Lessons Learnt from the Australian Defence Materiel Organisation

1
Lessons Learnt from the Australian Defence
Materiel Organisation

• Chief Finance Officer (Comptroller)
• Steve Wearn

2
Who Are We?

• The DMOs role is to
• To equip and sustain the Australian Defence
  Force.
• The Australian Defence Force (ADF) relies on us
  to provide its equipment on time, on budget and
  to the required levels of quality and safety
• DMO is involved in many of the largest and most
  demanding projects in Australia.
• About 46 per cent of total Australian 2009-10
  Defence budget
• 1 per cent of Australian GDP
• Capital Acquisition program of 6.3 billion in
  2009-10
• More than 5.4 billion on sustainment
  (through-life support)
• Over 210 current major projects
• Over 150 minor projects
• Over 8,000 employees
• Over 40 locations throughout Australia and
  overseas

3
Timeline

• 2000-01 Australian Government introduces Accrual
  Reporting for each Agency.
• 2003-04 Australian Government introduces Accrual
  Budgeting for each Agency.
• 2004-05 Defence self qualifies its own accounts
  and receives significant Audit qualification
  on its Accounts.
• 2004-05 Defence embarks on Remediation Plan.
• 2005-06 DMO separates from Defence as a
  Prescribed Agency.
• 2005-06 Defence Accounts qualified, DMOs
  Accounts unqualified.
• 2006-07 Defence Accounts qualified, DMOs
  Accounts unqualified.
• 2007-08 Defence and DMO Accounts unqualified

4
Adoption of Accrual Budgeting and Reporting

• Australia is one of only a few countries that
  have adopted full accrual budgeting and
  reporting.
• Introduced reporting in 2000-01and budgeting in
  2003-04
• A real challenge for Defence/DMO
• Some of challenges
• Not fully funded for depreciation
• Many of our records where still paper based or
  lost over time
• What value do we place on assets and inventory?
• Areas still thought they were managing cash
• Very costly to implement
• Move to Australian Equivalent to International
  Financial Reporting Standards

5
So what did Defence/DMO do?

• Although unqualified in the first few years it
  wasnt until Defence really started to examine
  the details that it was apparent that it did not
  meet accounting standards and as such was at risk
  of being qualified by the ANAO (the Australian
  GAO equivalent), so it self qualified.
• Embarked on a Project to draw together all
  components necessary for a best practice accrual
  financial management environment.
• The cornerstone of the project was a number of
  targeted remediation strategies. 31 in total.

6
Financial Controls Framework

• Develop and embed a comprehensive Defence
  Financial Controls Framework that includes
• Establishing the elements of the financial
  controls framework
• Assigning responsibility to Group Heads to
  implement the financial controls framework
• Implementing standardised processes and
  practices and
• Establishing business skilling and competency
  assessment.

7
Improving the Australian National Audit Office
Annual Audit Process

• Establish an accountable officer to manage audit
  activities between Defence and the Australian
  National Audit Office. Key tasks include
• Negotiating an engagement plan
• Agreeing to a consistent approach for
  terminology, quality and format of responses and
• Establishing comprehensive procedures for quality
  assurance and clearing audit findings.

8
Financial Management and Systems Training
Financial and Business Management

• Develop, conduct and deliver business capability
  workshops to improve officers underpinning
  knowledge and skills
• Accrual accounting
• Diploma of Government (Financial Management)
• Graduate Certificate in Professional Management
  (Finance) and
• Financial management for Senior Executive Service
  (1 Star and above) and Executive Level 2 (Col
  equivalent) officers and ADF equivalents.

9
Stores Record Accuracy

• Remediate the general stores inventory and
  repairable items qualification by
• Conducting 100 per cent stock takes at our
  Warehouses
• Correcting errors in stores record quantities in
  logistics management systems and
• Promulgating and ensuring compliance with
  stocktaking policy to improve stocktaking
  practices and reporting.

10
General Stores Inventory Pricing and Accounting

• Remediate the general stores inventory pricing
  and accounting qualification by
• Developing a statistical model to validate legacy
  (pre-1997) priced items
• Implementing an exception reporting regime to
  provide quality assurance
• Establishing policies and procedures for
  inventory pricing controls on the Standard
  Defence Supply System and
• Establishing policy to ensure the correct
  treatment of general stores inventory.

11
Supply Customer Accounts

• Remediate the supply customer account element of
  the repairable item quantities qualification by
• Allocating all supply customer accounts an
  accountable owner
• Ensuring all supply customer account balances on
  the Standard Defence Supply System are correct
  and
• Improving business processes and controls for
  supply customer accounts.

