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• The Defence financial management system has been subject to many Australian National Audit Office (ANAO) findings over a period of years. The aim of the remediation activity is to provide a robust control regime for the financial management of Defence business. The financial controls framework will draw together, in a structured and integrated fashion, all of the control elements necessary to build a best practice financial management environment for Defence. It will encompass the standardisation of financial processes, reporting and data requirements, a financial staff certification strategy and a change management program. The remediation plan is Australian equivalent to International Financial Reporting Standards (AIFRS) compliant.

1. Establishing the elements of the financial controls framework;
2. Assigning responsibility to Group Heads to implement the financial controls framework;
3. Implementing standardised processes and practices; and
4. Establishing business skilling and competency assessment.

• The Financial Control Framework used Tiger Teams to identify key controls and risks across Defence's balance sheet and document key processes and procedures;
• Financial training has been strengthened; and
• The substantive testing of employee records completed, 80 per cent of the leave controls testing program completed and analytical reviews commenced.

• Continue the implementation of a comprehensive financial management and controls framework for Defence which embeds best practice financial controls and ensures conformance and performance; and
• Continue to develop and implement tailored financial management training, maintaining the framework, and a robust financial risk management regime.

G2: Improving the Australian National Audit Office Annual Audit Process

Having a clear agreement with the ANAO on timelines, methodologies and expectations of deliverables from both parties is crucial to the finalisation of the annual financial statements.Accountable officer: First Assistant Secretary Financial Services

1. Negotiating an engagement plan;
2. Agreeing to a consistent approach for terminology, quality and format of responses; and
3. Establishing comprehensive procedures for quality assurance and clearing audit findings.

• Defence Audit Liaison Officers network was established;
• A series of position papers on accounting treatment issues was released, and comprehensive procedures for quality assurance and clearing audit findings were established; and
• Regular meetings were held with ANAO staff to improve the relationship between Defence and the ANAO.

• Continue to clear Australian National Audit findings; and
• Continue to improve the relationship between Defence and the ANAO.

G3: Financial Management and Systems Training—Financial and Business Management

A consistent theme in the ANAO audit findings is the requirement for enhanced skills in the execution of financial management procedures and adherence to approved procedures in the use of Defence corporate information technology systems. The ANAO made some targeted recommendations with regard to enhanced training to address the lack of knowledge in accounting, financial and business management (ROMAN), transactor knowledge (PMKeyS), and the supply system (Standard Defence Supply System). These are complemented by a number of other observations about failures in the application of policy and procedures.

Accountable officers: Chief Finance Officer and Director-General Defence Education and Training Development

1. Accrual accounting;
2. Diploma of Government (Financial Management);
3. Graduate Certificate in Professional Management (Finance); and
4. Financial management processes for Senior Executive Service (SES) and Executive Level (EL) 1 and 2 officers and ADF equivalents.

• A new set of three induction/introductory level financial management courses was developed and rolled out including regional delivery across Australia;
• Financial management training for the Senior Leadership Group (Service and civilian) continued to be delivered; and
• Three financial management courses were developed and delivered to Senior Officers at the EL1/2 (and military equivalent) levels. These programs included tailoring to meet specific Group requirements as well as being rolled out to meet regional needs.

• Complete development of Certificate IV level competency aligned courses and release during 2006–07;
• Continued development and delivery of Financial Management Training for SES, EL1/2 and ADF equivalents with an increased regional delivery focus; and
• Develop and pilot new courses as training needs are identified.

S1: Stores Record Accuracy

Defence ‘self-qualified' stock quantities relating to general stores inventory and repairable items in 2003–04, following adverse stocktake results.

The ANAO noted material weaknesses in the internal controls over stocktaking, failure to accurately record and report physical asset quantities, and inadequate system controls to safeguard the accuracy of data. This resulted in a significant range of uncertainty around general stores inventory and repairable items balances.

During the 2004–05 systems audit of the Standard Defence Supply System (SDSS), the ANAO indicated that the control and compliance mechanisms were not adequate and did not provide assurance about the data in the system. Due to the limitation of scope for the opening balances for 2005–06, the qualification was not resolved this financial year.

Full remediation of all inventory issues is forecasted for completion by 2008.

Accountable officer: Commander Joint Logistics

1. Implementing control and compliance mechanisms for SDSS to provide assurance for the systems information for Joint Logistics Command warehouses;
2. Correcting errors in stores record quantities in the SDSS; and
3. Promulgating and ensuring compliance with stocktaking policy to improve stocktaking practices and reporting.

