Portfolio overview

The Defence portfolio includes a number of entities that together are responsible for the defence of Australia and its national interests. The principal entities within the portfolio are the Department of Defence, the Department of Veterans’ Affairs, the Australian Signals Directorate and Defence Housing Australia. The Department of Veterans’ Affairs is administered separately to Defence and is discussed separately.

The Department of Defence, including the Australian Defence Force (ADF), is responsible for protecting and advancing Australia’s strategic interests through the promotion of security and stability, the provision of military capabilities to defend Australia and its national interests, and the provision of support for the Australian community and civilian authorities as directed by the Australian Government. In 2020–21, support for the community and civilian authorities included a range of activities to support state and territory authorities during Operation COVID-19 Assist, as well as related support provided by the department to other parts of the Australian Public Service. Further information is available from the department’s website at defence.gov.au.

The portfolio’s entities include a number of statutory offices, trusts and companies that are subject to the Public Governance, Performance and Accountability Act 2013, and that are independent but reside administratively within the Defence portfolio.

In the 2021–22 Portfolio Budget Statements (PBS) for the Defence portfolio, the aggregated budgeted expenses for 2021–22 total $45.9 billion. The PBS contain budgets for those entities in the general government sector (GGS) that receive appropriations directly or indirectly through the annual appropriation Acts.

The level of budgeted departmental and administered expenses, and the average staffing level for entities in the GGS within this portfolio, are shown in Figure 1. The Department of Defence represents the largest proportion of the portfolio’s expenses, and departmental expenses are the most material component, representing 85 per cent of the entire portfolio’s expenses.

Figure 1: Defence portfolio – total expenses and average staffing level by entity

Note: The Department of Defence’s average staffing level excludes Australian Defence Force personnel.

Note: Australian Signals Directorate staffing levels are classified as ‘not for publication’, and are therefore excluded from the figure.

Source: ANAO analysis of 2021–22 PBS.

Audit focus

In determining the 2021–22 audit work program, the ANAO considers prior-year audit and other review findings and what these indicate about portfolio risks and areas for improvement. The ANAO also considers emerging risks from new investments, reforms or changes in the operating environment.

In the Defence portfolio, these considerations predominantly relate to governance and reform of a large organisation, the substantial procurement activity currently underway, the management of existing assets and capabilities, and financial management where the valuation of assets and liabilities is complex.

Governance

In November 2020, the Department of Defence released Lead the Way: Defence Transformation Strategy, which builds on the One Defence enterprise concept set out in the 2015 First Principles Review. Establishing a strong ‘strategic centre’ in the department and embedding its desired cultural settings remains a key focus. Delivery of Defence’s purposes relies on a large and dispersed workforce (comprising approximately 60,800 Defence personnel, 21,000 reservists, 16,300 public servants and 32,500 consultants, contractors and outsourced service providers), the support of commercial entities, and effective internal management and coordination.

Defence depends on effective governance, review and reporting arrangements to inform senior stakeholders on the progress of key activities. Recent audit work identified that Defence had enterprise-level arrangements to provide the accountable authority with advice and assurance on the implementation of agreed ANAO recommendations, with similar arrangements for agreed parliamentary committee recommendations introduced in August 2020. Recent audit work also identified that Defence is unable to provide assurance of the effectiveness of its implementation to date of its Pathway to Change – Evolving Defence Culture 2017–2022 cultural reform strategy. Further audit work found that the benefits obtained through independent assurance reviews, a key Defence assurance mechanism for complex procurements, were not fully realised in a number of cases.

Audit work on Defence’s internal administration has indicated that ensuring compliance with requirements and providing management with assurance on compliance can be challenging. The audit of Defence’s modernisation of Army command and control through the Land 200 program observed that unreformed governance and coordination arrangements had affected project delivery. Audit activity has also identified shortcomings in Defence advice to senior Defence leaders and ministers.

