Chapter One > Year in Review > Review by the Secretary and the Chief of the Defence Force > page 3 of 4

Year in Review

Review by the Secretary and the Chief of the Defence Force

Intelligence Inquiries

Our intelligence agencies operated at a high tempo during the year to support ADF operations and the war against terrorism. They were also the subject of a number of official inquiries. These included the Parliamentary Joint Committee on ASIO, ASIS and DSD inquiry into intelligence on Iraq's weapons of mass destruction, the Senate Standing Committee on Foreign Affairs, Defence and Trade inquiry into security threats to Australians in South East Asia, and the inquiry by Mr Philip Flood AO into Australia's intelligence agencies.

Mr Flood recommended that the coordination, governance and legislative underpinning of the organisation and operations of Australia's intelligence community be strengthened. He recommended a cohesive national approach to the priorities and funding of our intelligence agencies and to evaluating their performance. In addition to contributing to community wide responses, the key implementation issues for Defence are to rebalance the Defence Intelligence Organisation's focus towards Defence requirements, to integrate Defence intelligence assessment priorities into national assessment priorities and to restore a healthy balance of ADF personnel in the Defence intelligence agencies.

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Defence Capability and Procurement Reviews

During 2003, the Defence Procurement Review (known as the 'Kinnaird review') examined the procurement process for major Defence acquisitions. In response to the review's recommendations, Government directed that the Defence Materiel Organisation, while remaining part of the Defence organisation, should be established as a prescribed agency under the Financial Management and Accountability Act 1997 from 1 July 2005.

Defence acted quickly to implement the Kinnaird recommendations. A new Capability Development Group, headed by Lieutenant General David Hurley, was formed to provide better definition both of the capability we require and the equipment or systems solutions to deliver it. We instituted a new process for approving capability proposals which requires the solutions to be better defined, more robustly costed, and their owners more accountable. In February 2004, Dr Stephen Gumley was appointed as the Chief Executive Officer of the Defence Materiel Organisation. With his new management team, Dr Gumley has initiated a program of reform that will professionalise the organisation's workforce, improve contract management, standardise business practice and process, benchmark the organisation against best practice and improve its relationship with industry.

A Defence Procurement Advisory Board made up of senior public and private sector members was established to monitor the implementation of the Kinnaird recommendations. The Board provides strategic advice and support to Dr Gumley on the direction, focus, objectives, planning, management and structure of the organisation.

The Defence Capability Plan was reviewed during 2003, with the revised plan endorsed by Government and released in November 2003. Subsequent Government decisions approved the acquisition of M1A1 Abrams tanks, two additional airborne early warning and control aircraft, five air-to-air refuelling aircraft, and an auxiliary oiler to replace HMAS Westralia.

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Financial Management

Defence's Financial Statements are set out fully in this report. The results in terms of cash management, receivables, revenue appropriations, explosive ordnance holdings, and specialist military equipment exclusive of repairable items are stated fairly. Budget management practices continued the improvement of the last few years. As well, new techniques such as our Portfolio Budgeting system and proposed Force Element Product Costing model attracted interest from other defence ministries and Commonwealth agencies.

In relation to certain accrual entries and provisions and their resultant impact, the Secretary could not conclude on the financial statements as a whole. The qualifications identified in previous years remain on the statements for 2003-04, and the scope of some of them has increased. In particular, work by Defence's Management Audit Branch and the Australian National Audit Office (ANAO) identified shortcomings in stock recording policies and practices. This has had an impact on the level of uncertainty in relation to the reported values of general stores inventory and repairable items, problems which in the past had reflected only pricing issues.

This outcome is disappointing, as we had increased significantly the resources committed to trying to achieve compliance with accrual accounting standards and the introduction of other new accounting standards. These efforts were driven by a Project Board chaired by the Secretary and including all Service Chiefs, and guided by our independently chaired Defence Audit Committee. More than 600 staff across the organisation were involved, on a full or part-time basis, and several major accounting companies were contracted in.

These efforts will be strengthened in 2004-05. They include remediation plans for each of the qualifications as well as for more generic reforms aimed at meeting not only accrual accounting requirements but also the newly introduced International Financial Reporting Standards. Establishing the Defence Material Organisation as prescribed agency, with its own accounts, will add a further layer to the challenge. To assist in this work, a representative from the Department of Finance and Administration will join the Project Board, together with a private sector accounting specialist.

In all of this, Defence and ANAO have accepted that while some of the problems we face might be susceptible to quick remediation, others are more deeply seated and will take some years to resolve as Defence endeavours to reach beyond the Public Service, cash-based arrangements of the past and to attain the corporate-like, accrual-based international standards required of us.

In the meantime, cash and budget management policy and practice remain sound, and Defence operations are not evidently affected by the problems.

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