• Defence continued to improve the processes, procedures and controls for all stock quantities, including Repairable Items;
• SDSS IT controls framework implemented;
• New stocktaking practices and procedures implemented;
• Policies and procedures implemented to ensure that SDSS stock locations are verifiable.
• Performance measures developed to drive timely reconciliation of returns from Navy ships;
• The policies, procedures and practices for the movement and disposal of explosive ordnance (EO) implemented and effective;
• The instances of serial number and equipment tracking mismatch were reduced;
• The monitoring of Disposed EO Discrepancies was implemented and a formal risk assessment undertaken;
• Inventory sample tool rolled out to JLC warehouses;
• Increased disposal volume over 2004–05 achievements; and
• $1.036 billion Repairable Item quantities verified.

• Complete verification of the remainder of Repairable Items;
• Segmentation of General Stores Inventory to allow analysis and verification of an aged profile;
• Second year of the recommenced two-year cyclic stocktake; and
• Prepare for the implementation of JP2077 as the replacement for SDSS in 2008.

S2: General Stores Inventory Pricing and Accounting

The 2003–04 Financial Statement had a limitation of scope qualification of approximately $2,026m with regard to uncertainty around the general stores inventory balance, of which approximately $610m relates to uncertainty around general stores inventory pricing carried over from 2002–03.

At issue was Defence's inability to produce, in a timely manner, invoice and contract documentation to validate the prices in the SDSS. The concerns of the ANAO also included the lack of accounting policy in place to ensure the correct treatment of general stores inventory.Inventory pricing issues continue to be assessed against the requirements of the AIFRS. The implementation of an even more onerous reporting requirement places greater long-term uncertainty across inventory pricing issues.

General Stores Pricing and accounting issues are not expected to be fully resolved until 2008.

Accountable officer: Chief Finance Officer, Defence Materiel Organisation

1. Developing a statistical model to validate legacy (pre-1997) priced items;
2. Implementing an exception reporting regime to provide quality assurance;
3. Establishing policies and procedures for inventory pricing controls on the SDSS; and
4. Establishing policy to ensure the correct treatment of general stores inventory.

• AASB consulted in relation to inventory accounting issues;
• Statistical sampling of data undertaken and identified prices potentially requiring error correction where available.
• Quantification of excess or insurance stock calculated;
• Established an exception reporting regime to provide quality assurance of in-year inventory prices; and
• Promulgated financial accounting general stores inventory policy.

• Remediation of the audit issue relating to Limitation of Scope—Inventory pricing carried forward from 1999–2000 to continue with respect to potential surrogate price sources;
• Complete the financial requirements specification for the Material Logistics Financial Framework for inclusion in a replacement logistics system; and
• Review AIFRS implementation to determine system and data retention impacts for multiple pricing records.

S3: Supply Customer Accounts

A supply customer account is a location indicator within the SDSS used to track and manage assets and accountable inventory moving through the supply chain, predominantly outside a warehouse structure.

The 2003–04 financial statements had a limitation of scope qualification of $2,857m with regard to the uncertainty around the repairable items balance, of which supply customer accounts are a subset ($1,000m). The ANAO concerns rested with the controls and management of supply customer accounts, including repairable items, and adherence to stocktake procedures.

Accountable officer: Chief Joint Logistics

1. Allocating an accountable owner to all supply customer accounts;
2. Ensuring all supply customer account balances recorded on the SDSS are correct; and
3. Improving business processes and controls for supply customer accounts.

• Accountable owners identified for all supply customer accounts;
• Stocktaking completed for 89 per cent of supply customer accounts and corresponding balances corrected on SDSS;
• Defence recommenced its stocktaking program;
• Revised the repair vendor supply customer accounts arrangements to improve management and control between repair vendors and system program offices; and
• Provided enhanced reporting to assist the responsible managers to fulfil their obligations and improve the quality of supply customer account data.

• Continue stocktaking supply customer accounts and correcting balances recorded on the SDSS; and
• Continue to improve business processes regarding management and use of supply customer accounts, incorporate these processes into the Defence Supply Chain Manual and transition the new controls into standard corporate governance activities of all Groups .

S4: Explosive Ordnance

The 2003–04 financial statements had a limitation of scope qualification of $845m relating to uncertainty around explosive ordnance pricing. At issue was Defence's inability to produce, in a timely manner, invoice and contract documentation to validate the explosive ordnance inventory prices recorded in the explosive ordnance procurement management system, Computer System Armaments (COMSARM).

The qualification represented approximately 38 per cent of explosive ordnance inventory and predominantly relates to direct purchase items and items acquired as part of asset under construction contracts between 1982–2000.

