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Annual Report of the Inspector General

January 1 to December 31, 2002

TABLE OF CONTENTS

Annex 1 - List of Audits Performed during 2002
Annex 2 - Audits by Technical Areas - 2002
Annex 3 - 2003 Audit Work Plan

I. INTRODUCTION

Pursuant to Article 118 of the General Standards to Govern the Operations of the General Secretariat, I hereby submit for consideration of the Permanent Council the Annual Report on audits, completed by the Office of the Inspector General (OIG) during the calendar year ended December 31, 2002. The report makes reference to the recommendations of the Board of External Auditors and the adequacy of resources, including the level of staffing allocated to the Office of the Inspector General.

II. GENERAL INFORMATION

 A. Mandate

In accordance with Article 116 of the General Standards, the Secretary General has established appropriate internal auditing procedures to verify compliance with standards and regulations in force, especially through systematic and selective examination of official transactions and operational procedures related to the resources administered by the General Secretariat. The Office of the Inspector General has been established as the dependency responsible for applying internal auditing procedures and performing the related functions. Executive Order 95-05 issued by the Secretary General on May 8, 1995 established the Office of the Inspector General and provided the declaration of responsibility, purpose and authority with respect to internal audits and the composition of the OIG.

The internal audit function provides an ongoing program for appraising performance, maintaining financial integrity and measuring compliance with operational regulations, policies and procedures, safeguarding of assets, economy and efficiency in the use of resources, as well as effectiveness of program and project management for achieving desired objectives. Internal audit assists in detecting and correcting conditions that pose unnecessary risks, identifies opportunities for improvement and helps the Organization achieve objectives, while keeping risks within tolerable limits. Specifically, the Office of the Inspector General is responsible for ensuring systematic review of internal management and accounting controls, and when necessary, inspections and investigations of all GS/OAS offices, departments, programs, divisions, units, activities and projects, both at Headquarters and in all Member States. Auditing activities are undertaken to determine whether the functions of planning, organization, management, documentation, accounting, custody and control of resources are carried out efficiently, effectively and economically and in accordance with: a) instructions, policies, standards, regulations, manuals, procedures and other administrative provisions and b) the Organization's overall aims and the highest standards of administrative practice.

The OIG reports on the adequacy and effectiveness of the system of internal controls within the General Secretariat including the integrity of financial information, compliance with directives for administering all OAS programs, the effectiveness of program and project management according to the terms of signed agreements, efficiency and effectiveness of the OASES computerized system security and application controls, and safeguarding of assets. OIG reports provide recommendations for promoting economy, efficiency and effectiveness in General Secretariat operations and to assist all levels of management in the prevention or detection of fraud and abuse. The OIG evaluates elements of internal controls against identified risks within the General Secretariat including organizational structure, standards of business and the risk thereof in programs or operations. The OIG also provides consulting services to various units and departments of the General Secretariat at their request or as an observer at GS/OAS meetings regarding operational processes, emerging issues, proposed organizational restructuring, and planned changes to business processes.

In accordance with the General Standards, audits are conducted with special emphasis on the proposals of the Board of External Auditors, particularly regarding the need to concentrate on high risk areas and/or those with the greatest potential for increasing efficiency, economy and effectiveness. OIG enjoys full technical autonomy and the broadest possible managerial autonomy.

B. Quality of Work

The OIG ensures the quality in its work by performing its duties in accordance with the provisions of its mandate, the rules and directives of the General Secretariat and the Standards for the Professional Practice of Internal Auditing approved by the Institute of Internal Auditors. Internal Auditing Standards govern the independence, proficiency, objectivity and diligence of the OIG, the scope and performance of the internal auditing work and the professional care to be applied in carrying out auditing services.

C. Reports and Implementation of Recommendations

In accordance with Executive Order 95-05, the Inspector General submits a timely report of audit findings and recommendations to the Secretary General. OIG recommendations are directed at contributing to better management, more accountability and improved transparency and are rated as High, Medium and Low risk. High-risk recommendations are considered to have the most far-reaching consequences for the organization's performance as their implementation would result in better productivity, workflow and programme effectiveness. Findings and recommendations from approved audit reports are transmitted to senior management by the Secretary General. Executive Order 95-05 provides that within 30 days following the receipt of the report transmitted by the Secretary General, managers are expected to ensure that appropriate corrective action is taken or planned with regard to the recommendations made or the deficiencies reported by the Inspector General. The Inspector General is responsible for reporting to the Board of External Auditors on the issuance of all reports submitted to the Secretary General.

