Executive Board Hundred and ninety-fifth session

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Executive Board Hundred and ninety-fifth session 195 EX/23.INF.3 PARIS, 3 September 2014 English & French only Item 23 of the provisional agenda NEW AUDITS BY THE EXTERNAL AUDITOR DETAILED COMMENTS BY THE DIRECTOR-GENERAL ON PARTS III AND IV OF THE AUDIT REPORT ON BUDGETARY METHODS, TOOLS AND PROCESSES SUMMARY The Director-General hereby submits her detailed comments on Parts III and IV of the External Auditor s audit report on UNESCO s budgetary methods, tools and processes, as contained in document 195 EX/23.INF.2 and commented upon in document 195 EX/23 Part II. 1. Pursuant to documents 195 EX/23 Part II and 195 EX/23.INF.2 and the comments of the Director-General thereon, the present information document contains the more detailed observations of the Director-General on Part III and Part IV of the audit report. Comments concerning Part III: Process organization and responsibilities 2. The Director-General readily admits that the Manual only describes a part of all budgetrelated processes and recalls that these multi-stakeholder and multi-layered processes may not lend themselves easily to a full description. However, she wishes to state that the budget framework and process is the object of much internal information and discussion, and in particular that the preparation of the Draft C/5 budget is specified by the Director-General in a dedicated ivory note and senior management meetings. The process is further elaborated in two sets of internal notes, with accompanying technical guidance provided by the central services to the programme sectors. Hence, it is not correct to state that the process is left to internal discretion or that it is not documented. 1 The existence of a high degree of interaction and iteration should not be equated with arbitrariness. 1 There is therefore no genuine and challengeable description of the Organization s internal budget process. The lack of documentation perpetuates recourse to oral expert opinion and personal interpretation. It prevents Member States from being given reasonable assurance of the quality of the process. ( ) but no preparatory document compiled by BSP or other units was produced when requested by the auditors, which makes it impossible to understand the choices made, when appraising the relevance and efficiency of the process.

195 EX/23.INF.3 page 2 3. Therefore, the Director-General proposes that: with respect to Recommendations No. 1 and No. 2, 2 efforts will be made to examine the relevant parts of the Manual and other steps in the process with a view to enhancing the availability of information about the budgeting process, keeping however in mind the speed, complexity and iterative nature of the work, as outlined above; with respect to Recommendation No. 3, 3 the review of the Manual will provide an opportunity to address the first part of the recommendation, keeping in mind the extreme complexity and inter-connectedness of the budgeting process. 4. Finally, with respect to Recommendation No. 4, 4 it is acknowledged that the logic of a full results-based (RBB) budgeting process is not today entirely respected the sectors, field offices and institutes are indeed assigned budget envelopes and are not entirely free to develop their own budget proposal based on a full costing of their own work plans. The Director-General agrees that the proposal made by the auditors to give to the sectors full budgetary initiative, allowing them to fix for themselves the level of staff and budget resources needed, deserves to be examined, but she notes that this will require extensive examination and discussion, including with the governing organs, as it would need to be made coherent with the exigencies of the management of UNESCO across all sectors and services, and as some detailed ground rules would need to be developed. Comments concerning Part VI: Forecasting cost trends and estimation of staff costs 5. With regard to the technical methodologies used for estimating cost increases, namely the calculation of staff costs, the External Auditor has raised two important remarks under section 4.4: (a) (b) The Secretariat s approach of applying standard costs (i.e., forecasted average costs per duty station and per grade) to the costing of staff structure is leading in the view of the External Auditor to an over-estimate of staff cost budget. By taking the example of occupied General Service category posts, the External Auditor seeks to demonstrate that the Secretariat s method of using the average within-grade steps is resulting in a higher total amount compared with a method of applying the post-by-post actual base salary in accordance with the exact within-grade-step of each incumbent. (Ref: paragraph 71) The Secretariat s method of establishing the Multiplier Point applicable to Paris-based (Headquarters) Professional and Director posts is considered erroneous due to its treatment of pension funds contribution, and is leading to an over-estimate of the Multiplier point by 1.2 point, equivalent to some $1.12 million for this category of posts. (Ref: paragraph 74 and Annex 5) The Secretariat would like to provide the following observations and clarifications: 6. It is very important to understand the prudent approach under which the Secretariat aims at avoiding any kind of under-estimation of the budget, if an absolute accuracy is not possible. Unlike 2 3 4 Recommendation No.1, The External Auditor recommends that the Administrative Manual be updated regularly in such a way as to describe and publicize all rules and methods applicable to the internal budget preparation process ; Recommendation No.2, The External Auditor recommends that the choices made in the apportionment of budget resources among the sectors on the Director-General s decision be based on clear and explicit rationale. The External Auditor recommends that the respective responsibilities of the sectors Assistant Directors-General (ADG) and of BSP s Assistant Director-General (ADG/BSP) be clarified formally and, in particular, that budgeting decisions be formalized in traceable and relevant documents. The External Auditor recommends, with a view to results-based budgeting, that the sectors be authorized to submit draft results-based budgets earlier in the process, outlining variable options for adapting budgets to strategic orientations and expected results validated by the governing bodies.

