Annual Report 2003-04

Internal Audit and Risk Management Arrangements

Internal Audit

Management Audit Branch, within the Inspector-General's Group, provided an internal audit capability in accordance with an annual audit work program approved by the Defence Audit Committee. The Branch undertook a number of investigative tasks requested by Ministers and senior Defence officials, or as a result of suspect transactions identified through computer-aided audit techniques and other fraud intelligence activities. This work provided managers across Defence with assurance, assisted them in performance improvement, and advised on the efficiency, effectiveness and legality of Defence's resource management and corporate governance.

A risk-based (likelihood/consequences) approach was used to allocate internal audit resources to where they would be of most assistance. This mainly involved consideration of business and resource management risks over the medium-term (three years). This medium-term analysis took account of Defence enterprise-level risks, Joint Committee of Public Accounts and Audit, Australian National Audit Office and Management Audit Branch reports, the views of Group Heads and the requirements of the Defence Audit Committee, which included the follow-up of implementation of all high-level audit recommendations.

Within the medium-term framework, the annual audit work program was developed to take account of emerging risks, changed risk impacts and priorities. Throughout the year, Management Audit Branch reported against the program, and the implementation status of high-level recommendations, to the Defence Audit Committee.

Ethics Awareness and Fraud Control

Defence has a well-developed program of ethics and fraud awareness. In 2003-04, over 200 ethics and fraud awareness presentations were given to approximately 10,000 Defence personnel across Australia.

Ethics Awareness

The program also included the provision of material such as videos, newsletters and a dedicated intranet site for information and advice. During 2003-04, the Chief of the Defence Force launched a new video, Defence Values - The Siege of Tobruk. The video was produced to illustrate how Defence's enduring values of professionalism, loyalty, integrity, courage, innovation and teamwork - integral to the overall success at Tobruk - are still critical to the success of Defence today. The video has won two international awards; a second place Silver Screen award, a third place for creative excellence at the 2004 United States International Film and Video Festival and one national award in 2003 for best documentary in its class, by the Australian Video Producers Association.

Fraud Control

During 2003-04, in line with the Commonwealth fraud control guidelines, Defence developed a new fraud control plan, Defence Fraud Control Plan (No 5).

There were 454 fraud investigations registered within Defence during 2003-04 and 475 investigations were completed (a number of those completed being registered in the previous year). Approximately one quarter of completed investigations resulted in criminal, disciplinary or administrative action. Of these, approximately half related to action under the Defence Force Discipline Act 1982.

The determined fraud loss for completed cases in 2003-04 was some $1.2m and, during the year, monies awarded and recovered amounted to around $0.125m. Over the last nine fiscal years, detected fraud has averaged an estimated $1.8m per year, within a range of $1.1m to $3.1m per annum.

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Portfolio Evaluations

Portfolio Evaluation Strategy

The Defence Portfolio Evaluation Strategy is promulgated as a Defence Instruction (General). In accordance with that strategy, the Defence Committee authorised a schedule of portfolio evaluations covering 2003-04 and 2004-05. In calendar year 2003, the principal evaluation topics were:

• Defence leave policy and administration;
• adventurous training in the ADF; and
• corporate governance of the Defence information environment (Phase 2).

The principal evaluation topics for calendar year 2004, in order of priority, are:

• preparation of ADF officers for joint appointments;
• implementation of the Defence customer - supplier model; and
• Defence civilian performance agreements.

The foreshadowed topic, 'Defence Strategic Workforce Planning Outcomes', was dropped from the 2004-05 schedule because of the work done by the Strategic Workforce Planning Review.

The Defence Committee deferred the topic 'The Effectiveness of the Risk Management Framework' from the 2004-05 schedule because of a review of risk.

Topics foreshadowed for calendar year 2005 in the Portfolio Budget Statements 2004-05, in order of priority, are:

• the technical regulatory system;
• the effectiveness of personnel policy development and delivery; and
• the injury prevention program.

Schedule of Portfolio-level Evaluations for 2003-04

The following evaluation activities were completed in 2003-04:

Corporate Governance of the Defence Information Environment. This evaluation, to examine the use of information and governance arrangements in the Defence information environment, was provided to the Secretary and the Chief of the Defence Force in June 2004 and found:

• the Defence information environment governance arrangements only partly address good governance characteristics, and improvements are needed; and
• enterprise process ownership and accountability in the Defence information environment is sound, but implementation could be improved.

The Defence Leave Policy and Administration. This evaluation, completed in March 2004, found that:

• the strength of Defence's leave policy is its flexibility and coverage, but there are policy weaknesses that contribute to Defence's high leave liability;
• there are several shortcomings in leave administration that contribute to poor data quality, including disagreement about common processes and arrangements for administering leave; and
• Defence's accrued leave liability is high, but is affordable.

Adventurous Training in the ADF. The evaluation was forwarded to the Secretary and the Chief of the Defence Force in July 2004. The report found that:

• adventurous training is an important training tool for the preparation of individuals and teams for operations and, ultimately, combat;
• governance of adventurous training needs to be improved across the ADF; and
• risk management of adventurous training activities is generally sound.

Enterprise Risk Management

In October 2003, the Defence Committee agreed to replace the then current enterprise risks with key risk areas that are central to Defence's ability to defend Australia and to manage and conduct business. This follows the review of the enterprise risk management framework foreshadowed in the Defence Annual Report 2002-03.

In March 2004, Defence undertook a risk assessment using the key risk area concept. Based on this assessment, Defence has since devised treatments to mitigate risks that were judged to be unacceptable. Progress reports on the treatment of risks will be made periodically to the Defence Committee.

The Defence Risk Management Plan is being revised in the light of experience gained during the above activities.

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