The implementation rate for approved recommendations is a meaningful factor in the determination of the success of the auditing services provided by the OIG. The monitoring of the actions taken in implementing recommendations is critical in determining the impact of the OIG on the General Secretariat and in measuring improvements. In order to determine the action taken on deficiencies reported in audit reports, the Office of the Inspector General has successfully established a system for tracking actions taken by the General Secretariat on implementing recommendations. Reports generated by this tracking system are provided to the Board of External Auditors during their annual review and also provide important information in planning future OIG work programs.

III. SUMMARY OF AUDITS CONDUCTED

The OIG dedicates its efforts towards assisting the Member States and the General Secretariat in achieving responsible administration of resources, as well as creating an atmosphere of accountability, transparency and improved performance in the execution of OAS programs. During the period January 1 to December 31, 2002, the OIG carried out twelve audits that focused on operational and compliance audit activities. Five audits were carried out in dependencies located at Headquarters and the other seven audits were performed in GS/OAS offices located in the Member States. All reports submitted by the Inspector General were promptly approved by the Secretary General.

The audits completed in 2002 included examination of the operational processes related to the Oracle Financial™ System and the Oracle 11i implementation administered by the Secretariat for Management, internal controls in the Inter-American Agency for Cooperation and Development (IACD), Leo Rowe Memorial Benefit Fund and the Technical Secretariat of the Leo Rowe Pan American Fund. In addition to the audits of the operational activities of GS/OAS offices located in seven Member States, OIG examined transactions related to twenty-three projects executed in those field offices during 2002.

The impact of the OIG on the General Secretariat is significant as recommendations are directed at raising fiscal awareness among staff members, compliance with OAS directives, recovery of amounts owed to the Organization and a heightened awareness of the need for maintaining effective internal controls. The results of the audit activities carried out by the OIG provided seventy-two recommendations for the continuous improvement of programme performance, responsible administration of resources and management accountability. The seventy-two recommendations were categorized as forty-seven High-Risk, seventeen Medium-Risk and eight Low-Risk. Sixty-one recommendations identified a need for improved operational efficiency and effectiveness including compliance with OAS directives, six recommended a need for written procedures, two requested physical inspections of inventory for proper recording of OAS assets in the GS/OAS offices in the Member States and three identified the need for reimbursements and/or recovery of funds due to the General Secretariat, including refunds to the FEMCIDI account for unspent project funds. Project evaluations examined expenditures, progress reports and the efficiency and effectiveness of project management to determine whether objectives were achieved in a cost effective manner. A number of audits identified the absence of a uniform and timely system for effective project management in the form of monitoring, implementation and evaluating the results.

More notable achievements that have resulted from the combined efforts of the OIG and the General Secretariat are: · Reportable conditions and material weaknesses noted for the IACD in prior years' reports were resolved. · Agreements were signed between the IACD and the Secretariat for Management (SM) regarding the financial, accounting and payroll functions to be performed on behalf of the IACD. · Successful integration of IACD to OASES. · Ongoing SM efforts for improvement in the OASES operational processes and procedures to better serve the Technical Units in their requirement for reliable and timely financial reports · Systematic and ongoing training in the OASES computerized system, as well as published procedures for users. · Reimbursement of unused project funds to the OAS. · Systematic for updating Headquarters' inventory records regarding the physical assets located in the offices of the Member States. · Distribution of the approved Budgetary and Financial Rules for operational transactions at Headquarters. · Distribution of draft Budgetary and Financial Rules for operational transactions in the GS/OAS Offices in the Member States. · Improved relationship within the General Secretariat resulting in a consistent and positive impact on the organization's overall efficiency and effectiveness.

1. Type of Audit

Annex 1 and Annex 2 provide a list of completed audits according to technical areas. The lists show that ten operational and two compliance audits were performed, including operational activities of seven GS/OAS Offices in Member States. Operational audits review not only records and supporting documentation but also recommend actions, which lead to more efficient operations, improvements in management and accounting controls, reduction in costs and prevention of losses. Compliance audits review both financial and operating controls and transactions to determine whether the General Secretariat complies with OAS mandates, resolutions, established rules, standards, procedures and regulations, as well as agreements between the General Secretariat and other parties e.g. donor agencies. Compliance audits generally include examination for financial integrity and security of assets. Audits of the GS/OAS Offices in the Member States were undertaken to review the operational processes of GS/OAS Offices in the Member States. Those audits also included evaluation of projects executed in the respective Member States to determine compliance with the terms of project agreements and whether project objectives were achieved in a cost effective manner.

