Audit of UNICEF (Important Issues)

Audit of UNICEF(Important Issues) Satish Kumar, Deputy Director

About UNICEF • The United Nations Children’s Fund (UNICEF) was established on 11 December 1946 to provide emergency food and healthcare to children in countries that had been devastated by World War II. • Became permanent part of the UN system in 1953. • Provides long-term humanitarian and developmental assistance to children and mothers in developing countries. • Mandatedby the General Assembly to advocate protection of children’s rights, to help to meet the basic needs of children and to expand the opportunities of children to enable them to reach their full potential. • UNICEF relies on contributions from governments and private donors. Governments contribute two-thirds of the organization's resources. Private groups and individuals contribute the rest through National Committees. • UNICEF's Supply Division, Copenhagen serves as the primary point of distribution for programme supplies.

Important documents • International Public Sector Accounting Standards (IPSASs) • Accounts closure instructions • UNICEF Strategic Plan, 2014-2017 • UNICEF integrated budget, 2014-2017 • UNICEF Financial Regulations and Rules • UNICEF Supply Manual • UNICEF Revenue Management Policy • UNICEF Inventory Policy • UNICEF Cash Disbursements Policy • UNICEF Property Plant and Equipment Policy • Donor reporting guidelines

Important issues • UNICEF adopted the IPSAS framework for the preparation of its financial statements in 2012. • Five financial statements have been prepared under the IPSAS framework so far. • Important points noticed in past audits are discussed in subsequent slides.

IPSAS compliance • In accordance with paragraph 94 (b) of IPSAS 17, an entity should disclose the gross carrying amount of any asset that is still in use. • UNICEF capitalized more than 6,142 pre-2012 assets owing to the completion of the transition period, of which 5,893 assets were fully depreciated with zero carrying value. • However, the gross carrying value of the fully depreciated assets was not separately disclosed in the financial statements.

IPSAS compliance • Paragraph 108 under IPSAS 23 encourages the disclosure of the nature and type of in-kind services received during the reporting period. • Paragraph 102 of IPSAS 23 states that for some public-sector entities, the services provided by volunteers are not material in amount but may be material by nature. • No disclosure regarding the nature and type of in-kind services was made in the financial statements of UNICEF for the year 2016. • UNICEF followed various criteria for revenue recognition for different types of voluntary contributions/donors, which lacked consistency and clarity.

Budget Management • The budget is a key tool for effective financial management and control and thus is a vital component of a process that provides oversight of the financial dimensions of an organization’s operations. • UNICEF has multiple budgets like Institutional Budget, Country Programme Budgets, Emergency Appeal Budgets, Integrated Budget, Private Fundraising and Partnerships Budgets, etc. • The budget cycles, the level of aggregation and the sources of funds vary for each type of budget.

Budget Management • UNICEF does not have a composite annual budget, comprising all types of expenditure in order to use it as an important tool for effective financial control. • Although management functions are typically required to be funded from the institutional budget, the costs of the some of the divisions at the headquarters office in New York (viz. O/o the ED, DFAM, DHR, PPD, DoC, ITSS, etc.) were charged to programme funds. • We recommended that UNICEF implement the guideline on identifying the operational costs that should be met from the programme budget and the institutional budget.

Fundraising activities • The UNICEF Private Fundraising and Partnerships Plan 2014-2017 states that in accordance with the global corporate pledge-giving data, considerable untapped potential remains for corporate fundraising, and highlights an integrated approach to corporate engagement. • This potential has not been effectively tapped given that 18 country offices raised less than 25 per cent of the revised targets for corporate fundraising and 16 countries achieved only 25 to 50 per cent of the target. • We recommended that UNICEF formulate an appropriate mechanism to enhance the level of contribution from potential income channels such as corporate donors. The strategy needs to be finalised before the implementation of next Private Fundraising and Partnerships Plan.

National Committees • UNICEF partners with 34 National Committees for advocacy and mobilisation of resources for UNICEF. • Relationship between National Committees (independent non-governmental organisations) and UNICEF are regulated by cooperation agreements. The national committees raise funds from the private sector. • Three national committees (Korea, UK and Belgium) were not in compliance with the Reserves guidance note issued by UNICEF. • 10 national committees had retention level of reserves in excess of the stipulation in their respective reserve policy, Cooperation Agreement or the benchmark of three months operating expenses stated in the reserves guidance.