Accountable Officer: Head Electronic and Weapon Systems Division, Defence Materiel Organisation

1. Sourcing (where possible) original documentation to substantiate explosive ordnance inventory prices;
2. Developing tools to substantiate explosive ordnance inventory values when appropriate supporting documentation cannot be located to support prices; and
3. 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 to financial management standards.

• Addressed a total of $590m of the $845m price qualification comprising $346m in audit approval requests sent to the ANAO and $244m in identified provisions and other movements relating to the explosive ordnance price qualification;
• Implementation commenced of a training program to better identify and mitigate UNIX risks;
• Formulation and implementation of a compliance framework to ensure user access is managed effectively;
• Periodic reviews implemented to ensure access management is effective; and
• Improved integration of explosive ordnance asset and accounting inventory processing and reconciliation procedures.

• Resolve AIFRS issues in relation to explosive ordnance pricing;
• Continue the improvement in explosive ordnance inventory processing and reconciliation policies and procedures;
• Implement financial reconfiguration policies to improve the pricing accuracy of complex inventory assets; and
• Continue the program of enhancing computer systems to automate accurate pricing of explosive ordnance assets.

S5: Military Leave Records

The 2002–03 financial statements had a limitation of scope for military leave provisions because insufficient supporting documentation was available for leave records and, where documentation was available, unacceptable error rates existed in the recording of leave transactions. These shortcomings were mainly attributed to inadequate controls and processes within the military personnel systems and the inability to locate source documentation.

The prior year limitation had resulted in a wide-ranging military leave remediation program but Defence did not expect to resolve the problems before 2005. Defence again ‘self-qualified' the military leave provision in 2003–04.

Accountable officer: Head Defence Personnel Executive

1. Implementing a risk stratification and sampling methodology to quantify the risk to Defence accounts;
2. Providing an accurate representation of the military leave liability by ensuring the integrity of military leave data captured and recorded in PMKeyS; and
3. Applying quality assurance to business processes, record keeping strategies, reporting structures, relevant policy foundations, training initiatives and a controls framework.

• An auditable validation of military leave records and balances for 2005–06 was completed. This included leave record substantiation, a review of controls and analytical review of PMKeyS data;
• The validation tasks have confirmed the integrity of military leave data captured and recorded in PMKeyS, and have demonstrated, to management's satisfaction, that Defence's 2005–06 military leave balances are materially correct;
• Application of quality assurance to key business processes, including the refinement and release of instructions on leave management, and the ongoing checking of leave records, has enhanced the management of military leave; and
• The Leave Control Review demonstrated that a robust internal control environment in and around the military employee leave processes exists.

• Continue to embed an ongoing regime for the testing of leave controls, and
• Continue to enhance leave management processes through ongoing refinement of management structures, operating procedures and information technology support.

S6: Civilian Leave Records

In 2003–04, the ANAO noted problems with civilian leave and payroll processing. The systems issues identified in the management of military leave provisions also affect civilian leave balances.

Accountable officer: First Assistant Secretary Personnel, Defence Personnel Executive

1. Implementing a risk stratification and sampling methodology to quantify the risk to Defence accounts;
2. Providing an accurate representation of the civilian leave liability by ensuring the integrity of civilian leave data captured and recorded in PMKeyS; and
3. Applying quality assurance to business processes, record keeping strategies, reporting structures, relevant policy foundations, training initiatives and a controls framework.

• An auditable validation of civilian leave records and balances for 2005–06 completed. This included leave record substantiation, a review of controls and analytical review of PMKeyS data;
• The validation tasks have confirmed the integrity of civilian leave data captured and recorded in PMKeyS, and have demonstrated, to management's satisfaction, that Defence's 2005–06 civilian leave balances are materially correct;
• Application of quality assurance to key business processes, including the refinement and release of instructions on leave management, and the ongoing checking of leave records, has enhanced the management of civilian leave; and
• The Leave Control Review demonstrated that a robust internal control environment in and around the civilian employee leave processes exists.

• Continue to embed an ongoing regime for the testing of leave controls; and
• Continue to enhance leave management processes through ongoing refinement of management structures, operating procedures and information technology support.

S7: Executive Remuneration

The Executive Remuneration Note (containing information pertaining to civilian and military leave provisions) could not be reliably certified in 2004–05 because of the limitation of scope within the ANAO 2002–03 audit report regarding military leave provisions.

A separate limitation of scope was applied to the Executive Remuneration Note in respect of any accruals effects arising from the military leave balances. During the 2005–06 period, Defence focused on further improving the accuracy of leave records for the SES and military equivalents by gaining written agreement with the Auditor General on appropriate actions for remediation. These are outlined under activities.

