Audit of Non-Expendable Property Management

Transcription

1 Internal Oversight Service Audit Section IOS/AUD/2018/01 Original: English Audit of Non-Expendable Property Management January 2018 Auditors: Hir Purkait Christian Muco

2 EXECUTIVE SUMMARY Key Audit Results IOS conducted an audit of the management of non-expendable property and the works of arts to provide reasonable assurance that these are managed in an efficient and effective manner. IOS concluded that controls need to be improved to ensure correct recording of inventory, its proper management, including periodical physical verification, and effective disposal. IOS noted discrepancies between barcode number and the corresponding asset number as recorded in the asset register, which makes the asset identification difficult. While, this has been corrected for some IT equipment purchased since November 2016, the discrepancy persists for other items. Further, the custodian system as required under the policy is not functional and needs to be established for ensuring accountability and safe custody of assets. In addition, weak inventory recording practices coupled with dysfunctional physical inventory verification process leads to inaccurate asset register and poses risk of inventory loss. In a sample testing, IOS found a number of new asset acquisitions that were either not recorded or incorrectly recorded. There is a need to strengthen the inventory recording practices and physical verification process at HQ. UNESCO maintains a collection of approximately 800 works of art. Only a part of the collection has been valued with estimate of the collected value ranging from 90.5M to 124.3M Euros. There is a need to put in place a risk mitigation strategy as the collection is not insured for theft or irreparable damage, while at UNESCO premises. In addition, discrepancies noted in the last physical verification need to be reconciled. Finally, there has been a significant delay in the finalization of the gift policy. Lack of guidance regarding acceptance and management of gifts potentially weakens the ethical environment of the organization. UNESCO is in the process of finalizing a wider conflict of interest policy, which would also provide guidance on how gifts should be handled, reported, registered, and disposed of. Background 1. Non-expendable property management is a process that seeks to track property, for which an organization is responsible for purposes of financial accounting, preventive maintenance, and theft deterrence. Generally, the process entails assets (i) acquisition, (ii) registration, (iii) maintenance / insurance, (iv) depreciation, (v) inventory, (vi) reporting, and (vii) disposal. 2. At UNESCO, such property includes assets such as land and buildings, motor vehicles, various types of machinery, information technology equipment, office furniture and equipment, heritage assets, works of art, etc. These assets are maintained and tracked in the SAP Asset Management Module (AMM). 3. The detailed administrative guidance regarding management of property and its disposal is provided in chapter 10 of the administrative manual under which UNESCO property is classified as follows: Non-expendable property including: Fixed assets (Serviceable life > 1 year, value > US$ 1,000) Small attractive assets (Value between US$ 300-1,000) Works of art 2

3 Expendable property moveable items with a value of less than USD 1,000 per unit (e.g. office furniture, office consumables). As per item 10.1 of the administrative manual, these are not recorded in the AMM. 4. Following the recommendation of the High-Level Committee on Management in 2005, UNESCO and other UN system organizations started working towards implementation of International Public Sector Accounting Standards (IPSAS) with a target of producing a first set of IPSAS compliant financial statements for the year ended 31 December The adoption and implementation of IPSAS 17 in particular had a major impact on UNESCO, because the standard requires assets to be capitalized rather than expensed. The standard requires that Property Plant & Equipment PP&E is recognized and reliably measured. 6. As of 31 December 2016, UNESCO had PP&E with a net value of US$ 549.9M. This amount includes $541.9M of land and buildings that are out of scope of this audit. The categories of fixed assets, excluding works of arts, lands and buildings, is shown in figure 1 below. Figure 1: Categories of Fixed Assets Vehicles $ % Comms & IT Equipm t $ % Furniture & Fixtures $ % Other Equipm t $ % 7. Additionally, UNESCO holds fully depreciated PP&E but still in use worth US$ 47M as well as works of art whose value is not recognized in the financial statements. The last valuation exercise of these works of art, done in 2008 by Sotheby, estimated their value to be between 90.5M to 124.3M Euros. Audit objective, scope and methodology 8. The purpose of the audit was to provide reasonable assurance that UNESCO s nonexpendable properties are managed in an efficient and effective manner. The audit objectives were to assess whether: a. The policies and administrative guidance on property management are adequate, b. non-expendable properties register i.e. Asset Management Module is complete and reliable, c. periodical physical inventory is conducted in an effective manner, d. assets are disposed of in line with UNESCO administrative and financial rules. 9. The audit was performed in accordance with the International Standards for the Professional Practice of Internal Auditing, following the IOS audit manual and field audit guidelines. 10. The scope of the audit covered the management of fixed assets, small & attractive items and works of art at headquarters for the period of with the exception of lands and buildings. In addition, inventory management practices for a sample of six field offices were 3