National Committees • As per the model Cooperation Agreement, the National Committees are recommended to make low risks investments. • However, the US National Committee invested $7.50 million and $2.84 million in US equity and non-US equity, respectively, which was 19.69 percent of their total investment. • The Italian National Committee had investments that included stocks and bonds where the fair value was indicated less than the nominal value. • Projected targets of 16 national committees were reduced by percentages ranging from 1.35 to 57.30 as compared with the original Joint Strategic Plan for 2016.

National Committees • The Committees may retain up to 25 per cent of gross proceeds to cover the costs of their activities. A variance of five per cent of gross proceeds is permitted for expenses applied to child rights advocacy. • 22 National Committees incurred expenses of more than 25 per cent of gross revenue according to the final revenue and expenditure report. • The budgeted retention ranged from 30 to 61 per cent of gross revenue. • We recommended that Private Fundraising and Partnerships Division continue to engage with National Committees to align their reserve policy including the retention of reserves with reserves guidance of UNICEF.

Investment Management • UNICEF has a cash and investment portfolio of $4.59 billion (2015: $4.53 billion). • This constitutes 54.3 per cent (2015: 51.5 per cent) of the total assets. • Out of the total portfolio, UNICEF internally manages a portfolio of $4.31 billion (2015: $4.53 billion). • UNICEF invested in counterparties that did not meet the standards laid down in the financial and administrative policy. • We recommended that UNICEF ensure investments only in those counterparties that meet the approved standards in accordance with the investment policy.

Management of cash transfers • UNICEF adopted a revised Harmonised Approach to Cash Transfer (HACT) framework in February 2014. • The framework essentially makes the monitoring of cash assistance given to implementing partners more efficient by moving to a risk-based approach adopted by all the United Nations agencies that participated in the framework. • HACT includes activities like macro assessments of the public management environment within programme countries, micro assessments of the implementing partners, assurance plans based on risk rating of the implementing partners in micro assessment. • Spot checks, programmatic visits, planning a scheduled audit by an external service provider.

Management of cash transfers • UNICEF has deployed substantial resources on HACT but does not have, readily available, the centralized information of the utilization of these resources. • 35 country offices did not have a macro assessment whereas only 1,730 of 2,042 micro-assessments planned in 2015 were completed. • Nine country offices conducted less than 80 per cent of spot checks. • Five country offices conducted less than 80 per cent of programmatic visits. • We recommended that UNICEF institute a process to comprehensively capture the data and strengthen implementation of the harmonized approach to cash transfers to achieve the targets.

Programme Management • There were delays in the implementation of integrated monitoring and evaluation plans in country offices, which in turn affected the monitoring and evaluation responsibilities of country offices and national partners. • There were also delays in the preparation and approval of annual work plans and annual management plans, affecting the timely implementation of various country programmes. • We recommended that UNICEF ensure to follow the procedure prescribed in the UNICEF Program Policy and Procedure Manual with respect to preparation and implementation of Annual Work Plans and Annual Management Plans in order to enable their timely execution.

Contract Management • Paragraph 5.4 of chapter 6 of the Supply Manual states that valid and acceptable quotes, bids or proposals should preferably be received from at least three reliable suppliers before purchases are undertaken. • Rule 112.32 (a) of the UNICEF Financial Regulations and Rules also states that when invitations to bid or requests for proposals have been issued, the award of a contract shall be made to the lowest evaluated bid. • Any or all bids may be rejected in the interests of UNICEF. Reasons for rejection shall be recorded along with a determination made whether to invite new competitive tenders.

Contract Management • In the clause on bid modifications and withdrawal, the Kenya country office clearly indicated that all changes to a bid must be received prior to the closing time and date. • Five suppliers responded to the invitation to bid invited by Kenya Country Office. The evaluation committee unanimously noted reasons to reject the bids of four suppliers, including the lowest bidder. • Further, it gave the third highest bidder the opportunity to modify the product specifications. There was nothing on record to show that the other rejected bidders had been given the same opportunity. • The bidding process thus turned out to be single-source procurement.

