National Capitol Area Conference
Patrick Hetherington, CPA
Director Finance and Business Liaison
Embassy Of Australia
November 14, 2011
2011 NPMA Conference Series III
National Capital Area Conference
Leaders in Asset Management
Creative Accounting
…… The good kind.
2011 NPMA Conference Series III
National Capital Area Conference
Size: Australia and the contiguous United States are nearly the
same size, both measuring about 3000 miles coast to coast
2011 NPMA Conference Series III
National Capital Area Conference
Population Distribution: Australia the lowest
density of any country, and the most urbanised
2011 NPMA Conference Series III
National Capital Area Conference
Defence vs. Defense
Defence
Defense
Base Funding
$24.7 billion
$553.1 billion
Operational Funding
$1.9 billion
$117.8 billion
$26.6 billion
$670.9 billion
Army
30,617
547,000
Navy
14,220
325,000
Air Force
14,216
332,800
Marines
-
202,100
59,053
1,406,900
Funding
Total
People
Total
2011 NPMA Conference Series III
National Capital Area Conference
The Defence Materiel Organisation
The DMO’s role is to:
To equip and sustain the Australian Defence Force.
•
•
•
•
•
•
•
•
•
•
The Australian Defence Force (ADF) relies on us to provide its
equipment on time, on budget and to the required levels of quality and
safety
DMO is involved in many of the largest and most demanding projects in
Australia.
About 40 per cent of total Australian 2011-12 Defence budget
1 per cent of Australian GDP
Capital Acquisition program of $5.1 billion in 2011-12
More than $5.0 billion on sustainment (through-life support)
190 current major projects
Over 150 minor projects
Over 7000 employees
Over 40 locations throughout Australia and overseas
2011 NPMA Conference Series III
National Capital Area Conference
The Balance Sheet
•
•
•
•
•
•
•
Land and Buildings - $15 billion
Specialist Military Equipment – $36.4 billion
Infrastructure - $5.2 billion
Plant and Equipment - $1.1 billion
Heritage Assets - $0.9 billion
Intangibles - $0.6 billion
Inventories - $5.2 billion
Total - $64.4 billion
2011 NPMA Conference Series III
National Capital Area Conference
Regulatory Framework
• Relevant Legislation includes:
• The Financial Management and
Accountability (FMA) Act 1997
• The Auditor-General Act 1997
• The Archives Act 1983
2011 NPMA Conference Series III
National Capital Area Conference
FMA Act 1997
• Under the FMA Act, the Minister for Finance
produces the Finance Minister’s Orders (FMOs)
on an annual basis.
• The FMOs outline the requirements for the
preparation of Financial Reports of Australian
Government Entities
• FMOs require that the financial statements of
each entity comply with Australian Accounting
Standards
• FMOs have the force of law under the FMA Act
2011 NPMA Conference Series III
National Capital Area Conference
The Australian National Audit Office
(ANAO)
• The Auditor-General is responsible, under the Auditor-General
Act 1997 (the Act), for providing auditing services to the
Parliament and public sector entities.
• The ANAO supports the Auditor-General, who is an
independent officer of the Parliament.
• The Auditor General provides the Parliament with an
independent assessment of selected areas of public
administration, and assurance about public sector financial
reporting, administration, and accountability.
2011 NPMA Conference Series III
National Capital Area Conference
ANAO Continued
• The ANAO has extensive powers of access to
Commonwealth documents and information
• The ANAO’s work is governed by its auditing
standards, which adopt the standards applied by
the auditing profession in Australia
• In accordance with these standards, performance
audits, financial statement audits and assurance
review reports are designed to provide a
reasonable level of assurance.