These include improvements to data creation,
maintenance and reporting to ensure accurate
quantity, ownership and location details are
entered and maintained for all supply customer
accounts on the Standard Defence Supply System.
12
Explosive Ordnance

• Remediate the Explosive Ordnance inventory
  pricing qualification by
• Sourcing (where possible) original documentation
  to substantiate Explosive Ordnance inventory
  prices
• Developing tools to substantiate Explosive
  Ordnance inventory values when appropriate
  supporting documentation cannot be located to
  support prices and
• Improving and integrating Explosive Ordnance
  inventory accounting and systems management
  processes. These changes are designed to confirm
  the accuracy of asset values and enable adherence
  of financial management standards.

13
Leave Records

• Remediate the leave provisions qualification by
• Implementing a risk stratification and sampling
  methodology to quantify the risk to Defence
  accounts
• Providing an accurate representation of the leave
  liability by ensuring the integrity of leave data
  captured and recorded in the Defence Personnel
  system and
• Applying quality assurance to business processes,
  record keeping strategies, reporting structures,
  relevant policy foundations, training initiatives
  and a controls framework.

14
Executive Remuneration

• Remediate the Executive Remuneration Note
  qualification by
• Completing the Senior Executive Service and
  military equivalents leave audit and
• Implementing a new system for reporting Executive
  Remuneration that includes applying quality
  assurance to business processes, record keeping
  strategies, reporting structures, relevant policy
  foundations and training incentives, and a
  controls framework.

15
Property Valuations

• Remediate the land, buildings and infrastructure
  and other plant and equipment qualification by
• Revising the Australian Valuation Office
  engagement letter to clarify valuation policy,
  procedures and outcomes
• Contracting the Australian Valuation Office to
  revalue all land, buildings and infrastructure
  and other plant and equipment assets to fair
  value in accordance with policy guidance
• Undertaking quality assurance on Australian
  Valuation Office site reports to ensure
  completeness
• Entering revaluation data into the financial
  system (ROMAN) and completing revised
  depreciation calculations
• Engaging a valuation contractor for the next
  three
• year cycle and
• Fully documenting the revaluation process in
• Corporate Services Asset Management and
• Accounting Manual.

16
Preventing the Escalation of Category A and B
Findings

• Prevent the escalation of Category A and B
  findings by
• Assigning responsibility across Defence for
  remediation of each of the 57 audit findings not
  already allocated to a remediation plan
• Establishing a project-based management system
  for tracking and managing resolution of these
  Australian National Audit Office findings
• Undertaking progressive and final quality
  assurance of the remediation outcomes and
• Reporting to the Financial Statements Project
  Board and Defence Audit Committee on detailed
  progress.

17
Stock Holding Controls

• Improve stock holding controls by
• Preventing or reducing the instance of items
  first found and write-offs and
• Accounting for and monitoring those instances
  first found and write-offs considered legitimate
  or expected.
• The remediation activities focussed on preventing
  errant transactions on the Standard Defence
  Supply System through improvements in policy,
  procedure and system process, and the
  introduction of investigative reporting to
  measure compliance.

18
Standard Defence Supply System Items
Not-in-Catalogue

• The activities included
• Clarifying and simplifying policy directives to
  better support effective item identification,
  purchasing and management process.
• Make Logistics Managers accountable
• Developing a self remediation methodology to
  transition Not- In-Catalogue items into the
  Standard Defence Supply System and the standard
  financial management regime, including
  development of a value proposition for the
  management of legacy items and
• Developing a compliance monitoring and reporting
  framework to assist with adherence to new policy
  and process

19
Provisions for Contaminated or Potentially
Contaminated Land, Buildings and Infrastructure

• Remediate the provision for land decontamination
  qualification by
• Ensuring accounting policies reflect current
  reporting requirements
• Ensuring that sufficient and appropriate
  policies, procedures and practices are formalised
  and implemented for the identification of
  contaminated land , valuation of required
  documentation and review of procedures undertaken
  and assessments made and
• Obtaining a clear understanding from the
  Australian Valuation Office regarding matters
  included in valuation assessments.

20
Commitments and Accounting for Leases

• Remediate the audit finding issued for
  Commitments and Accounting for Leases carried
  forward by defining the criteria for recording
  commitments and
• Establishing a lease register that identifies
  cashflows, revenues, expenses, liabilities,
  receivables and commitments.

