US embassy cable - 02ROME4499

UNCLAS SECTION 01 OF 02 ROME 004499 
 
SIPDIS 
 
FROM U.S. MISSION IN ROME 
 
STATE FOR PRM/P, EUR/WE AND IO/D 
USAID FOR A/AID, AA/DCHA AND PPC/DC 
USDA/FAS FOR RTILLSWORTH AND ICD 
BRUSSELS FOR USAID 
USUN FOR CSERWER AND SMCLURG 
NSC FOR JDWOKEN 
                       UNCLASSIFIED 
 
PAGE 02        ROME  04499  01 OF 02  170654Z 
OMB FOR TSTOLL 
PARIS ALSO FOR OECD 
 
E.O. 12958: N/A 
TAGS: EAID, EAGR, AORC, PREF, EAGR, AORC, PREF, KUNR, WFP, UN, KUNR    EAID, WFP, UN 
SUBJECT:  FAO'S EXTERNAL AUDITOR RECOMMENDS OVERHAUL OF 
ORGANIZATION'S INTERNAL CONTROLS 
 
 
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SUMMARY 
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1. FAO'S EXTERNAL AUDITOR, WHILE ISSUING AN UNQUALIFIED 
AUDIT OPINION ON FAO'S BIENNIUM ACCOUNTS FOR 2000-2001, HAS 
RAISED CONCERNS RELATED TO THE ADEQUACY AND GENERAL 
EFFECTIVENESS OF FAO'S INTERNAL AUDIT MECHANISM. THE 
EXTERNAL AUDITOR HAS OUTLINED A NUMBER OF IMPROVEMENTS 
REQUIRED INCLUDING ESTABLISHMENT OF AN INDEPENDENT AUDIT 
COMMITTEE, CLEARER DELINEATION OF THE ROLE OF FAO'S 
INSPECTOR GENERAL, AND A REINVIGORATED INTERNAL AUDIT 
DIVISION. THE FAO, APPARENTLY STUNG INTO ACTION BY THE SHARP 
CRITICISM, BASICALLY ACCEPTED ALL RECOMMENDATIONS AND 
PRESENTED AN ACTION PLAN FOR IMPLEMENTATION LAST WEEK TO THE 
FAO FINANCE COMMITTEE.  THE VACANCY FOR THE INSPECTOR 
GENERAL'S POSITION HAS ALREADY BEEN POSTED ON THE FAO 
WEBSITE.  END SUMMARY. 
 
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                       UNCLASSIFIED 
 
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BACKGROUND 
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2. FAO HAS PRESENTED ITS CONSOLIDATED FINANCIAL STATEMENTS 
FOR THE 2000-2001 BIENNIUM, WHICH WILL BE REVIEWED AT THE 
THIRTY-SECOND SESSION OF THE FAO CONFERENCE NOVEMBER 29- 
DECEMBER 10. THE REPORT OF FAO'S EXTERNAL AUDITOR (THE 
FRENCH GOVERNMENT'S COUR DES COMPTES) CENTERS ON THE CHANGES 
INTRODUCED DURING THE BIENNIUM UNDER REVIEW IN TERMS OF 
DECENTRALIZATION AND IMPLEMENTATION OF NEW INFORMATION 
SYSTEMS (ORACLE INTEGRATED SOFTWARE IN PARTICULAR) WHICH 
HAVE LED TO GREATER RESPONSIBILITY BEING GRANTED TO BUDGET 
HOLDERS BOTH AT HEADQUARTERS AND IN THE FIELD. THE EXTERNAL 
AUDITOR CONTENDS THAT "THESE CHANGES SHOULD HAVE LED TO A 
REASSESSMENT OF INTERNAL CONTROLS." 
 
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STATUS OF FAO'S INTERNAL AUDIT 
------------------------------ 
 
3. AFTER REVIEWING FAO'S INTERNAL CONTROLS, THE EXTERNAL 
AUDITOR LISTED THE FOLLOWING DEFICIENCIES: 
 
-    INTERNAL AUDIT DIVISION HAD A LARGE SCOPE OF 
  RESPONSIBILITIES BUT FURNISHES INADEQUATE AUDIT COVERAGE; 
-    THE AUDIT DIVISION SUFFERS FROM RECURRENT VACANCIES AND 
  LACK OF ICT EXPERTISE; 
-    FAO LACKS A FORMAL AUDIT PLAN; 
-    FAO FAILS TO CONDUCT REAL RISK ASSESSMENTS (I.E., 
  REVIEWING PAST CASES OF FRAUD AND MISUSE OF THE 
  ORGANIZATION'S RESOURCES IN ORDER TO DETERMINE THE FACTORS 
                       UNCLASSIFIED 
 