Accountable officer: First Assistant Secretary Personnel, Defence Personnel Executive

1. Accepting current leave balances, after a 30 day personnel review period, with a process of appeal;
2. Requiring leave records to be subject to a 100% audit confirmation for validity of movements in the last 12 months;
3. Requiring performance of a 100 per cent audit of leave records accepting self confirmation where there is missing documentation;
4. Providing a signed declaration from the Secretary and the Chief of the Defence Force deeming the balances to be materially correct; and
5. Improving the standardisation of processes and controls with mandatory quality assurance checks and the development of an explanatory manual outlining Executive Remuneration Note processes and controls.

• Self confirmation received from all SES and military equivalents of their current annual and long service leave balances;
• A 100 per cent audit completed of all SES and military equivalents, including validity of movements in the last 12 months;
• A signed declaration gained from the Secretary and the Chief of the Defence Force deeming the balances to be materially correct;
• Mandatory quality assurance checks and the Executive Remuneration Note manual developed; and
• The Executive Remuneration Note being no longer qualified as a result of the achievements outlined above.

• Continue to review and verify leave balances for SES and military equivalents.

S8: Property Valuations

The ANAO issued a ‘limitation of scope' for land, buildings and infrastructure and other plant and equipment as significant flaws were identified in associated project management, reporting practices and management review functions. The requirements to be met by the Australian Valuation Office were not fully and adequately documented and Defence was considered to have misinterpreted the results of revaluations and incorrectly applied depreciation. A particular consequence has been the misapplication of remaining useful life data provided by the independent valuer. This affected both the valuation adopted by Defence and the reported depreciation expense.

Accountable officer: Deputy Secretary Corporate Services/Chief Information Officer

1. Revising the Australian Valuation Office engagement letter to clarify valuation policy, procedures and outcomes;
2. 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;
3. Undertaking quality assurance on Australian Valuation Office site reports to ensure completeness;
4. Entering revaluation data into the financial system (ROMAN) and completing revised depreciation calculations;
5. Engaging a valuation contractor for the next three year cycle, i.e. 2005–06 to 2007–08; and
6. Fully documenting the revaluation process in the Corporate Services Asset Management and Accounting Manual.

• Completed all land, buildings and infrastructure valuations by 30 June 2005;
• Completed other plant and equipment valuations, except for Chief Information Officer by 30 June 2005;
• ICT valuations completed;
• Undertook quality assurance of valuation data and progressively load the data into the financial system (ROMAN);
• Australian Valuation Office contracted to conduct the next three year valuation cycle; and
• Documented the revaluation process in the Asset Management and Accounting Manual.

• Complete the loading of valuation data into ROMAN;
• Complete the depreciation calculations; and
• Undertake quality assurance of ICT valuation data and load the data into ROMAN.

S9: Preventing the Escalation of Category A and B Findings

Audit findings which could not be allocated to a General or Specific Remediation Plan were grouped under Remediation Plan S9 to ensure each finding is remediated. Any audit findings that are not resolved could escalate from Categories B and C to the most serious category, Category A. Defence has recognised the clear need to improve the outcome, focus and management of the implementation of solutions to ANAO findings.

Accountable officer: First Assistant Secretary Financial Services

1. Assigning responsibility across Defence for remediation of each of audit findings not already allocated to a remediation plan;
2. Establishing a project-based management system for tracking and managing resolution of these ANAO audit findings;
3. Undertaking progressive and final quality assurance of the remediation outcomes; and
4. Reporting progress to the Financial Statements Project Board.

• The progress on and completion of remediation activities in relation to this plan has been good.

• Continue to remediate outstanding audit findings.

S10: Stock Holding Controls

Items first found are assets and inventory items that, because of threshold and deployment policies, are not or no longer registered in a corresponding Defence register or were previously considered consumed. Where a check of stock holdings shows that the Defence register record varies from the physical quantity, an investigation into the discrepancy is undertaken and the outcome may be an adjustment to the Defence register record, and/or a corresponding financial adjustment.

While it is accepted that the normal stock adjustment process will require a certain level of adjustment activity, current levels of adjustment are considered too high and indicate poor adherence to currently approved business processes.

Accountable officer: Chief Operating Officer, Defence Materiel Organisation

1. Preventing or reducing the instance of items first found and write-offs; and
2. Accounting for and monitoring those instances first found and write-offs considered legitimate or expected.

• All components of S10 Plan are complete. A closure package has been delivered to the ANAO for inclusion in the 2005–06 audit.
• Developed and implemented a suite of reports in the SDSS in relation to:
  • repair vendors
  • tracking of repairable items
  • items in transit
  • receipting discrepancies; and
• Enhanced the SDSS controls by restricting the ability to change item classifications between inventory and asset, to improve adherence to the accounting guidelines.

