Supreme Audit Office of Poland

Transcription

1 CERN/FC/6006 CERN/3242 Original: English 24 May 2016 ORGANISATION EUROPÉENNE POUR LA RECHERCHE NUCLÉAIRE CERN EUROPEAN ORGANIZATION FOR NUCLEAR RESEARCH Action to be taken Voting Procedure For information FINANCE COMMITTEE 356 th Meeting June For information COUNCIL 181 st Session June Recommendations from the External Auditors to the CERN Pension Fund Management on the Annual Report and Financial Statements for the Year ended 31 December 2015 and Comments from the CERN Pension Fund Management Supreme Audit Office of Poland

2

3 SUPREME AUDIT OFFICE OF POLAND Audit No. P/16/051-2/CERN PF ML EXTERNAL AUDITOR S MANAGEMENT LETTER RELATING TO THE FINANCIAL STATEMENTS OF THE EUROPEAN ORGANIZATION FOR NUCLEAR RESEACH PENSION FUND (CERN PF) FOR THE YEAR ENDED 31 DECEMBER 2015 Warsaw, 19 May

4

5 KST /2016 Supreme Audit Office ul. Filtrowa Warsaw Poland Tel.: Fax: May 2016 Dr Thomas Roth Chairman of the Pension Fund Governing Board CERN Pension Fund CH-1211 Geneva 23 Switzerland For information: Sijbrand de Jong, President of the CERN Council Members of the CERN Council Dear Doctor Roth, We have recently completed our audit of the CERN Pension Fund financial statements for the year ended 31 December 2015, which we conducted in accordance with International Standards of Supreme Audit Institutions. Our audit examination was conducted primarily to enable us to express an opinion on the financial statements and compliance with authorities but not for the purpose of expressing an opinion on the effectiveness of the Organization s Pension Fund internal control. Our consideration of internal control was for the limited purpose relevant to the entity s preparation and fair presentation of the financial statements and compliance with authorities and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We have not found any new matters or areas of possible improvement involving internal control and accounting issues. During our audit, we checked and assessed the follow-up of our previous recommendations. This letter does not affect our audit report dated 19 May 2016 on the Financial Statements of the CERN Pension Fund. There is one outstanding observation to which you have provided a comment declaring an action to be taken. We will follow up this observation during the next year audit. We have also reviewed the status of all previous recommendations provided by us and previous external auditors and have determined their current status of implementation in the Annex to this Management Letter. We are pleased to announce that most of these recommendations have been closed, which means that they have been followed as expected. 2

6 Our observations from this year audit are summarized as follows: There are no observation as regards the financial audit of the CERN Pension Fund for the year 2015 (see the Annex for previous years observations). 3

7

8 CERN Pension Fund Annex Status of previous year s observations OBSERVATION / RECOMMENDATION ACTION TAKEN STATUS NIK Management Letter FY 2015, Audit No. P/16/051-2/CERN PF ML: Observation 1. The CERN Pension Fund Internal Control System (COSO Framework) The CERN Pension Fund Internal Control System has been fairly well developed, based on the offthe-shelf software and Microsoft SharePoint platform. It addresses most of risks identified for the Fund operations, in reference to brief descriptions of operational cycles, and controls to mitigate the risks identified. However, we have identified room for improvement of the system: many operational processes and risks are too briefly described, descriptions of control activities often do not sufficiently inform what is actually done; it is often the case that operational processes do not clearly show what operational objectives they serve. Overall ICS assessment of the specialised internal auditor (MAZARS) has revealed, mainly in 2013, minor but fairly numerous number of weaknesses and documentation omissions. Three of our last year observations also referred to internal control activities. In general, the current system requires broad and consolidated institutional knowledge to operate well. A new COSO internal control framework, developed on the basis of world-wide experience since 1992, is an overall comprehensive and very consistent concept based on 17 principles grouped within five components of internal control framework: control environment, risk assessment, control activities, information and communication, and monitoring activities. Each of the said principles is further illustrated by points of focus, which assist to understand a principle and to evaluate whether a particular principle is present and functioning. The idea is that particular elements of the system operate together, which The Fund is committed to undertaking a review of the costs, benefits and added value of a transition to the 2013 COSO Internal Control Framework. Action has been taken by the Fund management, first to study all possible options of implementing, then establishing a person responsible for developing and bringing an enhance system into play. The decision was taken to build on the existing internal control system by reviewing it and checking where improvements and additions can be made. The guidance for this activity will be the original upgraded COSO Framework and supporting documents, previous observations regarding the Fund Internal Control System made by MAZARS specialized internal auditor and NIK (external auditor), the content of NIK s recommendation as well as discussions on the issue in the course of internal and external audits. The date of accomplishing the said results has not been yet established. The recommendations made by the Fund s specialized auditor, MAZARs, regarding the Fund s IN PROGRESS 4

