Financial Management Transformation
Overview
Since 2003, a concerted program of work has been undertaken to reform Defence's financial management. The result of this program has been a new focus on best practice financial management across the Department and the remediation of audit qualifications which had identified uncertainty in the area of $3 billion. Financial remediation in Defence has matured over 2005–06 and is now guided by three interrelated activities:
- Financial Controls Framework—Defence recognises the importance of a robust, documented internal control framework as the foundation for its future financial management. The centrepiece of Defence's financial remediation program is the implementation of a financial controls framework, which is underpinned by extensive financial training and comprehensive system upgrades.
- Position Papers—AIFRS have been mandated for 2005–06 financial reporting. In response to the new standards, Defence has developed a series of conceptual 'position papers' which explore the key accounting issues for Defence in depth and describe the positions Defence has adopted in relation to these issues for the 2005–06 financial statements. The position papers will continue to guide and prioritise Defence's financial remediation activities into the future.
- Remediation Plans—Defence has implemented 16 Remediation Plans which have improved the management and oversight of financial audit findings. All ANAO financial statements assurance audit findings have been assigned to a remediation plan. Each plan has been assigned to an accountable officer who is responsible for progressing the remediation activities in the plan, including the timely resolution of audit findings and reporting on progress to the Financial Statements Project Board.
Defence continues to strive to reach its objective of being recognised as a respected financial manager in the public sector. The remediation work already completed and, in particular, our handling of the new accounting standards has attracted positive interest from other Australian Government agencies and of defence departments internationally.
Financial Controls Framework
In June 2005, the Secretary and the Chief of the Defence Force officially launched the Financial Controls Framework Project as the cornerstone of financial reform in the Department. The framework is being modelled on the Committee of Sponsoring Organisations integrated internal control framework, which is internationally recognised as best practice.
The framework will provide a formalised structure within which Defence can effectively manage its financial risks by:
- documenting the key financial management processes in Defence;
- documenting the key financial management risks;
- identifying, documenting and categorising controls to manage the risks;
- assigning traceable accountabilities for the controls;
- implementing a comprehensive training regime to support financial management; and
- establishing a single system of monitoring and maintenance to ensure that the controls framework retains its relevance and integrity.
In the year since its launch, significant progress has been achieved, including:
- the development of a process framework for financial management in Defence;
- high-level mapping of the three key financial processes (Employee Payments, Supplier Payments and Taxation processes) that account for 97 per cent of the total cash used in Defence;
- the identification and documenting of 442 key financial risks to the management of the Defence Balance Sheet accounts;
- documenting in the order of 1,000 key controls that exist in Defence to manage these key financial risks;
- the development of strategies for the Defence finance domain workforce and financial skilling in Defence; and
- the redevelopment of financial systems training and the introduction
of 12 new financial management training courses. In excess of 14,000
training places were provided to staff in 2005–06.
This effort included:
- training support for the Senior Leadership Group and senior officers at the Executive Level 2/Colonel (equivalent) level (296 participants);
- finance and business training (6,940 participants);
- tertiary-level training (93 participants); and
- financial information systems training (7,281 participants).
Position Papers
Defence has prepared over 29 detailed position papers in relation to key accounting issues. The position papers deal with the basis of the underlying issue, the impact on Defence's financial management and reporting and the manner in which any required action would be implemented.
The papers which play a significant role in remediation, and the removal or prevention of the qualifications on our financial statements, are in relation to such issues as:
- transition to AIFRS;
- accounting for inventory and repairable items;
- leave liabilities;
- asset capitalisation thresholds;
- site restoration provisions; and
- prior period adjustments.
Defence will continue to develop position papers as issues arise in implementing new accounting standards and Defence's ability to produce financial statements which conform to these standards.
Remediation Plans
The remediation plans were developed in 2004 and recognise the synergy between related findings. They provide better visibility of financial audit findings and provide a vehicle for additional remediation work. There are currently 16 remediation plans; three relate to general financial areas and 13 cover specific functional areas.
Each plan is allocated to an accountable officer and a responsible officer is identified for each finding within the plan. Progress is reported monthly to the Financial Statements Project Board, which is chaired by the Secretary. In addition to monitoring progress in remediation, the board provides guidance on specific remediation matters as they arise.
G1—Financial Reporting Framework. The objective and progress of the Financial Controls Framework has been discussed above.
G2—Managing the ANAO Audit Process. The objective of this plan is to implement strategies and processes which facilitate the effective and efficient conduct of the annual and interim assurance audit processes.
Defence and the ANAO agreed a strategy for the 2005–06 audit which provided a framework of guidelines in relation to various audit activities, including communication protocols. The Financial Statements Remediation Program Office continues to provide a single point of contact for ANAO auditors, oversight of the audit as a whole and monitoring of the progress of remediation activities. In February 2006, Defence established a network of Defence Audit Liaison Officers who are responsible for ensuring the orderly conduct of the audit process and the timely and appropriate actioning of ANAO requests.
G3—Financial Management and Systems training—Financial and Business Management. The development and delivery of improved and new financial management training courses are described above.