21
Just to add some spice!

• Issues arising as being part of Defence
• Kinnard Review
• continuing delays in the delivery of major
  defence equipment
• clear aim for DMO to continue to become more
  outcome-focused and business-like in its
  operations
• Greater Accountability and Responsibility
• Increased Flexibility and Performance
• Greater Autonomy
• 3 Options Do nothing Prescribed Agency
  Executive Agency
• Prescribed Agency helped to avoid duplication and
  extra costs.
• Government decided to establish the DMO as a
  separate agency

22
Business Model

• DMO delivers services to the Government and
  Defence through the provision of services across
  three key areas
• 1. Planning and Advising
• 2. Capital Acquisition to Support Defence
• 3. Sustainment of Defence equipment
• Defence is DMOs primary customer and has
  responsibility for setting requirements and
  priorities for the services to be delivered by
  DMO to meet the Governments capability
  commitments.
• CEO has defined financial responsibilities
  directly to Government.
• Must present own Budgets and Financial Statements
  
• However decisively linked to Defence due to
  funding nature of Purchaser-Provider
  relationship.
• Defence pays DMO for all acquisition and
  sustainment costs along with the associated
  operating costs.

23
Achieving Prescription

• One of the biggest demergers in corporate
  Australia
• Main process of demerging with Defence was the
  development of the Business Model.
• DMO brought across very few assets, financial
  reporting aspect relatively painless, however
• Separation of DMO within Defences Financial
  Management Systems took place over the preceding
  18 months.
• Establishment of Special Account with the
  Government also had to be developed 
• Established opening DMO Balance Sheet
• Negotiate with Defence and ANAO as to where AUC,
  SME and Inventory/EO would sit - DMO or Defence.
  Had to conform and be tested against Australian
  Accounting Standards.
• All assets and inventory holdings transferred
  across had to be valued - Still an issue for
  Defence today
• DMO specific Chief Executive Instructions,
  delegations and Accounting Policies had to be
  developed
• Accounting policy had to be aligned with the
  DMO-Defence Business Model
• DMO officially separated on 1 July 2005

24
Current Defence / DMO Financial Arrangements
(until 30 June 09)
Government
Policy and Advice and associated operating costs
Funds for Capital Projects and Sustainment and
associated operating costs
DMO
Defence
Payment for Capital and Sustainment and Op costs
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How Did We Perform?

• DMO financial statements have never been
  qualified since 2005.
• Many of the initial DMO audit findings were
  carried across from Defence.
• About 1/3 of current DMO audit findings relate to
  Defence financial statements, but are allocated
  to us due to DMO staff being involved in the
  preparation of that aspect of Defence's financial
  statements.
• Remaining audit findings are generally in regard
  to DMO's controls framework. On rectification of
  audit issue, new audit findings are generally
  found in respect to different aspect of controls
  framework.
• Different interpretations of the DMO business
  model by ANAO and DMO often result in audit
  findings. Both interpretations are correct but a
  difference of opinion results.
• Audit findings in relation to the financial
  systems are duplicated across both Defence and
  DMO financial statements.

26
Reform Since Prescription

• Since prescription, DMO has focused on optimising
  DMOs effectiveness and making the organisation
  more business like, accountable and outcome
  driven.
• Deloittes Review
• Performance is being hindered by the need for
  significant effort by staff to perform ongoing
  reconciliations and validation of historical
  information.
• This effort is a result of a lack of accurate
  end-to-end processes and IT systems which
  inadequately support the business processes.
• The lack of integration and alignment of
  corporate IT systems with business processes has
  resulted in the proliferation of work around
  activity and standalone IT solutions.
• Mortimer Review

27
Defence / DMO Financial Arrangements (Post 1 July
2009)
Government
Policy and Advice and associated operating costs
Funds for Capital Projects and Sustainment
Operating Costs for Capital and Sustainment
DMO
Defence
Payment for Capital and Sustainment
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Achievements to Date

• Financial processes, management and policies are
  largely satisfactory, but possibly requiring
  slight refinement.
• Most issues/problems in DMO can be traced back to
  deficiencies in the systems which it uses. DMO
  has no Chief Information Officer and relies on
  Defence for IT support.

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What we would do differently

• In hindsight, it would have been better to have a
  more in-depth understanding of how the cash
  balances which were transferred across were made
  up, and what each dollar was allocated to.
• On prescription, very little documentation
  exists, instead details are embedded in various
  staff members knowledge.
• Too many systems!!
• Place a greater emphasis on record keeping.
• Argue the case to not include Specialist Military
  Equipment
• Maybe an Executive Agency instead of Prescribed

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Where to from here

• Operation Sunlight Government has decided to
  move to funding Agencies on a Net Cost of
  Services basis. Still report on an accrual basis.

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Questions