Tuesday, 27 February 2007
Department of Defence: Financial Management
As a member of the Joint Committee of Public Accounts and Audit, I want to address the progress in reconciling Defence accounts over the last two to four years. We all vividly recall the ANAO reports of the financial statements of various Australian government entities, particularly the Department of Defence. Those reports extensively comment on Defence’s failure to sign off on its annual accounts or, more accurately, the inability or unwillingness of the secretary of the department and the CDF to sign off on those annual accounts. By way of background, in its 2005-06 report the ANAO found Defence was unable to reconcile almost $8 billion of accounts for that financial year. As we know, Defence has one of the largest budgets in the Commonwealth, and we also know it has a more recent history of financial mismanagement. Compounding that, the government’s general management of Defence has been quite appalling under successive ministers. On the procurement side, there has barely been a single project in the last seven to eight years which has not gone over time and over budget.
Let’s set the environment by recounting the list: the AWACs, now two years late; the FFG upgrade, at least three years late; Seasprite helicopters, first planned for delivery in 2001 and most likely to be cancelled, and almost $1.3 billion wasted; the M113 personnel carriers, first planned for 1998 and we still do not have one; the Tiger helicopters, two years late and strongly suggested to be not airworthy; and, finally, the Joint Strike Fighter aircraft, and at this stage we are told it is only a theoretical commitment.
Recently we have seen another chapter in the 10-year saga of stolen weapons from various Defence armouries, not to mention other theft for which, as usual, police investigations appear to have sunk into the sand. Indeed, $8 billion lost is a big mistake. It is to the credit of Defence and its recently retired secretary, Mr Smith, that the irreconcilable ledgers were identified and made public. The secretary then refused to sign off on the accounts. But there is more context and I am grateful for evidence given to the joint committee on 8 February last by Dr Mark Thomson of ASPI. Dr Thomson made several points which might explain the ongoing difficulties for Defence. He said that he tracked Defence’s problem to 2001-02 when:
There was a complete breakdown in financial management.
Then there was a requirement to provide accounts on an output basis and on an accrual basis. These he described as enormous hurdles. Also, it was considered that the audit goalposts kept moving. Reasons for failure might be accurate but they are still, in the scheme of things, blatantly unacceptable.
I do not accept the excuse that Defence is frequently distracted by operational demands and, by implication or excuse, cannot attend to these routine matters satisfactorily. Moreover, these problems are endemic and have existed for at least the decade of the current government. Essentially, the single issue at the heart of everything is poor record keeping. This has been exacerbated by lack of political management, poor attitudes, lack of skill and a lack of determination to identify and fix the problems, until more recent years.
It is salutary to note that since the identification of the $8 billion black hole by ANAO, remediation of the accounts has happened quite quickly, albeit with a long way to go. Nevertheless, these accounting matters should never have been allowed to get into such a poor condition. It simply invites theft and fraud—another fundamental disease. And 16 remediation plans have been drawn up to fix the $8 billion black hole. It is pleasing to note that ANAO has now signed off on these.
Still, the single biggest issue in fixing Defence accounts has been the IT systems and the vital issue of human skill and knowledge to work the systems properly. Expenditure on training in the use of the financial systems does seem to be paying off. Perhaps if that same investment had been made a decade ago, much of the trouble that we have come to understand could have been avoided.
The largest and most problematic area remaining is that of stores inventories, their value and their management on an ongoing basis. This was reported at length in 2004-05 by ANAO and, unfortunately, is still a much troubled subject. In recent weeks, two matters on this subject have given me cause for concern. The first concerns media reports of high-level criminal activity in the theft and fraudulent management of Defence stores. This was previously alleged at major depots during the late 1990s when the then Minister Assisting the Minister for Defence, Mrs Bishop, ordered a full-scale inquiry. Any reading of the material available on what was happening then is frightening. If it is true, it explains why Defence inventories are in such a mess. Simply put, the allegations were that inventory records were being falsified to enable theft by consignment. It was reported that trucks entered and left the Moorebank site unchecked. That was almost a decade ago. It is all on the public record. As we know from the recent round of estimates, the Australian Federal Police advised that nothing was ever proven and therefore, as a consequence, nothing was done.
Sadly, that seems to be the fate of a lot of inquiries that occur in Defence. It was disturbing to have heard the evidence given to the JCPAA on 8 February that this same practice is still occurring. To quote the witness:
Trucks leaving the operation are not secured and, coming from a distribution background, I know how truck drivers manage to relieve loads from the backs of their trucks—it disappears.
The evidence was more disturbing for the insight it gave to the way in which Defence has gone about remediating the stores inventories. ANAO says the value of inventories general not reconciled is $1.7 billion. This is, by definition, a major issue.
I will summarise the points made by this particular witness, who is a CPA qualified accountant and brought to Defence his extensive private sector experience on the distribution side at a senior level. He said that Defence as a whole has been poor at adopting accrual accounting; there is a general predilection to write stock off and continue with cash accounting attitudes; Defence accounts over the past eight years show they have spent $2.4 billion on items that would not produce a future benefit to the government—that is, these assets were written off and not capitalised as they should have been; high capitalisation thresholds have resulted in a large number of assets not being reported in annual accounts; the lowering of those capitalisation thresholds saw only part of that previous write-off restored; of the assets that have been recorded, Defence has written off $4.5 billion worth of items that it could no longer locate or had no future use for; by Defence’s own admission it has wasted $12 billion in taxpayers’ funds; and, over the past eight years, Defence has spent $8.7 billion on repairs and maintenance, with $1.6 billion spent in 2006 alone, which is three times the amount spent in 1999.
And so the litany of shortcomings identified on the public record by this witness continued. The single biggest show stopper, according to the witness, was the constant failure to comply with accounting standards that are common throughout the world. The other point he made was that it is not just the reconciliation of existing inventories that is the problem; it is the fact that Defence keeps procuring equipment which it does not need.
I think it is up to Defence to examine that evidence carefully and to respond to the joint committee in detail. All I can say is that these are most serious allegations. Based on these allegations, we might never see the reconciliation of Defence accounts for their inventories without some drastic action. Through the joint committee and the Senate, we will keep pressing to have this historic mess in Defence cleaned up. That is why we on this side will commit to the UK model with the direct involvement of the ANAO in the oversight of Defence accounts. That is a highly recommended solution but it is one which, to date, the current government has spurned. (Time expired)