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Review by the Secretary and the Chief of the Defence Force

Financial Management

Financial Transformation

During 2002-03, Defence put in place a comprehensive financial transformation agenda that seeks to significantly improve its financial management capability. In particular, the strategy aims to embed lasting processes and understandings which will support more effective planning, estimation and reporting of Defence finances. Achievements in 2002-03 included:

Despite these improvements, longstanding financial management issues still affect Defence's ability to control costs, ensure accountability, anticipate future costs and claims on the budget, measure performance and maintain funds control. Several years of further hard work are required to fully resolve the challenges facing Defence in these areas.

The size of the task cannot be underestimated. Defence is one of Australia's largest and most complex entities. It manages some $50b worth of assets on behalf of the Government and has an annual operating budget of some $16b. But the imperative for current and future capability plans to be linked both to strategic priorities and to sustainable and achievable resource levels is recognised. So is the need for Defence to be able to estimate reliably its future investment, operating and workforce requirements, and have visibility and accountability relating to capability budgets. Improving processes in all these areas remains a high priority for the organisation.

Tackling the Financial Management Challenge

During the course of 2002-03, Defence made progress in tackling its financial management challenges. The Defence business model was strengthened, and the Defence Capability and Investment Committee's role broadened, to give more focus to the balance between current capability and future investment.

The 2003-13 Defence Management and Finance Plan was presented to the Government in February 2003. The plan provided Ministers with a much clearer oversight of Defence planning and resourcing strategies than they have had previously. This document, together with the 2003-04 Defence portfolio budget submission which was lodged in March 2003, enabled the Government to make important resourcing decisions in respect of the Defence portfolio.

In addition to providing the third annual tranche of White Paper funding, the Government announced new policy measures totalling $2.1b over the period 2002-03 to 2006-07. These included funding for the net additional costs of current operations, including Defence's commitments in the Middle East area of operations.

During 2002-03, we took action to arrest, and then reduce from 2003-04 onwards, overhead costs in a number of areas. As part of the $200m per annum program of administrative savings announced in the 2003-04 Budget, savings targets have been set for civilian personnel numbers, travel, use of professional service providers and the level of overseas representation. In support of these endeavours, we sought generally to encourage a 'culture of economy' in the organisation.

To give effect to these reforms, Defence's peak management body, the Defence Committee, agreed to a set of programming principles and business rules designed to strengthen the accountability of senior leaders in managing their budget allocations. More rigorous performance agreements were introduced for civilian SES staff, to take effect in 2003-04.

A new outcomes/output structure was developed for implementation in the 2003-04 Budget, and Defence introduced a new portfolio-wide budgeting system and initiated a rolling program of zero-based budget reviews to improve the overall quality and accuracy of the Defence Budget. Group Heads were provided with their 2003-04 and ten-year forward budget allocations on 2 June 2003.

Significant improvements were also made to Defence's preparedness management system which have enhanced performance reporting and also helped our work in better understanding and managing the linkage between preparedness levels and costs. In turn, our work on the decision-support project will, by 2003-04, enable us to accurately cost Force Element Groups.

Further improvements to the budgetary process are aimed at achieving a best practice budgeting system in line with the Australian National Audit Office's (ANAO) Better Practice Guide for Internal Budgeting. The benefits of these endeavours will be apparent in 2003-04 and beyond.

Overall, the budget outcome for 2002-03 was broadly in line with expectations.

Financial Statements Improvement Plans

To improve the quality of its financial statement reporting, Defence put in place financial statement improvement plans that focused attention on high-risk financial areas, including inventory and other asset areas that were the subject of the 2001-02 audit qualification. These plans were prepared in consultation with the ANAO and designed to ensure that all steps in the financial statement preparation process were undertaken, our quality assurance procedures were completed and that the required internal sign-offs and assurances were received.

This planning process also addressed the many audit findings raised by the ANAO in recent years. Much of this work was directed at improving the controls and business processes relating to Defence's major systems, including the financial reporting framework, the Standard Defence Supply System, the general ledger system and personnel systems. Many of the audit findings of the past year have been resolved, but ANAO audits and Defence's own continuous improvement programs and data-quality review processes continue to expose deficiencies. A process of identifying and addressing issues is in place, but a number of significant areas will require several more years to complete.

To ensure further improvement in the quality of our financial reporting, a number of data-quality 'tiger teams' were established to achieve permanent changes to business practices and to make the review and improvement of data a continuing process. These teams are focusing on capital expenditure programs, inventory management and reporting, the accuracy of employee entitlements and budgeting and financial structures.

The financial statement planning processes and data quality initiatives mean that our 2002-03 financial statements are of better quality than those of previous years. Although the 2002-03 financial statements have again been qualified by the ANAO in respect of inventory and repairable items, the extent of the qualification is reduced over that of 2001-02. A new qualification in respect of military leave provisions has highlighted the need for stronger leave processing arrangements and for improvements in the filing and storage of personnel data. Defence has a comprehensive data quality assurance program in place to address these issues.

It is important to note that the qualification is of an 'except for' nature, so all aspects of our financial statements were considered by the ANAO to be in accordance with the Finance Minister's Orders except for those aspects relating to certain inventory, a part of our specialist military equipment, and military leave provisions and executive remueration. Several more years may be required before Defence will see the elimination of the audit qualification.