Executive Summary

The UNDP Office of Audit and Investigations (AI) conducted an audit of the United Nations Capital Development Fund (UNCDF) from 1 March to 30 April 2023. The audit aimed to assess the adequacy and effectiveness of the governance, risk management and control processes relating to the following areas and sub-areas:

(a) Governance - Governance framework, financial sustainability:

1. Organization objectives/priorities.
2. UNCDF business model viability.
3. Resources needed to achieve the organization's objectives/priorities, as determined by the organization.
4. Effectiveness of the Internal Control Framework.
5. Organizational structure and reporting lines.
6. Financial sustainability.
7. Working environment and working relations.

(b) Capital deployment management - Grants, loans and guarantees

1. Grant management:
   1. Grant making process, including the sourcing, solicitation, offer evaluations, grantee selection.
   2. Grant disbursement, including the compliance with disbursement conditions.
2. Concessional loans and guarantees management.

(c) Development activities:

1. The alignment of the project portfolio with the 2022-2025 Strategic Framework and the reporting modalities on the results.
2. Usage of the different capital and development triggers.
3. Project design, management, monitoring, and closure.
4. Project risk management.

(d) Operations - Procurement, finance, human resources, administrative services, information communication and technology (ICT).

The audit covered the activities of UNCDF from 1 January 2021 to 31 December 2022. UNCDF recorded programme and management expenses of approximately $226 million. The last audit of UNCDF was conducted by AI in 2020 and concluded that systems of governance, risk management and control were 'satisfactory/some improvement needed'.

This audit was conducted in conformance with the International Standards for the Professional Practice of Internal Auditing of The Institute of Internal Auditors.

Overall audit rating

OAl's opinion is that the systems of governance, risk management and control within UNCDF are partially satisfactory/major improvement needed in some areas. In OAI's view, issues identified by the audit could significantly affect the achievement of the objectives of UNCDF.'

In OAl's view, the control environment within UNCDF was less effective than when the prior audit was carried out in 2020. In the intervening period, UNCDF has grown its programme portfolio. This has likely stretched management controls and contributed to pressure points throughout the organization. The audit team found examples of reduced or absent oversight and supervision across a number of first and second line teams, including grant management, procurement and human resources. Some of these reductions in control were taken consciously with revisions to UNCDF's Operating Manual, most recently in November

2020. While AI recognizes that UNCDF is a distinct organization with a unique mandate and offer, there is a risk that changes to the operating model which is not aligned with UNDP's Programme and Operations Policies and Procedures (POPP)may compound over time and cause UNCDF's and UNDP's risk appetites to become misaligned. OAI recommends that UNCDF apply the UNDP POPP standards, unless there is strategic advantage to flex rules within a risk tolerance agreed with UNDP.

Alongside these issues. OAI found that UNCDF lacked an effective strategic workforce plan to consistently align resources to risk and deliverables, and to ensure it had the right people in the right places to deliver UNCD's objectives. Key human resources issues to address include the following: ensuring resources are optimally geographically located to preserve UNCDF's "last mile" commitments; filling vacancies; and delivering on gender commitments. AI recommends that UNCDF managers complete a strategic workforce review to analyse UNCDF's resourcing and skills requirements needed to deliver its Strategic Framework 2022-2025.