projects;
• existing documentation should be completed and/or updated (especially all parameters’ guides) and procedures defined for their maintenance;
• all controls carried out either at the level of AFI or AFFS should be formally documented. [paragraph 195]

Fundamental

Before the end of 2002

Procedures and controls in relation to system access security have now been formally documented and will be published on the AFF Intranet. The other items have been implemented (see Finance Committee document FC 102/8).

Status: In course of implementation, except as indicated above

Will be verified in the next review by the External Auditor, as planned for 2004-2005

Interfaces

Although I acknowledge that the Controls Branch has started to address these problems through the monitoring and reporting of interface activity and follow up of issues arising, I recommend that efforts be continued to establish procedures for the following: frequency of up-dates; regular analysis of rejects; recycling and audit trail. [paragraph 196]

Significant

Immediate effect

As noted by the External Auditor, regular review and reporting of interface activity is already in place. In addition, ongoing work includes documenting and updating all current Interface procedures and it is expected that this work will continue throughout 2003 and 2004.

Status: In course of implementation

Progress in this area will be verified after implementation is reported.

FOLLOW UP REVIEW OF THE TREASURY MANAGEMENT

Organizational Arrangements

Advisory Committee on Investments

I recommend that the ACI [Advisory Committee on Investments] meet twice a year, by teleconference and that informal consultation be encouraged in between. Minutes should be prepared in all cases, even for informal consultation, and promptly issued, as previously recommended. [paragraph 213]

Merits attention

In 2003

The recommended approach is being implemented from 2003 onwards depending on the availability of ACI members and the issues to be discussed. Urgent issues will be discussed by way of phone conference calls. During this year, the ACI has already met once, in April 2003.

Status: In course of implementation

Progress in this area will be verified after implementation is reported.

Banking Arrangements

I recommend prompt action to implement the third tier of the strategy in order to further streamline the number of retail banking relationships and reduce the cost of banking. [paragraph 215]

Significant

Before the end of 2003

With regard to the third tier of the banking strategy, a banking expert is currently engaged to assist with restructuring the FAO’s field banking relationships and contacts have already been made with the main banking service providers for the FAO regions.

Status: In course of implementation

Progress in this area will be verified after implementation is reported.

Long-Term Investments

2002 Update

While regretting that the existing arrangements were not reviewed earlier, as recommended in my previous report, I urge the Organization to progress on this issue (transfer of the long-term investments) as soon as possible now that a Chief, Treasury Unit has been appointed. [paragraph 224]

Fundamental

By mid-2003

With regard to the referred arrangements for the long-term investments, the Organization has terminated the previous investment manager’s contract. Both bonds and equities have been provisionally transferred to two investment managers pending the implementation of the remaining phase of the long-term investment strategy.

This strategy is subject to the completion of a detailed asset and liability study, which is in progress and which it is expected will be completed by the fourth quarter of 2003.

Status: In course of implementation

Progress in this area will be verified after implementation is reported.

FOLLOW UP REVIEW OF THE AFF REORGANISATION AND STAFFING

Staffing review

I recommend that on the basis of the final report of the consulting firm, a detailed action plan on how to address the unresolved issues faced by the AFF division be prepared and that its implementation be closely monitored through the regular issuance of progress reports. [paragraph 254]

Significant

Detailed plan of action before the end of 2002

The recommendations of the consulting firm are being considered as part of the budgetary process and proposals to address the staffing situation are included in the PWB for 2004-05.

Status: In course of implementation

Progress in this area will be verified after implementation is reported.

ACTION TAKEN IN RESPONSE TO PREVIOUS REPORTS

Human Resources Management

Use of Other Human Resources

Regarding the use of other human resources, I recommended 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 [paragraph 119 of my 1998-99 report]. At the time of writing this report, my staff were informed that the envisaged new contractual arrangement called “Personal Services Agreement”, which would replace four previous types of contracts, and would be implemented in October 2002.

Not indicated

Not indicated

Experience with the implementation of the new contractual arrangement called “Personal Services Agreement (PSA)“ was reviewed and some adjustments to the contract document are being made to take into account users’ feedback and needs.

Status: In course of implementation

Progress in this area will be verified after implementation is reported.