The 2002 audit work program also concentrated on many of the financial and management issues identified in the 2001 audit report of the Board of External Auditors, including a follow up audit on prior years reports related to IACD internal control environment.

2. Audit Coverage

The 2002 audits were directed towards operations with the highest degree of risk and those with the greatest potential for increasing efficiency, economy and effectiveness within the General Secretariat. In addition to identifying areas of significant or high risk, the Inspector General is responsible for conducting systematic and selective audits of all operations in accordance with a long-term cyclical plan that ensures complete auditing within an appropriate time period. OIG audit activities in 2002 focused on areas of high-risk and audit efforts concentrated on maintaining significant audit coverage throughout the General Secretariat within available resources. The OIG's planning methodology ensures that high-risk areas receive primary focus and consequently this approach allows the Inspector General to better prioritize the use of limited resources. The 2002 rate of audit coverage of operations was approximately 42% at Headquarters and 58% in the GS/OAS offices in the Member States.

3. GS/OAS Comments to OIG Reports

The Member States, the Secretary General and the Board of External Auditors rely on the OIG as an ongoing safeguard for maintaining effective internal control.

The success and usefulness of the audit function depends on the value and importance senior management places on that function and the way it is integrated into GS/OAS operational activities. Effective audit trails control the quality of the transactions, demonstrate managers' accountability for the tasks assigned and are essential to the OIG in determining the timeliness of the audit. Specifically the success of the internal audit function depends on managers' acceptance of their responsibility for established controls as well as for the findings and implementation of recommendations issued from audit reports.

In order to ensure the effectiveness of the OIG function, at the completion of the audit work final audit findings and recommendations are first discussed with the senior program managers at a final exit interview. Audit findings and recommendations are communicated to senior management in the form of a draft report transmitted for comments. In several cases weaknesses were corrected prior to finalizing the audit and auditees' comments and observations were taken into account in finalizing the audit report that was sent to the Secretary General for approval. This mechanism provides a transparent audit process that is designed to allow for auditees' comments before the audit report is finalized, as well as a deeper appreciation of the value of the audit. OIG has observed that this allows for greater transparency and acceptance of audit findings, prompt implementation of recommendations and improves OIG relationships with management.

Upon approval by the Secretary General, reports are forwarded to the GS/OAS Directors and/or Managers of the departments, offices or programs audited, with a request to implement the approved recommendations. Executive Order 95-05 requires auditees to submit formal responses within thirty days after being notified of the approved report by the Secretary General.

4. Audit follow-up

The successful implementation rate of recommendations issued by the OIG is a positive factor in determining that OIG services have had a consistent and positive impact on the Organization's overall efficiency and effectiveness. A system to track actions on recommendations has been established in the Office of the Inspector General and the Board of External Auditors relies extensively on the reports generated by that system in its annual review of the effectiveness and implementation of audit recommendations. The Board of External Auditors has stated that it was highly impressed with that initiative.

Ninety-nine per cent of the 102 recommendations issued in 2001 were implemented. The two recommendations for 2001 that are still in process relate to the establishment of an effective automated Fellowships Tracking system as mandated by Resolution AG/RES. 1381 (XXVI-O/96) and the closing of prior years' General Assembly financial accounts. As of April 2003, fifty-three of the approved 2002 recommendations (74%) were fully implemented. As of the date of writing this report nineteen recommendations relating to the year 2002 were still in various stages of implementation of which eleven were considered high risk and identified the need for better internal controls, transparency and effectiveness

The Inspector General is pleased with the successful rate of implementation demonstrated by the GS/OAS and the timeliness in reporting on actions taken for compliance with recommendations. In carrying out follow up action, every effort is made by the OIG to take into consideration the austerity measures which are in place within the General Secretariat and to work with the various areas towards implementing recommendations in an appropriate, effective and timely manner within available resources. The Inspector General requests and receives legal advice and assistance from the Department for Legal Services, as appropriate, with regard to various issues arising in the course of its auditing and investigation activities. The OIG greatly appreciates the continuing efforts and cooperation of the General Secretariat towards overall efficiency and effectiveness in the Organization.