Contract Management Non-availment of exemption on value-Added tax • Under the basic cooperation agreement with the host government, UNICEF is exempted from direct taxes, levies, tolls and duties on supplies, equipment and services furnished by UNICEF under the country programme action plan. • However, the Uganda country office had paid $5.80 million towards value-added tax, of which a claim of $671,193 was outstanding for recovery for the years 2014 to 2016. • Similarly, the China country office has also paid $37,480 on account of value-added tax on the purchases, for which exemption could have been availed. • We recommended that UNICEF Country Offices ensure that the exemption on taxes, levies, tolls or duties are availed of on supplies and equipment as provided under the cooperation agreement with the host country.

Supply Management • The timely arrival of supplies is a critical programme requirement. • Procurement and shipping activities should therefore be closely coordinated to ensure that target arrival dates for shipments are met. • Supply Division, Copenhagen monitors the timely delivery of supplies. • The procurement and delivery undertaken by the Supply Division include both emergency and non-emergency items.

Supply Management Delay in case of non-Emergency items • There were delays ranging from 6 to 604 days in 6,411 cases of deliveries of non-emergency items worth $665.14 million. • Of these, there were 1,443 deliveries worth $117.08 million where the delay was more than 30 days. Delay in case of emergency supplies • Emergency calls require prompt and efficient response from the Supply Division. • However, in 171 deliveries (worth $10.95 million) related to emergency cases, there were delays ranging from 6 to 81 days.

Supply Management Levy of liquidated damages • In accordance with UNICEF departmental procedure 114, the liquidated damages clause shall be included in all tenders, long-term agreements and purchase orders so that the instruction can be contractually utilized in case of non-performance by various vendors. • However, against 6,411 cases of delays in non-emergency supplies and 171 cases of delays in emergency supplies, the liquidated damage was levied or proposed to be levied by the Supply Division in only 42 cases, which works out to less than 1 per cent of the cases. • We recommended that UNICEF review cases of delay and take appropriate action in accordance with the terms and conditions of the contract to improve timely delivery.

Supply Management Cost of Demurrage • In accordance with the provisions of the UNICEF Supply Manual, a free detention time of 45 days is allowed for unstuffing and eventual release of containers to the carrier. • Detention beyond 45 days incurs demurrage charges, which vary based on the destination and carrier. • UNICEF accrued $1.60 million in demurrage charges for containers returned to the consignee and $4.48 million in demurrage charges for containers that were not returned until February 2017. • We recommended that UNICEF identify the reasons for detention of the containers for long periods and provide guidance to the country and regional offices to reduce the container detention time.

Inventory Management Carrying cost of programme supplies • Under IPSAS 12, the cost of inventories comprises all costs (including transport, handling and other costs) incurred in bringing the inventories to their present location and condition. • Financial and Administrative Policy 6 of UNICEF and the accounting policy on inventories also states that the cost of purchase of the Fund’s programme inventory consists of purchase price, import duties and other taxes (non-refundable purchase tax) and transport handling and other direct acquisition costs, that is to say, freight-in-costs (i.e., from the supplier). • Further, IPSAS 12 requires that when inventories are distributed, it is the carrying amount of the inventories that should be recognized as an expense in the period in which the goods are distributed.

Inventory Management • However, the in-bound freight ($85.28 million) incurred during 2015 on purchase of programme supplies was not capitalized at the time of taking them as stores-in-hand. • Instead, an end-of-the-year exercise of apportionment of freight costs at an enterprise-wide level was carried out on an approximation basis for inclusion in the inventory in the Financial Statements. • When the inventory is issued as programme supplies and expensed during the year, the value so expensed does not include in-bound freight costs and the same is added in ‘Other Expenses: Distribution costs’. • This resulted in understatement of ‘transfer of programme supplies’.Freight costs would have been incurred on items currently in stock as inventory and the items expensed when issued to programmes. • We recommended that UNICEF include freight costs in the programme supplies transferred to the implementing partners in order to reflect the value of freight costs in programme supplies transferred to IPs.

Inventory Management Prolonged goods in transit • In the closure instructions, the Division of Financial and Administrative Management (DFAM) requested all offices to document reasons for having items still in transit after 200 days. • Inventories worth $100.33 million ordered through 6,097 supply deliveries were reflected as goods in transit at the year-end 2016, of which items covered by 629 supply deliveries worth $ 5.3 million were delayed beyond the period of 200 days. • Of 629 supply deliveries, 83 supply deliveries worth $0.13 million were emergency items. • 76 supply deliveries worth $73,695 were reflected as goods in transit for more than two years.