4 reviewed. The methodology included walkthroughs of the asset management process focusing on asset registration, maintenance, inventory, reporting, and disposal. Interviews, document review, data analysis, sample testing and internal control tests supplemented the walkthroughs. 11. As part of the audit, IOS performed the following tests in order to achieve the audit objectives: a. Review of administrative manual items 10.1 and 12.9 (Property and Works of art) with a benchmark to IPSAS 17 and other UN agencies administrative guidance, b. Review of a sample of purchase orders at headquarters and selected field offices with an aim of assessing whether all asset purchases were recorded in the Asset Management Module, c. Analysis of completeness of works of art records in the Asset Management Module, d. Assessment of progress made to reconcile inconsistencies identified during the recent physical inventory exercise, e. Analysis of fixed asset lifecycle to identify controls for ensuring timely updates of all assets information, f. Review of property management roles and responsibilities, g. Review of physical inventory practices and records, h. Review of disposals practices and records. Achievements and good practices In June 2016, a physical verification conducted by an external firm (Cabinet Roux) at the UNESCO HQ provided some assurance on the state of non-expendable assets. Key issues and unmitigated risks Inconsistencies in asset identification numbers along with lack of a custodian system leads to difficulties in tracking and safeguarding of assets. While some progress has been made in harmonizing asset identification number (notably for IT equipment bought under the long-term contract since November 2016), this needs to be applied for all assets. Further, the custodian system as required under the policy is not functional and needs to be established for ensuring accountability and safe custody of assets. There is a need for reconciliation between physical inventory and the asset register. In this regard the work done by Cabinet Roux could be leveraged to update the asset register and therefore improve its reliability. The report identified a number of asset items missing and conversely another set of items physically in custody but not recorded in the register. Weak inventory recording practices coupled with dysfunctional physical inventory verification process leads to inaccurate asset register and poses risk of inventory loss. In a sample testing, IOS found a number of new asset acquisitions that were either not recorded or incorrectly recorded. Further, there is need to strengthen the inventory recording practices and physical verification process at HQ. Unmitigated risks related to the collection of works of art. UNESCO maintains a collection of approximately 800 works of art. Only a part of the collection has been valued with estimate of the collected value ranging from 90.5M to 124.3M Euros. There is a need to put in place a risk mitigation strategy as the collection is currently not insured for theft or irreparable damage. Further, discrepancies noted in the last physical verification needs to be reconciled. There is a need to review the accounting policy to allow for aggregation of similar items for determining the threshold amount for capitalization. Failure to aggregate small items of equipment leads to a number of similar items not captured in the asset register. There is a large backlog of items for disposal. Further, a number of items that were disposed of were not written off due to non-identification of assets in the asset register. 4

5 There has been a significant delay in the finalization of the gift policy, which creates a confusion about the acceptance and management of gifts, thereby potentially weakening the ethical environment of the organization. UNESCO is in the process of finalizing a gift policy, which should provide guidance on how gifts should be handled, reported, registered, maintained, and disposed of. 12. The recommendations below, if well implemented, could lead to improved management of UNESCO s property and a more reliable source financial information for decision-making and financial reporting. TABLE OF RECOMMENDATIONS We recommend that BFM revisit the relevant accounting policy on fixed assets to allow for capitalization of groups of assets that meet the capitalization criteria. (Medium Priority) We recommend that the Ethics Office, in consultation with HRM and other stakeholders finalize a gift policy including guidance on how gifts should be accepted, handled, reported, registered, and disposed of. (Medium Priority) We recommend that MSS explore cost effective ways to mitigate the risk of theft or irrecoverable damage to the items of works of art. (High Priority) We recommend that MSS a) undertake a time bound search for the 43 missing works of art and update information on their location, or status, in the Asset Management Module; and b) in consultation with LA decide on future course of action with regard to the four stolen items. (Medium Priority) We recommend that BFM remind AOs of the weak practices, noted by IOS, in recording asset items and, if necessary, produce online guidance or training material for the AOs to avoid such errors in future. (Medium Priority) We recommend that MSS works with relevant AOs to undertake a time bound exercise to a) harmonize the barcode numbers with the asset numbers as recorded in the asset register for all asset items, and b) update the asset register to include details of custodians of the assets. (High Priority) We recommend that MSS a) should conduct periodic physical inventory verification of fixed assets and reconcile them with the asset register, and b) continue to make efforts to locate the missing items as reported by Cabinet Roux, in order to reconcile and update the asset register. (High Priority) We recommend that MSS working with BFM and KMI undertake a time bound exercise to identify, dispose and write off asset items that are no longer in use. (Medium Priority) We recommend that MSS assign the asset management responsibilities to staff who do not have other conflicting duties and modify the access privileges of the purchaser in iris. (Medium Priority) 5