9 ensures that identifying missing elements or flaws in the system is easy and rectifying them may be effective. Failure to apply the new COSO framework would mean losing an opportunity to develop a system in which all its five components, while operating together, may collectively and effectively reduce to an acceptable level the risk of not achieving the organisation s objectives. Recommendation: We recommend to develop a transition plan to pass over from the current Internal Control System to the 2013 New COSO Internal Control Framework. In our view this will require: - creating a centralized project management function, - transferring knowledge on the new framework to the personnel, - developing a cost-effective approach to converting the underlying documentation, - mapping controls through each of the five components and supporting principles and, to the extent they are applicable, particular points of focus, - designating roles, responsibilities and authorities for converting documentation, - developing a road-map of implementation until the conversion is completed. Observation 2. An annual report of the CERN Pension Fund Information given in annual financial statements does not always satisfy interest of the Fund stakeholders, including members and beneficiaries, because of its informative limitations, specialized nature and reference to one particular year. A standard practise of pension funds is to prepare an annual report which provides various metrics illustrating a fund financial position and its performance over a longer period of time, showing trends in its asset build-up and increase/decrease in liabilities, changes in the level of coverage of accrued benefits by contributions and investment income, changes in the Fund s members /beneficiaries structure, changes in life-expectancy over a longer period, etc. Some of these information is available in the CERN Pension Fund dashboards but Internal Control System and the COSO framework will be implemented during The Pension Fund Governing Board recognizes the importance of meeting the information requirements of the Fund s various stakeholders. To this end, the Board will study this recommendation carefully with a view to establishing the appropriate reporting format.. The first issue of the CERN Pension Fund Annual Report has been prepared in 2016 to accompany 2015 Financial Statements of the Fund. The CLOSED 5

10 comparisons are mostly limited to an immediately preceding period and the circulation of these reports is also limited. In our view, the preparation of an annual report of the Fund would positively contribute to satisfy information needs of the Fund stakeholders and to enhance the on-going discussion on the Fund future. Recommendation: We recommend to prepare an annual report of the Fund which would provide information on various metrics illustrating the Fund financial position and its performance over a longer period of time. Observation 3. Presentation of negative interests Negative interests have been presented in Statement of Financial Performance under the line item Other Financial Expenses. They were further in the Note 23 as negative interest rates in the meaning that it [the Fund] effectively paid a fee to the custodian for the safekeeping of its money. Colloquialism of the statement it [the Fund] effectively paid a fee to the custodian for the safekeeping of its money may mislead the reader of the Note as to an actual nature of the expense in question. Recommendation: We recommend that the Note detailing Other Financial Expenses when refers to negative interest should simply inform that an expense of a particular amount was incurred because of negative interest on bank deposits. Observation 4. Presentation of cash flows from investing activities regarding financial assets Situation: Two line-items of financial assets cash flows presented on the face of the Cash Flow Statement are identified as purchases of and proceeds from Equities and Investment Funds. The mentioned types of assets are not presented separately, unlike it is the case on the face the Statement of Report contains all essential areas of the Fund operations during the year and information on its performance for the year ended 31 December Additionally it provides information on the Fund governance, its membership base of contributions and beneficiary group to be supported. Auditors expect further development of the Report, especially descriptions of the Fund s financial situation trends, based on the on-going periodic actuarial review and accompanying analyses. The Fund will implement in full this recommendation with a revised text in line with the External Auditors remarks. The wording of the Note has been corrected in line with the recommendation. Implementation of this recommendation will require further dialogue with the Custodian as at present the Custodian is not able to disclose separately these payments and receipts (i.e. for Equities and Investment Funds and also cash payments and receipts on derivatives). CLOSED CLOSED 6

