FINANCE COMMITTEE

LONG FORM REPORT

Financial Position of the Organisation

Tax Equalisation Fund

I recommend that the necessary arrangements be made with the Member Nations concerned with a view to reducing their credits from the tax equalisation fund by the amount of tax reimbursement to their nationals.

The Accounts Receivable Unit is now responsible for accounting for tax payment amounts to be reimbursed to staff and for management of contributions due from Member States, including any amounts to be offset against their Tax Equalisation Fund credit.

In order to take action in those cases where staff members have been requried to pay tax liabilities to their national governments, FAO is dependent upon the staff members in question or their supervisors informing AFF of this fact. Once informed of the details of such cases, the Accounts Receivable Unit contacts LEG for guidance and, depending on the case in question, to request that LEG follow-up the matter with the government in question.

The Accounts Receivable Unit then raises a receivable against the government in question as part of the RP contributions call process and monitors recovery as part of normal receivables management procedures.

In reply to observations made on this issue, we have been informed that measures have been taken to try and clear the outstanding balances through invoice and contacts with the relevant Governments.

We will review the results of these actions during our final audit mission for the 1998-99 biennium, as well as the implementation of the new system, which is described in column 2.

I wish to reiterate my previous recommendation to carry out closer checking of ULO at the end of the biennium. I understand that this is a complex and time consuming exercise with a variety of criteria to be applied across objects of expenditure. In this connection, I would recommend that, for the future, the Organisation might consider simplified criteria which could be incorporated into the accounting systems for recognising the validity of undisbursed commitments at the end of a biennium.

The most significant change results from the fact that, in Oracle, only approved Purchase Orders in place at the period end are automatically accrued. The Oracle applications implemented by FAO have no equivalent to non-Purchase Order related commitments.

With regard to transactions which are not processed through Oracle Purchasing, (e.g. travel and field transactions), the accruals procedure has been simplified to include only those transactions which can be demonstrated to relate to the year being closed.

In particular:

� in the case of travel related transactions, the period end accrual is based upon travel advances processed at 31 December 1999;

� in the case of country office and project transactions, the accrual is based upon information provided to AFF by imprest account holders and checked by OCD (country office accruals) and Project Accounting Unit (project accruals).

Control of Bank Accounts

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

� accounts require to be maintained in many countries to support the requirements of field offices and projects located in those countries

� the terms of the Organisation's Telefood initiative require that specific accounts be maintained for recording Telefood receipts

� for reasons of transparency in Trust Fund donor operations (donor covenants and related reporting) and the fact that Trust Fund donor monies are provided on trust as set out in donor agreements, complete pooling of the cash resources of the Regular Programme and Trust Funds is not possible either legally or politically.

Nevertheless, FAO continues to make progress in streamlining banking arrangements. With the assistance of IFAD, the Organization is considering utilisation of the SWIFT network for payments and receipts using existing IFAD arrangements.

In addition to the above, AFF is discussing with existing bankers a plan covering steps to bring about general and specific improvements in FAO's cash management and banking relations. The main areas covered by this plan include:

� Reduction of the number of banks with which FAO has accounts and the use of primary banks as the focus of all major bank transactions

� Improvement of the level of automation in relation to transmission of data between FAO and banks

� Making greater use of more economic disbursement methods

� Improvement of returns on surplus cash

� Reduction in costs of foreign exchange transactions

Cash Management

I wish to recommend formally that the Organisation call for international bids for the provision of corporate banking services.

My staff noted that a consultant had recommended to "externalise" the management of cash to achieve higher returns at reduced risks and free up treasury unit resources for other tasks. I recommend that such proposals be carefully considered by the Organisation. If they were to be implemented, the FAO should call for bids from several international cash managers and start revamping and upgrading the treasury unit to allow it to become a professional counterpart to the selected cash manager.

FAO has since been involved in detailed discussions on service standards with the preferred bank. The bank has confirmed that it will require some time to implement changes to its systems and procedures to meet FAO's requirements.

In the meantime, FAO is continuing to take steps to improve conditions and working relationships with its current bankers.

With respect to investments , we have proceeded to implement the recommendations of the ACI as approved by the Director-General during 1999. More specifically:

� following outsourcing of the management of short-term investments in January 1999, we have now, on the basis of advice from ACI and with the assistance of IFAD and WFP, completed a tender process for the management of these funds and selected two firms specialised in short term portfolio management to substitute the single previous fund manager

� with regard to long term investments we have , again on the basis of advice from ACI and with the assistance of IFAD and WFP, completed a tender process for the management of the fixed income portion of our long-term investment portfolio and selected two firms specialised in long term portfolio management .

We are now in the process of implementing these decisions

With regard to the strengthening of the Treasury function, FAO has hired, on a temporary basis, the ex-Director of the IBRD Investment Department to help implement changes. FAO is also actively involved in negotiating with IFAD a joint Treasury advisory function.

As we indicated last September we have started reviewing the tender process and its outcome. Questionaires were issued in October 1999, to which we have not received all replies at the time of writing this progress report, with respect to the way the competitive tendering process was conducted.

As mentioned in column 2, the contract for the provision of corporate banking services had not been finalised at the time of writing the present Progress Report .

With respect to the management of cash and short-term assets we note that our recommendation to select the managers through a competitive tendering process has now been taken into consideration. We will examine the conduct and the outcome of this tender and assess the performance of the commingled funds with the Northern Trust Company previously in charge of the short-term investments.

With regard to the management of long-term investments our audit work will be pursued on the same lines to review selection procedures and evaluate results and performance.

Closer monitoring of the fund manager(s) performance including visits to the manager's office, is necessary and will require revamping and upgrading of the Treasury.

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:

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

b) 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.

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.

With regard to the reduction in the number of contracting auditors, our plan is still to identify a suitable firm in each Region with correspondents in countries where FAO has Representations. Efforts to complete this process have, however, been delayed as a result of resources being diverted to introduction of the Field Offices Accounting System which requires priority.

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

Procedures relating to travel advances and LRIs have also been changed. All staff related transactions are now accounted for in the same way: through an account opened for each staff member within the sub-ledger, managed by the Accounts Receivable Unit.

Functionality includes ageing of balances and the responsibilities of the Accounts Payable and Receivable Units include ensuring that the ageing of balances are at acceptable levels.

I recommend that the Organisation finalise and formalise the delegation of authority to the regional representatives.