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GB.276/PFA/7
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Programme, Financial and Administrative Committee |
PFA |
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SEVENTH ITEM ON THE AGENDA
Review of procedures for the appointment
of the External Auditor
1. At its 274th Session (March 1999) the Governing Body approved the reappointment of the Comptroller and Auditor-General of the United Kingdom as External Auditor for a period of four years from 1 April 2000. During the discussion on this subject in the Programme, Financial and Administrative Committee, some members, while endorsing the recommendation to the Governing Body, requested that a paper be prepared for the present session of the Governing Body that would review the procedures for the appointment of the External Auditor and also provide information on the practice of other international organizations.
2. The appointment of the External Auditor and other matters relating to external audit are governed by Chapter IX (External Audit -- articles 35 to 38) of the Financial Regulations (Appendix I). The Appendix to the Financial Regulations entitled "Additional terms of reference governing external audit" (Appendix II) states the duties and rights of the External Auditor as well as the requirements regarding the content and presentation of his report. The Financial Regulations do not provide for any detailed procedures regarding the appointment of the External Auditor and leave the matter entirely to the discretion and the judgement of the Governing Body.
3. In the ILO, the practice of the Governing Body has been to appoint the Auditor-General of a member State as External Auditor and to renew that mandate at the expiry of each term. The principle of rotation has not been applied and the Governing Body has not changed the Auditor until such time as the incumbent has expressed a wish not to be reappointed. The fact that the Governing Body has each time renewed the term of the serving Auditor would imply that it was satisfied with the quality of the audit and of the reports that were submitted to it.
4. Since 1937 the Auditors-General of three member States have held the office of External Auditor of the ILO:
- 1937 to 31 March 1967: the Auditor-General of Sweden, who was also the Auditor-General of the League of Nations and subsequently Chairman of the Panel of External Auditors of the United Nations, the specialized agencies and the IAEA;
- 1 April 1967 to 31 March 1974: the Auditor-General of Norway;
- 1 April 1974 to 31 March 1978: the Auditor-General of Sweden;
- 1 April 1978 onwards: the Comptroller and Auditor-General of the United Kingdom,(1) who is also a member of the United Nations Board of Auditors and Chairman of the Panel of External Auditors of the United Nations, the specialized agencies and the IAEA.
5. The practice of the United Nations and other organizations of the UN system is summarized in Appendix III. As can be seen, apart from the requirement that the External Auditor be the Auditor-General (or officer holding the equivalent title) of a member State, there is no common approach and the practice varies between organizations. The major difference between the ILO and the other organizations is that the latter invite all member States to nominate candidates for the appointment of the External Auditor upon the expiry of the term of the incumbent.
6. If it is the wish of the Committee to explore possible changes to the practice followed by the ILO so far, it would be helpful if it could provide general guidance to the Office on this subject and also address the specific considerations mentioned below.
7. Rotation. Should the principle of rotation in the appointment of the External Auditor be introduced, and, if so, what should the frequency of such rotation be? The advantage of maintaining the same External Auditor for a long period of time is that the Auditor progressively acquires a thorough knowledge of the organization and of its administrative and financial procedures, as well as its internal controls and accounting systems. This experience and knowledge equips the Auditor to perform more effective audits. On the other hand, the appointment of a new Auditor may bring in new approaches and a fresh outlook to the planning of the audit activities, although there may initially be a steep learning curve and much time would have to be devoted to understanding the systems before being able to conduct a meaningful audit. At present no organization of the United Nations system, except for the World Food Programme, imposes a limit on the tenure of appointment: there is no defined period after which there must be a mandatory change of the External Auditor. Should the Governing Body introduce the principle of rotation, it may wish to leave the maximum tenure of appointment undefined and thus be in a position to dispense earlier with the services of an External Auditor should they prove to be unsatisfactory, and to maintain for a longer period of time an External Auditor who enjoys its confidence and who provides a high quality of audit.