OIG efforts have contributed significantly towards the achievement of clean audit reports for all dependencies of the General Secretariat for the 2002 accounts. The Inspector General continues to maintain a professional and effective working partnership with managers of the various areas of the GS/OAS to ensure the satisfactory and timely implementation of recommendations, improve internal controls and correct those weaknesses that inhibit organizational efficiency and effectiveness so that common goals may be achieved within the Organization.

IV. ACTIVITY REPORTS

Reports of all audit activities for the calendar year ended December 31, 2002 have been submitted to the Permanent Council in accordance with Article 118 of the General Standards and Executive Order No. 5 of May 8, 1995.

V. PROCEDURAL MANUALS AND OASES TRAINING

The OASES system is an integrated system developed to satisfy the financial, recording and reporting needs of all its GS/OAS users not just those of the Secretariat for Management. The implementation of the OASES computerized enterprise system has greatly changed major operational processes, particularly those relating to recording financial transactions, performance contracts, accounting for projects and financial reporting.

The success of the OASES system depends largely on its ability to satisfy the needs of the technical areas and donors for a user-friendly system as well as the production of timely and meaningful reports. The Inspector General acknowledges the Organization-wide training in OASES that was offered during 2002 as the Secretariat for Management continued its efforts to address the challenges faced by OAS managers in using the system. The Secretariat for Management is to be commended for the published OASES procedural instructions, as well as updated Budgetary and Financial Rules for Headquarters. The draft Budgetary and Financial Rules for the OAS Offices in the Member States is currently under review for finalization and approval and is expected to be distributed in 2003.

Both the OIG and the Board of External Auditors have received complaints from users that reports generated by OASES are not timely and present unreliable information. The Inspector General is concerned that to compensate for these weaknesses, and in spite of the fact that the system has been operational from 1999, some users are still challenged by the system and have started work-around efforts that waste operational resources. In order to improve user reliance and confidence in the OASES system and to maximize the cost effectiveness and gains that can be realized from such a robust system, it is incumbent on the Assistant Secretary for Management to diligently pursue system developments and enhance efforts to enable users to generate and obtain meaningful and timely reports from the OASES system. It is the opinion of the Inspector General that the maximum benefits to be gained from the significant investment in OASES and optimum levels of user confidence will not be achieved unless the issues regarding reporting requirements that have been raised by the technical units are resolved to the satisfaction of both the users and the Secretariat for Management.

VI. OIG PARTICIPATION AT MEETINGS

 During 2002, the Inspector General and staff members of the OIG participated as observers in some meetings of the Permanent Council and its sub-committees and the working groups of the General Secretariat, including the OASES Implementation Groups, the Contract Awards Committee, the Committee for Disposal of Surplus and/or Obsolete Assets (COVENT) and the GSB Renovation Committee. The Inspector General met with various department directors to discuss internal control weaknesses found in audits conducted, the implementation of recommendations to correct those inefficiencies, as well as other operational issues which were brought to the attention of the Office of the Inspector General. This internal auditing practice of consultations provides for a proactive rather than reactive and preventive not just detective approach to internal audits. The Inspector General has noted that this practice has a deterrent effect and effectively contributes to the OIG's function as an agent of positive transformation within the changing environment of operational activities and processes of the General Secretariat.

VII. WORK PLAN FOR THE YEAR 2003 

Executive Order 95-05 requires that audit activities are directed towards operations with the highest degree of risk and/or those with the greatest potential for increasing efficiency, economy and effectiveness. OIG is also required to perform systematic and selective audits of all operations in accordance with a long-term cyclical plan that ensures complete auditing of the General Secretariat within an appropriate time period. In the 2002 report the Board of External Auditors recognized the continuing achievements of the OIG despite lower resources and recommended continued audit follow up processes. The Inspector General notes that arrangements are being finalized by the Secretariat for Management to complete the OASES link of the financial activities of the GS/OAS offices in the Member States using the computerized system to process payments. This undertaking will not only centralize the financial processes of the GS/OAS but will also contribute to uniformity in its operational processes. The OIG plans to systematically review those offices when the link process has been completed in order to provide sufficient audit coverage. The review of those offices in the Member States will examine the level of risk associated with those offices and address the Board's recommendation in that respect. The 2003 work plan is designed to continue the OIG focus on examination of activities with the highest degree of risk and those, which promote economy, efficiency and effectiveness in GS/OAS operations as well as OAS programs and projects. The Board of External Auditors supports and agrees with this OIG approach to the planned audit activities.