Inventory Management Emergency goods in transit • Out of the total goods marked as goods in transit, supply deliveries valuing $16.3 million were emergency items. Of these, $8.6 million (53 per cent) were under the control of freight forwarders. • Against the remaining $7.7 million worth of supplies, the goods had arrived at the port of entry of the destination (signed bill of lading or airway bill), yet the supplies were either under customs clearance or awaiting country office action to either receive them in inventory or input the proof of handover in VISION.

Inventory Management Slow-moving inventory • The UNICEF Supply Manual states that supplies that have been held for more than two years should be reviewed and their retention in stock justified. • The Financial and Administrative Policy on Inventory accounting also states that slow moving, obsolete and expired inventory should be identified annually as part of the impairment assessment. Stocking of supplies in warehouses for long periods should be avoided and supplies with a limited shelf life must be withdrawn from active stock three months before they reach their expiry dates. • However, inventories valued at $2.52 million (4.3 per cent) have been held for over two years (slow moving inventory).

Inventory Management Safety level of stock • Supply Division Procedure outlines the management of emergency orders. The Logistics Centre, in collaboration with the Emergency Coordination Unit and the Procurement Centres, maintains the stock level of items in the emergency supply list, which is reviewed and updated periodically. • The Logistics Centre, in collaboration with the Procurement Centres, also maintains the safety stock of warehouse stock items. The safety stock is reviewed at least once a year and stock levels are adjusted accordingly. • However, the Supply Division did not have a specific minimum and maximum stock level of inventory. The Supply Division specified only the safety/emergency level for inventory. • We recommended that UNICEF review the existing mechanism of stock-keeping and establish minimum and maximum stock levels for emergency and non-emergency items.

Inventory Management Delay in initiating action on PSB recommendations • 18 items carrying a value of $0.69 million referred to and recommended by the Property Survey Board (PSB) were awaiting approval from the Comptroller for periods ranging from 1 to 11 months as of the end of December 2015. • No time frame had been prescribed for consideration and disposal of Property Survey Board recommendations by the Comptroller. • Thus, the absence of timely approval/disposal of Property Survey Board recommendations by the Comptroller was fraught with the risk of eroding the shelf life of the inventory and the possibility of affecting programme implementation, besides incurring additional storage costs when items were held for long periods. • We recommended that UNICEF fix a timeline for Comptroller to approve disposal of impaired supplies and ensure its compliance.

Donor Reporting • Offices are required to ensure timely and quality reports to account for the resources entrusted to the organisation and to help raise future resources. • There was delay in sending reports to donors on utilisation of grants. • The delay ranged up to 162 days for 74 per cent of the reports in West and Central Africa Regional Office and up to 120 days for 68 per cent of the reports in South Asia region. • We recommended that Regional Offices strengthen their internal control mechanism on monitoring of donor reports and ensure that all donor reports are sent on time.

Enterprise Risk Management • UNICEF adopted a risk management policy in May 2009, which constituted part of the UNICEF risk management framework. • The purpose of the UNICEF risk management policy was to embed a systematic and consistent approach for identifying, assessing and managing risks across UNICEF using a common risk language. • In 2013, UNICEF developed 12 risk categories divided into four areas: institutional, programmatic and operational, contextual and other. • In terms of the UNICEF enterprise risk management policy, while risk identification and assessment should be done on a day-to-day basis, each office should conduct a formal risk assessment at least once a year or whenever a major change in the environment occurs.

Enterprise Risk Management • UNICEF did not issue any instructions for annual risk assessment and reporting in 2016. • In 2016, 102 out of 137 applicable country and regional offices reported risks, while 5 divisions of the headquarters business area out of 17 applicable divisions reported risks in 2016. • The risk registers for Afghanistan and Yemen did not report risks under results-based management and reporting, which was rated as a high risk in the enterprise-wide risk profile. • While risk mitigation may require the commitment of resources, a formal embedding of risks in funds allocation is yet to be put in place. • We recommended that in order to meet the challenges posed by intrinsic and extrinsic factors, UNICEF ensure the risk assessment and risk reporting exercise by the applicable offices at least once every year.