PAGE 04        ROME  04499  01 OF 02  170654Z 
  THAT FACILITATED THEIR HAPPENING AND RECOMMENDING WAYS OF 
  PREVENTING FUTURE OCCURRENCE); 
-    MAJOR INADEQUACIES ARE NOTED IN FAO'S AUDIT MANUAL(S) 
  (ADJUDGED BY THE EXTERNAL AUDITOR TO BE BELOW UN STANDARDS); 
-    INADEQUATE ATTENTION IS PRESENTLY PAID TO COMPARISON 
  BETWEEN PLANNED AND ACTUAL AUDITS; 
-    FOR SOME AUDIT ASSIGNMENTS, FORMAL REPORTS ARE LACKING. 
  FAO HAS NO STANDARDIZED AUDIT REPORT FORMAT; 
-    INCOMPLETE AUDIT RECOMMENDATIONS ARE OFTEN OBSERVED. 
  GAPS EXIST IN REPORTING ON IMPLEMENTATION OF PAST AUDIT 
  RECOMMENDATIONS; 
-    FAO, IN THE BIENNIUM UNDER REVIEW, WAS, IN EXTERNAL 
  AUDITOR'S VIEW, NOT GETTING "ADEQUATE VALUE" FROM LOCALLY 
  SELECTED AUDITING FIRMS AT THE FIELD LEVEL. 
 
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RECOMMENDATIONS OF THE EXTERNAL AUDITOR 
--------------------------------------- 
 
4. IN THIS LAST REPORT OF THE PRESENT EXTERNAL AUDITOR 
(HAVING COMPLETED AN EIGHT-YEAR MANDATE), THE COUR DES 
COMPTES MAKES A NUMBER OF SPECIFIC RECOMMENDATIONS RELATED 
TO REVITALIZING FAO'S INTERNAL AUDITING APPARATUS: 
 
                       UNCLASSIFIED 
 
                           UNCLASSIFIED     PTQ1945 
 
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ACTION PRM-00 
 
INFO  LOG-00   NP-00    AID-00   AMAD-00  CIAE-00  WHA-00   SRPP-00 
      EB-00    EUR-00   UTED-00  TEDE-00  INR-00   IO-00    L-00 
      MMP-00   NSAE-00  NSCE-00  OES-01   OIC-02   OIG-03   OMB-01 
      TEST-00  TRSE-00  SAS-00     /007W 
                  ------------------E84D4F  170741Z /38 
P 170630Z SEP 02 
FM AMEMBASSY ROME 
TO SECSTATE WASHDC PRIORITY 5860 
INFO EU MEMBER STATES COLLECTIVE 
AMEMBASSY OTTAWA 
AMEMBASSY BERN 
USDA FAS WASHDC 2273 
USEU BRUSSELS 2804 
USMISSION USUN NEW YORK 
 
UNCLAS SECTION 02 OF 02 ROME 004499 
 
SIPDIS 
 
FROM U.S. MISSION IN ROME 
 
STATE FOR PRM/P, EUR/WE AND IO/D 
USAID FOR A/AID, AA/DCHA AND PPC/DC 
USDA/FAS FOR RTILLSWORTH AND ICD 
BRUSSELS FOR USAID 
USUN FOR CSERWER AND SMCLURG 
NSC FOR JDWOKEN 
                       UNCLASSIFIED 
 
PAGE 02        ROME  04499  02 OF 02  170654Z 
OMB FOR TSTOLL 
PARIS ALSO FOR OECD 
 
E.O. 12958:  N/A 
TAGS:     EAID, EAGR, AORC, WFP, UN, PREF, KUNR 
SUBJECT:  FAO'S EXTERNAL AUDITOR RECOMMENDS OVERHAUL OF 
ORGANIZATION'S INTERNAL CONTROLS 
 
-ESTABLISHMENT OF AN INTERNAL AUDIT SECTION ON FAO'S 
INTRANET CLEARLY DELINEATING ITS ORGANIZATIONAL STATUS AND 
MANDATE, ORGANIZATIONAL CHART, WORK PLAN FOR THE CURRENT 
YEAR, ANNUAL ACTIVITY REPORTS FOR AT LEAST THE LAST TWO 
BIENNIA, SETTING UP A CONFIDENTIAL "HOTLINE" TO REPORT 
FRAUD, WASTE AND ABUSE; 
 