11 Financial Position, Statement of Financial Performance, and in the Notes. One line-item of financial assets cash flows presented on the face of the Cash Flow Statement is identified as net proceeds from the sale of derivatives, i.e. cash payment for and cash receipts from derivative contracts are not presented separately. In accordance with IPSAS 1.45 Each material class of similar items shall be presented separately in the financial statements. Items of a dissimilar nature or function shall be presented separately, unless they are immaterial. If material cash-flows are presented as aggregate items or on a net basis the informative value for the user of financial statements is limited. Recommendation: We recommend that purchases for and proceeds from cash flows regarding the two material financial assets (Equities and Management Funds) be presented separately (relevant data should be requested from the Custodian). We recommend that cash payments for and receipts from derivatives be presented separately. Observation 5. Derivatives Disclosure in the Notes The Note 9 contains information on liabilitiesforwards. The said amount covers three types of derivatives: forwards hedging assets (equities, bonds in local currency), forwards overlay program hedging the currency against Swiss Franc, and active currency hedging however, this information is not presented in the said Note. In accordance with IPSAS 1.93 An entity shall disclose, either on the face of the statement of financial position or in the notes, further subclassifications of the line items presented, classified in a manner appropriate to the entity s operations. In accordance with IPSAS The detail provided in sub-classifications depends on the requirements of IPSASs and on the size, nature and function of the amounts involved. The presentation of derivatives as liabilities of a The Fund management has acquired separate data from the Custodian on the purchases of and proceeds from Equities and Management Funds and included them in the 2015 cash flow statement. The data on cash payments for and cash receipts from derivatives could not be retrieved from the Custodian. Because of the nature of the Fund s derivative contracts we agreed with the Fund management that the separation in this particular instance will not be of any additional informative value. Thus, the recommendation is assessed to have been followed. The Fund will implement this recommendation by providing in a Note to the Financial Statements an appropriate sub-division of the forward positions relating to the currency overlay program and other forwards. The Fund has provided the said information sub-divided into currency overlay program and other forwards. Because of the nature and size of the positions the information provided is sufficiently detailed. CLOSED 7

12 single amount without further subdivision does not provide information of the current position on derivatives of various functions (hedging local assets or hedging currency rates). Such presentation is not sufficiently informative. Recommendation: We recommend that data relating to open positions on derivatives be disclosed in the Notes. These should be derivative liabilities subdivided into the currency overlay programme (passive currency hedging), currency programme (active hedging) and to other forwards that hedge assets in local currency. Observation 6. Disclosure of Foreign Exchange Gains/(Losses) The Note 20 discloses foreign exchange loss on the currency overlay programme amounting to (191,860) Kch. F. The said amount is not divided into realised foreign gains/(losses) and unrealised foreign gains/(losses) on the programme. The Note provides comment that the corresponding gain/(losses) on the Fund s assets as a result of the movements in currency are disclosed in notes 13, 17 and 18. Value of foreign currency gains disclosed in the said Notes amounts to kchf. The Note does not provide a comment on significant disparity between the result of the currency overlay programme and unrealised and realised gains/(losses) on basic instruments. In accordance with IPSAS An entity shall disclose, either on the face of the statement of financial position or in the notes, further subclassifications of the line items presented, classified in a manner appropriate to the entity s operations. In accordance with IPSAS The detail provided in sub-classifications depends on the requirements of IPSASs and on the size, nature and function of the amounts involved. The Note on currency overlay programme is not sufficiently informative on its completion and performance in We recommend that the amount displaying the 2015 result of the currency overlay programme be subdivided to show realised and unrealised As discussed during our meetings with the External Auditors, the currency overlay programme is a hedging strategy implemented by the Fund to mitigate, at the overall Fund portfolio level, the effects of foreign exchange rate volatility on the Fund s assets denominated in foreign currency. It is important to note that this strategy is passive in nature and operates as a form of insurance against negative foreign exchange movements at the Fund level and not at the individual asset level. Given this concept, the notion of performance with respect to the currency overlay programme is not applicable. With regard to the recommendation, the Fund will look to supplement the information already available under Note 4 Financial Risks, B. Foreign exchange risk regarding the policy and documented process for executing the currency overlay programme. NIK accepts the statement of the CERN Management of passive nature of its currency hedging CLOSED 8