• Continue to modify the SDSS to increase the rigour applied to tracking of repairable items and receipting discrepancies to improve data accuracy; and
• Enhance compliance and audit capability, to ensure that all users are complying with the SDSS business processes.

S11: Standard Defence Supply System Items Not-in-Catalogue

Defence is investigating the extent to which items may have been incorrectly accounted for in the Statement of Financial Position. This may occur when an item is purchased via the ROMAN financial system and then not recorded and managed on the SDSS. Such items are managed and tracked locally with no central visibility. This may lead to the incorrect recording and treatment of an item's value.

Remediation of this plan is not due for commencement until all SDSS IT Controls are implemented and are operational (30 September 2006).

Accountable officer: Chief Operating Officer, Defence Materiel Organisation

1. Clarifying and simplifying policy directives to better support effective item identification, purchasing and management process.
2. Use the redrafted policies on item identification (codification), ADF Logistics Managers' roles and responsibilities, and procurement routing rules to drive new processes and procedures that will prevent the future incidence of Not-in-Catalogue;
3. Developing a ‘self remediation' methodology for use by units across Defence to transition Not-in-Catalogue items into the SDSS and the standard financial management regime, including development of a value proposition for the management of legacy items;
4. Developing a compliance monitoring and reporting framework to assist with adherence to new policy and process;
5. Implementing an ongoing compliance monitoring and reporting regime; and
6. Establishing a change management structure to introduce the changes to processes and procedures across Defence, which includes the coordination of training, compliance monitoring and communications.

• Baseline count training disseminated. The schedule for femediation and prevention training agreed.
• Reviewed and revised policies relating to item identification (codification), procurement routing rules and ADF Logistics Managers roles and responsibilities; and
• Commenced quantification of the items in Not-in-Catalogue category across Defence.

• Commence remediation in July 2006;
• The remediation stream of work is targeted for completion by 30 June 2007;
• Complete baseline count activity by 31 December 2006;
• Commence unit count training;
• Remediation tools finalised for the reporting of progress and the transmission of Not-in-Catalogue for codification and tracking in SDSS;
• Prevention strategies formulated and promulgated; and
• The prevention stream of work is targeted for implementation by 30 December 2006.

S12: Provisions for Contaminated or Potentially Contaminated Land, Buildings and Infrastructure

Defence is required to include a provision for land decontamination in the financial statements. The ANAO was unable to verify the adequacy of current procedures or the accuracy/valuation and completeness of the reported provisions for land decontamination.

Accountable officer: Deputy Secretary Corporate Services

1. Ensuring accounting policies reflect current reporting requirements;
2. Ensuring that sufficient and appropriate policies, procedures and practices are formalised and implemented for the identification of contaminated land, valuation of required decontamination and review of procedures undertaken and assessments made; and
3. Obtaining a clear understanding from the Australian Valuation Office regarding matters included in valuation assessments.

• Successfully achieved the first milestone of the S12 plan by using a probabilistic model in identifying provisions and contingent liabilities for contaminated sites in the Australian Capital Territory /Southern New South Wales region;
• A review of the balance of the estate based on assessment reports and a desktop exercise was undertaken. Provision and contingencies have been identified/calculated;
• A set of procedures for the Contaminated Sites Register was developed; and
• A position paper on amended site restoration was presented to the Financial Statements Project Board and the ANAO.

• Progress the S12 methodology across the estate; and
• Review of project milestones and amendments as appropriate based on the outcomes of the review of activities undertaken to identify the 2005–06 provision and the results of the ANAO audit of the financial statements.

S13: Commitments and Accounting for Leases

The ANAO was dissatisfied with the methods used by Defence to recognise and record leases and commitments.

Accountable officer: Chief Finance Officer

1. Defining the criteria for recording commitments; and
2. Establishing a lease register that identifies cashflows, revenues, expenses, liabilities, receivables and commitments.

• A quality assurance (QA) process implemented which ensures that a new lease register is established that identifies cash flows, revenues, expenses, liabilities, receivables and commitments;
• The Benalla Munitions facility lease has been assessed to be a finance lease. This will not have any impact on the underlying cash statement. There is a QA process now in place to ensure that the commitments schedule is complete and auditable;
• Ongoing progress made in enhancing the schedule of commitments in relation to completeness and measurement criteria; and
• Master Lease Register completed to support reporting of the Schedule of Commitments with all leases correctly reported and classified.

• Continue refining QA process for the Schedule of Commitments and Master Lease Register.