8. Term of office. The Financial Regulations are silent on this subject and leave it to the Governing Body to determine the period. In recent years, after the introduction of a biennial financial period, it has been the practice of the Governing Body to appoint, or reappoint, the External Auditor for a period of four years at a time so that he may audit the accounts of two full biennia. Appendix III shows that there is no common practice among the other organizations as to the length of the term of appointment.
9. In the event of a vacancy or of a decision to rotate the appointment, which member States should be invited to nominate candidates? In all other organizations, if there is a need to appoint a new External Auditor, the respective heads of the organizations invite all member States, including the member State of the incumbent, to submit nominations. In the interests of transparency and of providing all member States with an equal opportunity, the Governing Body may wish to follow the practice of the other organizations in the future when it is its intention to appoint a new External Auditor.
10. In what form should the nominations be submitted? There is no standard form that has been established by the organizations of the UN system. It is suggested that the following information should be provided by member States that make nominations:
(a) details of the national and international activities of the Auditor, including the range of audit specialities;
(b) a description of the audit approach, procedures and standards that the Auditor would apply;
(c) an estimate of the total time and grade-mix of staff that would be required to conduct the audit for a full financial period;
(d) the amount of the all-inclusive audit fee.
11. How should the nominations be evaluated? The other organizations submit all the nominations received to their appropriate legislative bodies for evaluation and selection. The input of the secretariat is limited to the translation of the documents into the working languages, but there is no preselection or evaluation made by the secretariat. If such a procedure were to be followed in the ILO, the Programme, Financial and Administrative Committee would be responsible for conducting the evaluations and making a recommendation to the Governing Body. It will be noted that the other organizations reach a decision either by a secret ballot or by consensus. Should the Governing Body opt for a secret ballot, the Standing Orders of the Governing Body may need to be amended to provide for a secret ballot in the Committee.
12. While it is recognized that the sole responsibility for the appointment of the External Auditor rests with the Governing Body and the External Auditor reports exclusively to the Governing Body, the Office can greatly benefit from the services of a competent External Auditor, as he provides the single most important component of oversight. It is therefore in the interests of both the Governing Body and the Office to appoint an Auditor who can provide the very highest standards of financial audits and who has the capacity to conduct management reviews on specific subjects and value-for-money audits. It is also in the interests of the Office to have regular, objective and impartial assessments of the efficiency of its financial and accounting procedures as well as of the strengths and weakness of the internal financial controls that are in place. An Auditor-General of a member State who has a support team of highly qualified specialists that could be called upon to address exceptional issues or generally reinforce the scope and effectiveness of an audit would present clear advantages to the Organization. Examples of such specialized services would be computer security, advanced techniques for the auditing of computer systems, procurement issues, forensic accounting and value-for-money audits. Timely advice or observations by the Auditor on weaknesses in any procedures lead to immediate remedial action by the Office, thus reducing the scope for irregularities or waste.
13. As the present term of the External Auditor does not expire until 31 March 2004 there is no urgency for the Governing Body to take any decisions on possible changes to the procedures for the appointment of the Auditor. The Director-General would, however, welcome the views of the Committee on the issues that have been raised in this document, as well as any other observations or comments that the Committee may wish to make, so that he may, if necessary, submit a further document to the Committee on this subject at a time closer to the expiry of the current mandate of the External Auditor.
Geneva, 18 October 1999.
1. It had been the practice of the Governing Body to appoint by name the holder of the office of the Auditor-General of the member State in question. At its 239th Session (February-March 1988) the Governing Body decided to make the appointment by reference to the office held rather than by reference to the particular holder of that office.
Appendix I
Extract from the Financial Regulations
Chapter IX. External audit
Article 35
1. An external auditor, who shall be the Auditor-General (or officer holding the equivalent title) of a member State or another person of high competence, shall be appointed in the manner and for the period decided by the Governing Body.
2. The external auditor shall not be removed during his tenure of office except by the Governing Body.
3. The Governing Body may, if necessary, appoint a deputy external auditor to assist and replace the external auditor in case of need.