2011 NPMA Conference Series III
National Capital Area Conference
The Archives Act 1983
• The Archives Act details document handling
and retention requirements
• Requirement to maintain financial records for a
period of not less than seven years
• Records management and adherence to the Act
is one of the single biggest causes of adverse
audit opinions for Defence
2011 NPMA Conference Series III
National Capital Area Conference
Timeline
• 2000-01
• 2003-04
• 2004-05
• 2004-05
• 2005-06
• 2005-06
• 2006-07
• 2007-08
Australian Government introduces
Accrual Reporting for each Agency.
Australian Government introduces
Accrual Budgeting for each Agency.
Defence receives significant Audit
qualification on its Accounts.
Defence embarks on Remediation Plan.
DMO separates from Defence as a
Prescribed Agency.
Defence Accounts qualified, DMO’s
Accounts unqualified.
Defence Accounts qualified, DMO’s
Accounts unqualified.
Defence and DMO Accounts unqualified
2011 NPMA Conference Series III
National Capital Area Conference
Qualified Financial Statements
Qualified Audit Opinion
In my opinion, because of the existence and pervasiveness of the
limitations of scope, outlined above in the qualifications paragraphs,
and the effect of any adjustments required had the limitations not
existed, I am unable to, and do not express an opinion as to whether
the financial statements:
(i) Have been prepared in accordance with Finance Minister’s orders
made under the Financial management and Accountability Act 1997;
and
(ii) Give a true and fair view, in accordance with applicable Accounting
Standards and other mandatory financial reporting requirements in
Australia and the Finance Minister’s Orders, of the financial position
of the Department of Defence as at 30 June 2005 and its financial
performance and cash flows for the year then ended (and the
respective prior year comparative figures).
Hugs and kisses, Auditor-General
2011 NPMA Conference Series III
National Capital Area Conference
Areas of Qualification
There were five principle areas leading to qualification of
Defence’s accounts:
• General Stores Inventory (approx $2 billion)
• Explosive Ordnance (approx $300 million)
• Repairable items ($2.7 billion)
• Infrastructure, Plant and Equipment and Intangibles
($5.8 billion)
• Employee Leave Provisions ($1.6 billion)
2011 NPMA Conference Series III
National Capital Area Conference
What did we do?
• Embarked on a Project to draw together all
components necessary for a best practice
accrual financial management environment.
• The cornerstone of the project was a number of
targeted remediation strategies. 31 in total.
• “Tiger Teams” focused on the remediation of
Category A audit findings.
2011 NPMA Conference Series III
National Capital Area Conference
General Stores Inventory
(GSI)
• Two areas of qualification - Price and Quantity
• Over 500,000 stock codes
• Millions of items, some more than 50 years old
• Disbursed Nationwide
• Approximately $2 Billion
2011 NPMA Conference Series III
National Capital Area Conference
The Sampling Approach
• The data was split into two initial broad
categories
• Pre -2000 Items; and
• Post 2000 Items.
• The Pre 2000 items would be the subject of a
valuation methodology.
• The Post 2000 items would be subject to an
evidence collection methodology.
2011 NPMA Conference Series III
National Capital Area Conference
Pre 2000 GSI
• Little expectation that source documentation could be
located.
• Employed the Australian Valuation Office to validate the
recorded prices of sampled items.
• Where items could not be validated, they were valued at
current price and discounted using Indexes.
• The sample design allowed for the calculation of an
adjustment factor.
2011 NPMA Conference Series III
National Capital Area Conference
Post 2000 GSI
• This segment of inventory holdings represented
the greatest value in dollar terms.
• Significant effort in designing an intelligent,
efficient sampling plan.
• Collection of documentation used to validate
inventory prices.
• Sample allowed for an adjustment factor.
2011 NPMA Conference Series III
National Capital Area Conference
Post 2000 GSI Continued
All Orders
Normal
Global
Regional
Workshop
LSD
.......
Divisions
JLU(W)
.......
Districts
Project
L0
Non-project
.......
SPOs
LSD
...
Global
Divisions
L0
Regional
.......
JLU(W)
SPOs
LSD
...
.......
Districts
Divisions
L0
.......