VIII. STAFFING 

The resources available for the operational activities of the Office of the Inspector General are provided in the Program Budget of the Regular Fund. OIG staff currently consists of the Inspector General and three auditor positions as well as an Administrative Assistant. The post of Deputy Inspector General is currently vacant.

The Inspector General makes optimum use of available resources to accomplish results that add value to the service provided to the GS/OAS and the Member States. The OIG is subject to the austerity measures that are currently in force in the General Secretariat and for a number of years both the Board and the Inspector General have expressed concern with OIG staffing resources. The lack of adequate resources continues to present difficulties to the OIG in fulfilling its mandate for maintaining significant audit coverage throughout the General Secretariat, including the GS/OAS Offices in the Member States, as well as review of projects administered by the GS/OAS. A request for an additional auditor position was included in the draft 2004 Program Budget.

In the 2002 report the Board stated that given the importance of the work performed by the OIG to ensure a sound internal control system and the importance of obtaining timely audit results, the OIG request for resources should be given favorable consideration and priority. The Board further added that because of the actual and projected increase in specific funds and projects at OAS, a specific provision is made in project agreements to ensure that the OIG receives the necessary funds to perform the required audits.

OIG staff members attended professional conferences and seminars within available resources in order to keep abreast of new developments and maintain continuing professional education. In the 2002 report the Board reaffirmed its 2000 and 2001 recommendations that sufficient funding to maintain the required 40 annual hours of continuing professional education credits be included in the OIG budget. The lack of adequate resources limits the ability of the OIG staff to address the Board's recommendations for maintaining the minimum annual amount of continuing professional education credits for the staff members of the OIG.

IX. INDEPENDENCE

The Inspector General reports directly to the Secretary General and is governed by the Articles of the General Standards for the operations of the General Secretariat, Executive Order No. 95-05 and Budgetary and Financial Rules and Procedures, as well as other OAS directives. The internal audit function is a management control that operates by measuring and evaluating the effectiveness of other management controls. In order to ensure objective analysis of facts and impartiality of judgment, the OIG does not take part in operating procedures or perform any day-to-day functions except with regard to their review and evaluation. The Inspector General and OIG staff enjoy full, free and unrestricted access to all functions, activities, operations, records, properties and staff of the General Secretariat, as may be considered necessary for planning and performing any audit action considered necessary for fulfilling its mandate. The Inspector General has complete independence in planning audit programs and in all audit activities. The operational independence of the OIG requires that audits be conducted in a professional manner. Despite its operational independence the OIG operates as an essential component of the General Secretariat and provides objective and useful information to the Member States, as well as the Secretary General, regarding the achievement of goals and objectives according to mandates assigned by the General Assembly.

X. RECOMMENDATIONS OF THE BOARD OF EXTERNAL AUDITORS 

The IACD Statutes provide that the Executive Secretariat for Integral Development is responsible for managing and authorizing the obligation and disbursement of resources from FEMCIDI, the specific funds and other resources entrusted to the IACD, in accordance with applicable regulations and agreements. In the reports for the fiscal years 2000 and 2001 the OIG and the Board of External Auditors noted that internal controls in the IACD were less than satisfactory. In the 2001 report the Board of External Auditors stated that use of different management systems and business processes complicates the already complex OAS financial and administrative management and dilutes the significant investment made in OASES. The Board also stated that use of different financial systems increases the external audit costs and severely taxes the resources of the OIG. The IACD Director General and the Assistant Secretary for Management have now signed agreements to perform financial, accounting, payroll and other mutually agreeable services to IACD on a fee for service basis. These signed agreements are major accomplishments in the successful integration of the IACD to OASES and will contribute towards improved internal controls in the IACD, as well as uniformity in the operational processes of financial transactions performed by agencies of the Organization. The Board of External Auditors noted in its 2002 report that the unification of OAS financial and administrative management under OASES has strengthened the system of internal controls of all its operating units and was a determining factor in obtaining a clean audit opinion in 2002 at reasonable audit costs. The Board of External Auditors commented in its 2002 report on the audit coverage, staffing, independence and follow-up of recommendations issued by the Office of the Inspector General. The Board also stated that the status and role of the OIG are important since the internal audit function works as an essential continuing safeguard assessing and maintaining the internal control environment within the OAS. The Inspector General continues to make every effort to address the concerns expressed by the Board and to review the areas of concern to the extent of available resources.

June 16, 2003
Linda P. Fealing
Inspector General 

ANNEX 1

ANNEX 2  

ANNEX 3

Conditions and disclaimer