13 gains/losses on the program. We recommend that the relevant note on the currency overlay programme be supplemented by a comment in case of ineffectiveness of the programme in a given year. Observation 7. Bonds and equities disclosure The Notes 10, 11 provide information on distribution of bonds and equities according to their geographical location. The Note does not inform on distribution of financial instruments based on the credit risk exposure. In accordance with IPSAS An entity shall disclose by class of financial instrument: (a) The amount that best represents its maximum exposure to credit risk at the end of the reporting period without taking account of any collateral held or other credit enhancements. The said notes is of little informative value as does not provide an assessment of risk related to the given geographical distribution. Recommendation: We recommend that the information on types of bonds and equities be disclosed, instead or in addition to geographical distribution of investments, to allow assessment of credit risk exposure in relation to general information on investment policy and market risk provided in Notes 1.5 and strategy, which is consistent with the Note 4. B. Additional information provided on foreign exchange risk is sufficient. The Fund will review the information in Notes 10 and 11 with a view to supplementing the risk information already included in Note 4 Financial Risks of the Financial Statements. It should be noted that while Notes 10 and 11 provide risk information based on geographical data, Note Credit Risk does indeed disclose the maximum exposure to credit risk at 31 December as required by IPSAS In addition, with regard to Bonds, under the same note further information on credit risk exposure is disclosed by the presentation of issuer quality data. The Fund considers that the requirements of IPSAS are already met within the existing Notes to the Financial Statements. NIK s position on the CERN Management comment: NIK accepts the CERN Management explanation as regards disclosure of the maximum exposure to credit risk at 31 December 2015 and the end of the previous year. For the ease of reading we suggest to make a back-reference in Notes 10 and 11 to the Note and , where the price risks and credit risks are sufficiently disclosed. With this the original recommendation will not be followed by us in the next year audit. CLOSED 9

14 Observation 8. Verification of Benefit Entitlements Benefit entitlements in the CERN Pension Fund are entered to and processed in the Fund s benefit system by three persons of the Benefit and Accounting section. The list of payments, once entitlements are established, is generated directly from the system. Mutual control among the said persons has been introduced and is exercised to ensure segregation of duties and double check, however this control is not recorded or documented. Double control is a generally accepted principle in any accountancy system. The lack of recording/documentation of the second level check prevents an executive body responsible for Internal Control System from assessing whether the second level check is exercised regularly and with sufficient insight. The management intends to introduce a signing-off procedure to the existing system by September this year. Recommendation: We recommend that the work on the intended signing-off procedure be timely finalized. The requested back-reference in the Notes 10 and 11 to the Note 4.1 has been provided. We welcome this recommendation of the External Auditors, and, as mentioned in the audit observation, confirm that it is intended to implement a systemgenerated signing-off procedure. The cross-check control of benefit entitlements is exercised effectively and recorded /documented manually on monthly records of entitlements and introduced changes in the status of beneficiaries. System-generated signing-off procedure has been introduced. ITALIAN COURT OF AUDIT (CORTE DEI CONTI), AUDIT REPORT NO. CERN/FC/5742: CLOSED Recommendation 11. Staged rotation of audit and actuarial functions for CERN Pension Fund A staged rotation of the mentioned functions should be introduced to avoid the situation that occurred in 2013 when all those functions were replaced in the same year. Thus, we consider this recommendation still open. Recommendation 13. Declarations of potential conflict of interests are to be carefully reviewed by a dedicated body This recommendation refers to a potential conflict of interests that may arise in an environment such as the CERN Pension Fund, where considerable assets are invested in different funds and can materialize at every level of the staff, through the management and Investment Committee, to the The information has been acquired that the rotation of audit and actuarial function for the CERN Pension Fund will not be executed at the same time. The CEO of the Fund has suggested implementing a Register of Interest for all PFGB/PFIC/ATC/PFMU members to sit alongside the existing Code of Conduct. This is a wellestablished best practice for pension funds, charities, foundations, and other corporate bodies. The PFMU will produce CLOSED IN PROGRESS 10

15 PFGB members. We agree that the conflict of interest may arise and wish to leave this recommendation open, at the same time to consider its content in the future, especially in the context of the manner of verifying declarations about the lack of the conflict of interests made by particular officials. the Register of Interests within the next year. We accept the proposed way forward on the issue, which is generally in line with earlier discussions with PFMU representatives during our audit. Next year we will check the implementation and close the observation if the Register of Interest is introduced and properly managed. 11

16