SPOs
2011 NPMA Conference Series III
National Capital Area Conference
Post 2000 GSI Continued
• The sample design enable targeted process
improvement as well as determining an
adjustment factor for our financial statements.
• The design also enabled us to make partial
adjustments reducing the risk of completion.
• Design is the creative, intelligent part implementation is time to roll up your sleeves.
2011 NPMA Conference Series III
National Capital Area Conference
Financial Controls Framework
• An Agency as large as Defence cannot continue to
rely on substantive tests of transactions!
• Establishing the elements of the financial controls
framework
• Assigning responsibility to Group Heads to
implement the financial controls framework
• Implementing standardised processes and practices
• Establishing business skilling and competency
assessment.
2011 NPMA Conference Series III
National Capital Area Conference
Quantities
• Conducting 100 per cent stock takes at our
Warehouses
• Correcting errors in stores record quantities in
logistics management systems
• Promulgating and ensuring compliance with
stocktaking policy to improve stocktaking practices
and reporting.
• Disposal Program.
2011 NPMA Conference Series III
National Capital Area Conference
Happy Days
Audit Opinion 2007-08
In my opinion, the financial statements of the Department of
Defence:
•
Have been prepared in accordance with Finance Minister’s
orders made under the Financial management and
Accountability Act 1997, including the Australian Accounting
Standards; and
•
Give a true and fair view of the matters required by the
Finance Minister’s Orders including the Department of
Defence financial position as at 30 June 2008 and its
financial performance and cash flows for the year then
ended.
2011 NPMA Conference Series III
National Capital Area Conference
Lessons
Learned
2011 NPMA Conference Series III
National Capital Area Conference
Senior leadership
• Buy in from Senior Leadership is CRUCIAL
• Defence priorities 2007-08
• Support to Military Operations
• Clean Financial Statements
• Some other stuff…
2011 NPMA Conference Series III
National Capital Area Conference
Get Good Help
• Accounting Advice – the only way to test the limits of
accounting standards is to understand them intimately –
Its worth the money!
• Statistical Advice – An undertaking as big as this
warrants the best advice. In my view, worth even more
than the accounting advice
• Valuation Experts
• Temper academia with pragmatism
• Understand the requirements of relying on the work of
experts
2011 NPMA Conference Series III
National Capital Area Conference
Appropriate Resourcing
• Remediation projects of this nature are
expensive:
•
•
•
•
Professional advice
Personnel costs
Costs associated with implementing reform
Equipment, memberships and other costs
2011 NPMA Conference Series III
National Capital Area Conference
Don’t be scared of your Auditor..
• Audit should be seen as a positive – it is quite
often the catalyst for significant
change/improvement
• Engage early and bring auditors on the journey
• Have a defined process for engaging Auditors
• You know more about your business than they
do!
2011 NPMA Conference Series III
National Capital Area Conference
Have an agreed process for
interaction with the Auditor
• Single point of contact supported by subject
matter experts.
• Negotiating an engagement plan
• Agreeing to a consistent approach for
terminology, quality and format of responses
• Establishing comprehensive procedures for
quality assurance and clearing audit findings
2011 NPMA Conference Series III
National Capital Area Conference
Make the most of the data
• Collection of documentary evidence is a long
and difficult process – get the most out of the
data!
• Opportunity to dissect and understand the
business
• Identification of process deficiencies
2011 NPMA Conference Series III
National Capital Area Conference
FIX THE
UNDERLYING
PROBLEM
2011 NPMA Conference Series III
National Capital Area Conference
The Benefits
• Credibility
• Morale
• Opportunity to understand and improve the
business
• Forging better working relationships with
Auditors and other stakeholders
• The Strategic Reform Program
• Clean financial statements is not an unrealistic
expectation.
2011 NPMA Conference Series III
National Capital Area Conference
QUESTIONS?
2011 NPMA Conference Series III
National Capital Area Conference