195 EX/23.INF.3 page 3 the activity costs, payment of salaries and allowances are mandatory to the Organization. It is very difficult to make a downward discretionary adjustment to the expenditure within a short period of time. The level of salaries and allowances largely varies depending on the evolving conditions of staff members. Moreover, there is likely to be a number of staff movements across the sectors/bureaux during a biennium as well as separations and new recruitments, all of which lead to frequent changes in costs. These conditions make it imprudent, if not impossible, to adopt a method of applying actual costs of existing staff members in calculating the total costs of the structure. 7. In order to cope with this difficulty, the Secretariat has been adopting the approach of applying standard costs, i.e., a set of representative average costs applicable to each grade in each duty station. This approach has been approved by Member States at each session of the General Conference. 8. One factor that determines the standard costs is the average within-grade step level, and the Secretariat analyses the latest status of all the staff members within-grade step levels in order to set the average. As an average of within-grade steps usually comes out with decimals, it is rounded upward so that it can be referred to the salary scales. (For example, an average withingrade step of 5.7 is rounded up to 6.) This is also due to the prudence principle, as most staff members receive a step increase annually, and the statistics show that indeed over the recent years the average step increases slightly. As the budgeting exercise is undertaken more than a year before the new biennium starts, the Secretariat considers that this approach is appropriate. 9. The over-estimate of staff costs demonstrated by the External Auditor in paragraph 71 is exactly due to this reason. It should be noted that the amount of $840,152 cited as over-estimate corresponds to only 1.5% of the base salary, whereas one step increase under the General Services salary scale corresponds to approximately 2.9%. Therefore this over-estimate corresponds to a half-step value, which can be recognized indeed as the result of the rounding-up. Moreover, this variation is expected to become narrower or inexistent later in the biennium due to the general step increases of all staff members. The Secretariat believes that this level of overestimate at the initial stage of the biennium should be considered as a prudent range of variation. 10. It is also important to note that, in relation to the method of utilizing the standard costs, the Organization maintains a centralized mechanism to monitor staff costs. As standard costs represent the house-wide averages, there can be variances between the budgets and the expenditures due to the inequality in the seniority and also due to vacancy. Thus the role of the central monitoring is to ensure that the staff costs are balanced at the global organizational level rather than at the level of each sector/bureau, and for this purpose the staff cost expenditures are monitored centrally, paying particular attention to deviations of actual costs from the standard costs. The reports showing such variances are being provided to Member States periodically. Based on the above, the Secretariat believes that the magnitude of deviation of actual costs from the standard costs as raised by the External Auditor in paragraph 71 should be considered as being within an acceptable range. 11. The Secretariat has no intention of allowing an unnecessary or avoidable over-estimate of staff costs. In particular, with regard to the second point raised by the External Auditor in paragraph 74 and in Annex 5, the Secretariat disagrees with and would like to reject the observation that the Multiplier Points applied to Paris-based professional and director posts is overestimated. 12. The criticism raised by the External Auditor focuses on how the pension funds contribution is handled in the formula used by the Secretariat to adjust the raw Multiplier Points published by the International Civil Service Commission (ICSC) into those applicable to UNESCO which uses the constant dollar mechanism. As the purpose of the monthly movement of Multiplier Point is to