Article 36
1. The audit shall be conducted in conformity with generally accepted common auditing standards and, subject to any special directions of the Governing Body, in accordance with the Additional terms of reference set out in the Appendix to these Regulations.
2. The external auditor may make observations with respect to the efficiency of the financial procedures, the accounting system, the internal financial controls and, in general, the administration and management of the Organization.
3. The external auditor shall be completely independent and solely responsible for the conduct of the audit.
4. The Governing Body may request the external auditor to perform certain specific examinations and issue separate reports on the results.
Article 37
1. The Director-General shall provide the external auditor with the facilities he may require in the performance of the audit.
2. For the purpose of making a local or special examination or of effecting economies of audit cost, the external auditor may engage the services of any national Auditor-General (or officer holding the equivalent title) or commercial public auditors of known repute or any other person or firm who, in the opinion of the external auditor, is technically qualified.
Article 38
1. The external auditor shall issue a report on the audit of the financial statements and relevant schedules reflecting the position of the final accounts for each financial period, which shall include such information as he deems necessary in regard to matters referred to in article 36, paragraph 2, and in the Additional terms of reference.
2. The external auditor's report shall be submitted to the Governing Body, together with the audited financial statements. The Governing Body shall examine the financial statements and the audit report and shall forward them to the Conference with such comments as it deems advisable.
Appendix II
Appendix to the Financial Regulations
Additional terms of reference governing external audit
1. The external auditor shall perform such audit of the accounts of the Organization, including all trust funds and special accounts, as he deems necessary in order to satisfy himself:
(a) that the financial statements are in accord with the books and records of the Organization;
(b) that the financial transactions reflected in the statements have been in accordance with the rules and regulations, the budgetary provisions and other applicable directives;
(c) that the securities and moneys on deposit and on hand have been verified by certificate received direct from the Organization's depositories or by actual count;
(d) that the internal controls, including the internal audit, are adequate in the light of the extent of reliance placed thereon;
(e) that procedures satisfactory to the external auditor have been applied to the recording of all assets, liabilities, surpluses and deficits.
2. The external auditor shall be the sole judge as to acceptance in whole or in part of certifications and representations by the Director-General and may proceed to such detailed examination and verification as he chooses of all financial records, including those relating to supplies and equipment.
3. The external auditor and his staff shall have free access at all convenient times to all books, records and other documentation which are, in the opinion of the external auditor, necessary for the performance of the audit. Information classified as confidential shall be made available on application. The external auditor and his staff shall respect the confidential nature of any information so classified which has been made available and shall not make use of it except in direct connection with the performance of the audit.
4. The external auditor shall have no power to disallow items in the accounts but shall draw to the attention of the Director-General for appropriate action any transaction concerning which he entertains doubts as to legality or propriety. Audit objections, to these or any other transactions, arising during the examination of the accounts shall be immediately communicated to the Director-General.
5. The external auditor shall express and sign an opinion on the financial statements of the Organization. The opinion shall include the following basic elements:
- the financial statements present fairly the financial position as at the end of the period and the results of the operations for the period;
- the financial statements were prepared in accordance with the stated accounting policies; and
- the accounting policies were applied on a basis consistent with that of the preceding financial period;
(a) the identification of the financial statements audited;
(b) a reference to the responsibility of the entity's management and the responsibility of the auditor;
(c) a reference to the audit standards followed;
(d) a description of the work performed;
(e) an expression of opinion on the financial statements as to whether:
(f) an expression of opinion on the compliance of transactions with the Financial Regulations and legislative authority;
(g) the date of the opinion;
(h) the external auditor's name and position; and
(i) should it be necessary, a reference to the report of the external auditor on the financial statements.