-AUDIT TIME DEDICATED TO FAO HEADQUARTERS SHOULD BE 
INCREASED SIGNIFICANTLY AND AREAS SUCH AS ORACLE FINANCIAL 
IMPROVEMENT IMPLEMENTATION, INVESTMENTS AND OTHER TREASURY 
FUNCTIONS BE MADE PRIORITY OBJECTIVES IN VIEW OF CLEAR RISKS 
AND SHORTCOMINGS. INTERNAL AUDIT SHOULD DOWNSIZE ATTENTION 
SPEND ON REVIEWING FAO'S COMMISSARY AND CREDIT UNION (WHICH 
ALSO FALL UNDER THE EXTERNAL AUDITOR'S PURVIEW); 
 
-THE MANDATE OF FAO'S INSPECTOR GENERAL NEEDS TO BE MADE 
EXPLICITLY CLEAR. IN PARTICULAR, A SPECIFIC UNIT FOR 
INVESTIGATION SHOULD BE ESTABLISHED AND STAFFED WITH PERSONS 
WITH APPROPRIATE COMPETENCE AND SKILLS (EG., LAWYERS, 
CERTIFIED FRAUD EXAMINERS, EX-POLICEMEN, ETC.); 
 
-LISTING OF FUTURE VACANCIES FOR FAO'S INSPECTOR GENERAL'S 
                       UNCLASSIFIED 
 
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POST ON FAO'S INTRANET AND INTERNET SITES ALONG WITH 
ATTACHED JOB DESCRIPTION; 
 
-ESTABLISHMENT OF AN INDEPENDENT AUDITING COMMITTEE IS 
PROPOSED, POSSIBLY CHAIRED BY AN EXTERNAL PERSON AND TO 
INCLUDE A REPRESENTATIVE FROM ANOTHER UN ORGANIZATION. 
 
5.  FAO MANAGEMENT PRESENTED A DETAILED PLAN OF ACTION TO 
THE FINANCE COMMITTEE AT MEETINGS SEPTEMBER 9-13 WHICH 
ACCEPTED VIRTUALLY ALL THE RECOMMENDATIONS MADE BY THE 
EXTERNAL AUDITOR AND OUTLINED A TIMETABLE FOR 
IMPLEMENTATION.  THE INSPECTOR GENERAL, WHOSE MANDATE HAD 
BEEN EXTENDED BY THE DIRECTOR GENERAL ANNUALLY FOR FIVE 
CONSECUTIVE YEARS ALTHOUGH THE INCUMBENT HAD REACHED 
MANDATORY RETIREMENT AGE, WILL BE REPLACED, AND THE VACANCY 
HAS ALREADY BEEN POSTED ON THE FAO WEBSITE.  ESTABLISHMENT 
OF AN AUDIT COMMITTEE WAS DEEMED TO BE A VERY USEFUL STEP AS 
WELL TO REESTABLISH CREDIBILITY OF THE INTERNAL AUDITOR. 
FINANCE COMMITTEE MEMBERS WILL MONITOR COMPLIANCE WITH THE 
EXTERNAL AUDITOR'S RECOMMENDATIONS AND INCORPORATE THE 
ACTION PLAN INTO THE INCOMING AUDITOR'S PROGRAM OF WORK. 
 
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COMMENT 
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6. THE OUTGOING EXTERNAL AUDITOR MAY HAVE BEEN UNUSUALLY 
CANDID IN ASSESSING "FLAWS" IN FAO'S INTERNAL AUDITING 
PROCESS IN THIS REPORT.  HOWEVER, THE FACT REMAINS THAT THE 
SHORTCOMINGS ARE NOW CLEARLY IDENTIFIED AND THE FAO 
                       UNCLASSIFIED 
 
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RECOGNIZES THESE RECOMMENDATIONS REQUIRE IMMEDIATE 
ATTENTION. WHILE REPRESENTATIVES OF DONOR COUNTRIES 
CHARACTERIZED THE REPORT AS "DEVASTATING" REPRESENTATIVES OF 
DEVELOPING COUNTRIES DEFENDED THE ORGANIZATION AND THE 
DIRECTOR GENERAL. THIS "LAST HURRAH" OF THE COUR DES COMPTES 
REPORT WILL, IN USMISSION'S VIEW, EQUIP THE U.S. AND OTHER 
REPRESENTATIVES OF DONOR COUNTRIES ON THE FINANCE COMMITTEE 
TO VIGOROUSLY PURSUE THE REFORM OF FAO'S INTERNAL OVERSIGHT 
CAPABILITIES. HEILEMAN 
 
                       UNCLASSIFIED 
 
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 2002ROME04499 - Classification: UNCLASSIFIED