195 EX/23.INF.3 page 4 stabilize the Net Take-home Pay of each staff member expressed in local currency, defined by ICSC as Base Salary plus Post Adjustment minus Pension Funds contribution, the Secretariat s adjustment mirrors exactly this purpose. The External Auditor, on the other hand, argues that a different formula should be used (as stated in Annex 5 of their report), one which would in effect stabilize Base Salary plus Post Adjustment only, without deducting the Pension Funds contribution. 13. Without setting out all of the technical and complex details, the Secretariat maintains that the formula proposed by the External Auditor is factually wrong and would inevitably lead to a considerable under-estimate of the costs for Paris-based professional and director posts. The Secretariat has consulted ICSC on this matter. ICSC has advised UNESCO that the method and the formula used by the Secretariat are correct. 14. Therefore, the Secretariat would like to reiterate its view that there is no over-estimate of staff costs arising from miscalculation. The External Auditor s report also implies that the Secretariat is not respecting the ICSC rules, but this is also not correct. The Secretariat would like to ensure the Member States that the staff costs estimates are as accurate as they can be, strictly following the ICSC rules wherever applicable. 15. With regard to Recommendation No. 8, 5 of the External Auditor, which recommends adopting the method of actual costs application, the Secretariat considers that at this stage the method of standard costs application combined with the central monitoring mechanism has many advantages, given the variation in personal conditions, staff movements and vacancies, etc. Nevertheless the Secretariat agrees that the budgeting techniques should be reviewed and revised as and when such needs arise, including the method of actual cost application, especially in view of the RBB implementation as described previously in document 190 EX/19 Part II. 5 The External Auditor recommends that the Organization revise the valuation techniques used for staff cost trends (salaries and adjustments) when drafting budget proposals and, in particular, that it use real data (actuals or forecasts) qualifying the structure of staff remuneration, that it document all work performed in order to ensure traceability, that it analyse beforehand the sensitivity of assumptions used and that it evaluate the validity thereof subsequently in the light of the execution of the resultant budget estimates. Printed on recycled paper

Executive Board Hundred and ninety-fifth session 195 EX/23.INF.3 Corr. PARIS, 6 October 2014 English & French only Item 23 of the provisional agenda NEW AUDITS BY THE EXTERNAL AUDITOR DETAILED COMMENTS BY THE DIRECTOR-GENERAL ON PARTS III AND IV OF THE AUDIT REPORT ON BUDGETARY METHODS, TOOLS AND PROCESSES CORRIGENDUM Paragraphs 2, 6, 11, 12 and 13 in document 195 EX/23.INF.3 should read as follows: Paragraph 2 The Director-General readily admits that the Manual only describes a part of all the budget-related processes, and recalls that these multi-stakeholder and multi-layered processes may not lend themselves easily to a full description. However, she wishes to recall that the budget framework and process is the object of much internal information and discussion, and in particular that the preparation of the Draft C/5 budget is specified by the Director-General in a dedicated ivory note and senior management meetings. The process is further elaborated in two sets of internal notes, with accompanying technical guidance provided by the central services to the programme sectors. Thus, in the view of the Secretariat, the process is not left to internal discretion or arbitrariness. Paragraph 6 It is very important to understand the prudent approach under which the Secretariat aims at avoiding any kind of under-estimation of the budget, if an absolute accuracy is not possible. The External Auditor and the Secretariat concur on the need for prudency but their views differ on the acceptable degree of prudency. Unlike the activity costs, payment of salaries and allowances are mandatory to the organization. It is very difficult to make a downward discretionary adjustment to the expenditure within a short period of time. The level of salaries and allowances largely varies depending on the evolving conditions of staff members. Moreover, there is likely to be a number of staff movements across the sectors/bureaux during a biennium as well as separations and new recruitments, all of which lead to frequent changes in costs. These conditions make it imprudent, if not impossible, to adopt a method of applying actual costs of existing staff members in calculating the total costs of the structure.

195 EX/23.INF.3 Corr. Paragraph 11 The Secretariat has no intention of allowing an unnecessary or avoidable over-estimate of staff costs. In particular, with regard to the second point raised by the External Auditor in paragraph 74 and in Annex 5, the Secretariat does not believe that the Multiplier Points applied to Paris-based professional and director posts are over-estimated. Paragraph 12 The criticism raised by the External Auditor partly focuses on how the pension fund contribution is handled in the formula used by the Secretariat with a view to adjusting the raw Multiplier Points published by the International Civil Service Commission (ICSC) into those applicable to UNESCO which uses the constant dollar mechanism. Paragraph 13 Without setting out all of the technical and complex details, the Secretariat believes, also in line with an informal communication with a staff member of the ICSC, that the formula it applied is factually correct. However, the issues involved including those related to the monthly movement of the multiplier point are still a matter of technical discussions to be further pursued between the External Auditor and the Secretariat. Printed on recycled paper