Workshop 99
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Workshop 99






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Workshop 99 Workshop 99 Presentation Transcript

  • Lessons Learnt from the Australian Defence Materiel Organisation Chief Finance Officer (Comptroller) Steve Wearn
  • Who Are We?
    • The DMO’s 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
  • 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, DMO’s Accounts unqualified.
    • 2006-07 Defence Accounts qualified, DMO’s Accounts unqualified.
    • 2007-08 Defence and DMO Accounts unqualified
  • 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
  • So what did Defence/DMO do?
    • Although unqualified in the first few years it wasn’t 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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;
  • 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.
  • 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.
  • 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
  • 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 DMO’s primary customer and has responsibility for setting requirements and priorities for the services to be delivered by DMO to meet the Government’s 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.
  • 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 Defence’s 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
  • Current Defence / DMO Financial Arrangements (until 30 June 09) DMO Defence Government Funds for Capital Projects and Sustainment and associated operating costs Policy and Advice and associated operating costs Payment for Capital and Sustainment and Op costs
  • 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.
  • Reform Since Prescription
    • Since prescription, DMO has focused on optimising DMO’s 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
  • Defence / DMO Financial Arrangements (Post 1 July 2009) DMO Defence Government Funds for Capital Projects and Sustainment Policy and Advice and associated operating costs Operating Costs for Capital and Sustainment Payment for Capital and Sustainment
  • 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.
  • 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
  • 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.
  • Questions