Defence

Chief Finance Officer

Keeping score is all about numbers

David Sibley talks with CFO Lloyd Bennett about why all Defence staff should understand and apply basic accounting.

Complex: "When you come to things like F-111s, that market doesn't exist," says Lloyd Bennett. Photo by Glenn Alderton

What is accrual accounting? Why is it so important to Defence at all levels?

From the humble Q-store clerk to the high-flying manager handling contracts worth millions, it's a concept that Chief Finance Officer Lloyd Bennett wants to explain so that all Defence staff have an interest - and pride - in making it work.

Mr Bennett believes it's an issue that lies at the core of improving Defence's financial management, reporting and culture. Recent media scrutiny of the Australian National Audit Office qualification of Defence's 2003/2004 financial statements highlighted that Defence had serious issues with record keeping.

Bowl the question again - "what is accrual accounting?" - at the CFO and be prepared for him to hit it out of the park.

"There is no such thing as accrual accounting as some sort of separate animal," he says.

Say again?

"There is accounting, there has only ever been accounting and if you go to any accounting text book and look for it, you might find one paragraph buried in first year text which tried to distinguish between the two - cash and accrual."

Got it?

Instead of only living in a cash world, where your budget consists of the actual money in your wallet and the only numbers worth remembering are how much you have in your bank account at the end of the day, accounting, in its full construct, is simply a statement of your financial health.

"Let's say you are an individual," Mr Bennett says. "To my mind, if you're an individual running bank accounts, a credit card, a house and a car then, if you are smart, you would operate on what people in Canberra call an accrual basis.

"What I mean by that is if your car is getting old, have you put some money aside progressively to meet the replacement cost of the vehicle? Do you look at what your future liabilities are and budget for that or do you just live from pay cheque to pay cheque?

"That is what I would describe as the difference between what people call cash and what people call accrual accounting."

It seems so logical - a perfectly acceptable and normal way of running a business. So why hasn't this been applied in the past across Defence?

Mr Bennett says using an accrual basis to financial management is not the current problem. The problem is what was an acceptable standard in the past is no longer acceptable after the introduction of the General Accounting Standards to the public sector.

Defence's past accounting practices had not prepared the department for the introduction of these standards, leaving a legacy of financial management issues, especially with the age of some assets still in service.

"One of the issues with [Defence] is that we have assets bought back in 1966 for which we can't find invoices for," he says. "So how do you then prove its initial value, then prove its current value and then set aside funds in the current budget to replace it when it needs to be replaced?"

The issue can become further complicated because there are issues where the accounting standards appear nonsensical.

For example, replacing a car means that there is a used-car market, which assigns a value to it when it's sold. Not so for Defence with its military assets.

"When you come to things like F-111s, that market doesn't exist - we have to hand them back for destruction when we've finished with them," he says.

The key to understanding the crucial role of managing assets through an accruals system is the importance of the little things which are the bedrock of any business - accurate records.

Mr Bennett says Defence personnel should view the accounts like "watching a cricket match you look up at the scoreboard, you see the state of play".

"You wouldn't criticise the scoreboard, you would criticise the way the game is being played," he says.

"In cricket, we all understand the importance of accurate record keeping - if you don't do it, you don't know where the game is at.

"So if we are not able to record what we are doing, we won't know what the health of our business is, we won't know how much money we need to anticipate what the future replacement, what the future maintenance costs would be."

And there is also a more pertinent aspect to accurate accounting - the human factor.

"Forget the sheer dollar aspect of it for a minute and think how does it reflect on how we look after our people - that would be my first concern," he says.

"... If we don't have the statistics, which is all it is, we can't actually say we are looking after our people properly - that's the way people should look at it.

"It's more the health of the people, the health of the equipment, the health of the business we are interested in and accounting is just the universal standard way of recording that - it's your business in numerical form."

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