Travel Management • UNICEF spent $140 million in 2016 on travel, which was 2.57 per cent of the Fund’s total expenditure. • In accordance with paragraph 1.1 of UNICEF Administrative Instruction CF/AI/2014-001Amend.1 dated 13 August 2015, all official travel must be authorized in writing by the approving authority before being undertaken. • In accordance with paragraph 11.14 of the same instruction, it is the responsibility of each staff member to submit a travel certification in the applicable system within 15 calendar days of the date of resumption of duties at his/her regular duty station, to indicate whether travel was completed as originally authorized or with changes to the itinerary or in respect of other entitlements or miscellaneous expenditures.

Travel Management • However, as at 31 December 2016, a total of 3,410 travel authorizations remained open for more than 15 calendar days. • Of these, 1,483 cases remained open for 16 days to 30 days, 870 cases for more than a month and 1,057 cases for more than two months. • The West and Central Africa region accounted for the maximum number of cases, with 1,181 travel authorizations open for more than 15 days. • The headquarters region accounted for 757 cases of travel authorizations open for more than 15 days, of which 539 cases pertained to the New York headquarters office.

Travel Management • UNICEF policy states that typically, the traveller and the supervisor must aim to book travel at least 21 days before the travel date. However, purchases of tickets 21 days in advance were made with respect to only 74.58 per cent of travel bookings. • UNICEF did not have any mechanism to explore more cost-efficient and greener options before authorizing travel. • We recommended that UNICEF generate and circulate division-wise month-end reports on open travel authorizations to create a monitoring mechanism so as to minimize the delays in trip closure. UNICEF also put in place a system check for exploring alternatives to travel by way of using technology before authorizing travel.

MDGs/SDGs • The Millennium Development Goals (MDGs) and targets were set in the Millennium Declaration, signed by 189 countries, in September 2000. The Declaration set 21 target areas under eight Goals. • Member States pledged that by 2015 the world would achieve measurable improvements in the most critical areas of human development. • UNICEF was responsible for monitoring performance in respect of 14 out of 60 indicators for specific targets. • Given that the Millennium Development Goal period ended in 2015 and the General Assembly adopted the Sustainable Development Goals in the 2030 Agenda for Sustainable Development, it is highly relevant to review the outcome of the Millennium Development Goals.

MDGs/SDGs • UNICEF addressed the issue of supporting the implementation of the Sustainable Development Goals in the midterm review of the UNICEF Strategic Plan 2014-2017, aligning the integrated budget with the new priorities of the Goals. • The Millennium targets were fixed with reference to baseline data for the year 1990. The performance data had to be compared with the base year data to assess the extent of achievement. • However, data for the base year were not available for all countries for some of the performance indicators.

MDGs/SDGs • The target set in the Millennium Declaration could not be achieved in almost all the parameters for which data were available. • The operational timelines for activities to achieve the SDGs by 2030 are to be aligned with the UNICEF Strategic Plans. Thus, the new strategic plan 2018-2021 will be the first leg of the Fund’s long-term effort to support the implementation of the Sustainable Development Goals. • We recommended that UNICEF use the lessons learned from the MDGs for effective implementation of SDGs.

Programme outcome: Education • There were delays in implementation of Integrated Monitoring and Evaluation Plans in country offices affecting the monitoring and evaluation responsibilities of Country Offices and national partners. • There were delays in preparation and approval of Annual Work Plans and Annual Management Plans also, affecting the timely implementation of various country programmes. • There were significant weaknesses in the management of programme outcome – Education such as vacancies and delay in recruitments, non-completion of initiatives for enhancing technical capabilities, lack of budgeting by activities, mismatch between output indicators and focus areas of country programme documents. • We recommended that UNICEF align output indicators with focus areas and activities towards achievement of outputs under the outcome ‘Education’.

Programme outcome: Nutrition • The progress in the implementation of the Infant and Young Child Feeding programme was monitored using incomplete data or without any data for many countries. • Many activities planned for 2016 in accordance with the nutrition annual work plan 2016-17 could not be completed in 2016 and were carried over to 2017. • We recommended that UNICEF continue to collect data from all country offices that are implementing the infant and young child feeding programme and ensure the completeness of the data for all the parameters.

THANK YOU

Audit of UNICEF (Important Issues)