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:
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.
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.
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.
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.
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
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
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
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
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.
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.
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.
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.