S1—Stores Record Accuracy. The objectives of this plan are to ensure the accuracy of the recorded quantities of all stores in the SDSS, implement stronger controls in SDSS, establish a compliance framework for SDSS and to improve the quality of stocktaking of stores.
The SDSS controls framework was released in October 2005 and implementation of the controls was conducted in January–June 2006. All Defence stores are now checked as part of a two-year rolling stocktake cycle, with high value items being subject to an annual stocktake. The level of discrepancies identified in the stocktakes continue to be within tolerances and a repairable item verification exercise undertaken in June 2006 confirmed that the records for over $1 billion of repairable items were correct.
S2—General Stores Inventory (GSI) and Accounting. The objectives of this plan are to develop a statistical model to validate legacy priced items, provide quality assurance of pricing, and establish policies and procedures for inventory pricing controls and the correct accounting treatment of general stores inventory.
Remediation action on six audit issues relating to provision for obsolescence, reconciliation of GSI, and GSI accounting policy has been completed. A position paper on inventory pricing has been developed by Defence and issues arising have been taken up with the Australian Accounting Standards Board, as the new standard will impose an impost on both the public and not-for-profit sectors. The implementation of the SDSS controls framework has improved the recording of inventory price and provides a higher level of control over the ability of staff to change processes on SDSS.
S3—Supply Customer Accounts (SCAs). The objective of this plan is to improve the management of assets not held in the major warehouses by allocating a responsible officer for each account, ensuring that regular stocktakes are undertaken and that appropriate business processes and controls are in place.
All remediation actions in relation to this plan have been completed. All SCAs now have a responsible officer and improved management processes are in place. All SCAs are now subject to the stocktake cycle described in S1 and a confirmation exercise of stock held in repair SCAs was successfully undertaken in May–June 2006.
S4—Explosive Ordnance (EO). The objectives of this plan are to ensure appropriate substantiation of EO pricing and to develop and implement financial policies for the correct recording of EO.
Progress has been made in validating the $309m considered to be 'uncertain' by the ANAO after the 2004–05 financial statements assurance audit. Defence has met the AIFRS inventory reporting conventions for its EO by completing a project where the service potential of all EO assets was assessed and adjustments made for those items where the replacement price was less than the carrying value. Issues in relation to provision for obsolescence are covered by a position paper.
S5 and S6—Military and Civilian Leave Records. The objective of these plans is to ensure the integrity of military and civilian leave data recorded on PMKeyS.
Defence was qualified on military and civilian leave due to insufficient documentation and unacceptable error rates in leave processing. Considerable substantive testing, sampling and analysis of military and civilian leave records was undertaken in 2005–06. The testing revealed that controls were operating effectively and that error rates were well within tolerances and that balances in PMKeyS were not materially misstated. Activities will continue during 2006–07 to further improve the integrity of leave data, processes and systems.
S7—Executive Remuneration. The objective of this plan is to ensure that the executive remuneration note for inclusion in the financial statements is developed in accordance with the Finance Minister's Orders.
A 100 per cent review of the leave records for all Senior Executive Service and military equivalents has been completed. Mandatory quality assurance processes are in place. A review of this plan will be conducted following the completion of the 2005–06 audit.
S8—Property Valuations. The objective of this plan is to ensure that the fair value of Defence's land, buildings and infrastructure assets is calculated and recorded in accordance with the relevant standards.
All land, building and infrastructure findings were completed by 30 June 2006 and have been quality assured. A tender for the next three-year valuation cycle has been released. The re-evaluation process has been documented in the Asset Management and Accounting Manual.
S9—Systems and Asset Management. The objective of this plan is to ensure that systems and asset management findings are being progressed in a timely manner.
Remediation action has been completed for over 90 per cent of the findings allocated to this plan in 2004–05.
S10—Stock Holding Controls. The objective of this plan is to improve stock holding controls of First Found and Write Off Items and monitoring legitimate occurrences.
New policies and processes have been implemented and the monitoring of First Found and Write Off items has been improved.
S11—SDSS Items Not in Catalogue (NIC). The objective of this plan is to reduce the number of NIC items being held by Defence by implementing procurement polices, processes and procedures that ensure that items being purchased are codified and loaded onto SDSS.
Scoping of the issue and the remediation project has been undertaken. The SDSS related controls have been implemented. Remediation activities in relation to this plan are not expected to be completed until June 2007.
S12—Provision for Contaminated or Potentially Contaminated Land, Buildings and Infrastructure. The aim of this plan is to provide an appropriate provision for the remediation of contaminated sites.
A position paper on this issue has been developed which has enabled the determination of a provision for the 2005–06 financial statements. All extant polices have been reviewed to ensure current reporting requirements are being met. New processes in relation to updating of the contaminated sites register are being developed.
S13—Commitments and Accounting for Leases. The objective of this plan is to ensure that the Schedule of Commitments and the accounting for leases have been completed in accordance with Defence polices and procedures and meet the accounting standard.
In accordance with the remediation plan, a new quality assurance process has been introduced that has substantially improved the completeness, accuracy and auditability of the schedule. The master lease register has been significantly modified to capture more detailed information relating to cash flows, revenues, expenses, liability, receivables and commitments.