6. The report of the external auditor to the Governing Body on the financial operations of the period should mention:
(a) the type and scope of his examination;
(b) matters affecting the completeness or accuracy of the accounts, including where appropriate --
(i) information necessary to the correct interpretation of the accounts;
(ii) any amounts which ought to have been received but which have not been brought to account;
(iii) any amounts for which a legal or contingent obligation exists and which have not been recorded or reflected in the financial statements;
(iv) expenditures not properly substantiated;
(v) whether proper books of accounts have been kept;
(vi) any deviations of a material nature in the presentation of financial statements from generally accepted accounting principles applied on a consistent basis;
(c) other matters which should be brought to the notice of the Governing Body and the Conference, such as --
(i) cases of fraud or presumptive fraud;
(ii) wasteful or improper expenditure of the Organization's money or other assets (notwithstanding that the accounting for the transaction may be correct);
(iii) expenditure likely to commit the Organization to further outlay on a large scale;
(iv) any defect in the general system of detailed regulations governing the control of receipts and disbursements or of supplies and equipment;
(v) expenditure not in accordance with the intention of the Governing Body or the Conference after making allowance for duly authorized transfers within the budget;
(vi) expenditure in excess of appropriations as amended by duly authorized transfers within the budget;
(vii) expenditure not in conformity with the authority which governs it;
(d) the accuracy or otherwise of the supplies and equipment records as determined by stocktaking and examination of the records;
(e) where appropriate, transactions accounted for in a previous financial period concerning which further information has been obtained or transactions in a later financial period concerning which it seems desirable that the Governing Body or the Conference should have early knowledge.
7. The external auditor may make such observations with respect to his findings resulting from the audit and such comments on the Director-General's financial report as he deems appropriate to the Governing Body or to the Director-General.
8. Whenever the external auditor's scope of audit is restricted, or he is unable to obtain sufficient evidence, the external auditor shall refer to the matter in his opinion and report, making clear in his report the reasons for his comments and the effect on the financial position and the financial transactions as recorded.
9. In no case shall the external auditor include criticism in his report without first affording the Director-General an adequate opportunity of explanation on the matter under observation.
10. The external auditor is not required to mention any matter referred to in the foregoing which, in his opinion, is not material.
Appendix III
Arrangements in other organizations for the selection and
appointment of the External Auditor
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United Nations |
WHO |
FAO |
UNESCO |
WFP |
IAEA | |
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Which organ determines the procedures for the appointment of the External Auditor? |
General Assembly |
World Health Assembly |
Council |
General Conference |
Executive Board |
General Conference |
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Who may be appointed as External Auditor? |
Auditor-General of a member State (or officer holding equivalent title)1 |
Auditor-General of a member State (or officer holding equivalent title or otherwise qualified) |
Auditor-General of a member State (or person exercising an equivalent function) |
Auditor-General of a member State (or an officer holding the equivalent title) |
Auditor-General (or official holding the equivalent title) of a member State of the United Nations or FAO |
Auditor-General of a member State (or an officer exercising an equivalent function) |
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Term of office |
3 years1 |
4 years |
4 years |
6 years |
4 years |
2 years |
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Is the tenure of appointment limited? |
No |
No |
No |
No |
Yes, 8 years |
No |
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Which member States are invited to nominate candidates? |
All |
All |
All |
All |
All |
All |
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How are nominations evaluated? |
No specific review. Nominations are submitted to the Fifth Committee of the General Assembly |
Each candidate makes a presentation to the World Health Assembly |
Finance Committee |
General Conference; candidates may make a presentation. |
Bureau of the Board |
Board of Governors |
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Which organ decides on the appointment? |
Fifth Committee of the General Assembly |
World Health Assembly |
Council |
General Conference |
Executive Board |
General Conference |
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How is the decision reached where more than one candidate nominated? |
Secret ballot |
Secret ballot |
Consensus |
Secret ballot |
Consensus, or failing that, secret ballot |
Consensus, or failing that, secret ballot |
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1 The United Nations, and its funds and programmes, have a Board of Auditors, which consists of three members. The term of office of one of the members expires each year.
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