Defence has a significant number of systems that it uses to gather information required to conduct business. A specific risk for Defence is whether its information and communications technology infrastructure is fit for purpose to support its business, including its responsibility to deliver effective security vetting services on behalf of the Australian Government.

Defence relies on portfolio entities to help achieve its purposes. Recent audit activity found that no work has been done to assess the effect of Defence Housing Australia’s (DHA’s) services on ADF member retention, which was a major reason for creating DHA.

Procurement

Defence is undertaking substantial procurement activity to refresh its capability in the land, air and maritime domains, in the context of the 2020 Defence Strategic Update and 2020 Force Structure Plan. Many key projects are dependent on successful mobilisation activity in Australia, including in relation to local industry and workforce participation, physical infrastructure development, knowledge transfer and enterprise-level management and coordination. Recent audits have observed that where partnership arrangements have been established with industry, their active management is of particular importance for the delivery of expected procurement outcomes.

There has been a move in recent procurement activities towards more developmental acquisition projects and a focus on the expansion of Australian industry involvement in Defence procurement. Acquisition projects that are more developmental in nature have historically been more prone to slippage, and there are a number of audited projects facing system integration and delivery challenges.

Recent investment has sought to address Defence’s industry policy by supporting more involvement by Australian industry and the delivery of sovereign industrial capability. Recent audit work has identified that Australian Industry Capability Program verification activities had not yet been established for a number of major procurements. Industry policy objectives are also being pursued through a Defence export strategy that did not clearly map how strategy initiatives would contribute to the achievement of strategy objectives.

Recent review activity has identified project cost pressures, with the Joint Strike Fighter project receiving government approval to transfer project scope of $1.5 billion to other phases of the program, with no corresponding transfer of funds out of the project budget.

Defence has established a range of non-materiel contracts of significant value for the delivery of essential services, such as base management and health care. Active contract management and the implementation of effective assurance arrangements across these contracts contributes to the achievement of value for money, and the mitigation of risks to the successful delivery of contracted outcomes.

Asset management and sustainment

The department maintains assets to support achievement of its purposes. Accurate valuations of assets are an important element in determining ongoing maintenance and sustainment investment required, the cost of future asset replacement, and reporting of the assets’ fair value in the annual financial statements. Valuation of the capability held at a point in time is challenging for specialist military equipment, inventory, infrastructure and land due to the significant judgement and estimation involved.

Effective sustainment activity is essential for the achievement of Defence’s purpose. Audit and review activity of the procurement and introduction into service of the Joint Strike Fighter and associated sustainment planning identified both financial and non-financial risks arising from a maturing global support solution for the new fighter fleet.

Pending the introduction into service of replacement platforms, Defence has planned to maintain certain platforms beyond their normal lifetime. Audit work on the Anzac class frigates observed limited planning to support the timely transition to new platforms. In the case of the Future Submarine program, the risk of a capability gap emerging has been recognised and a Collins class life-of-type extension was identified as a key risk mitigation strategy. For the Armidale class patrol boats, a planned life-of-type extension was set aside in favour of procuring additional Cape class patrol boats.

Financial management

Along with the issues discussed above, the military superannuation liabilities associated with Defence personnel are subject to complex assumptions and calculations underpinning the actuarial assessment of these liabilities.

Financial statements and other audit engagements

Overview

Entities within the Defence portfolio, and the risk profile of each entity, are shown in Table 1.

Table 1: Defence portfolio entities and risk profile

 

Type of entity

Risk of material misstatement

Number of higher risks

Number of moderate risks

Material entities 

Department of Defence

Non-corporate

High

2

3

Australian Signals Directorate

Non-corporate

Moderate

1

1

Defence Housing Australia

Corporate

Moderate

3

1

Non-material entities 

AAF Company

Company

Low

 

Army and Air Force Canteen Service

Corporate

Low

Australian Military Forces Relief Trust Fund

Corporate

Low

Australian Strategic Policy Institute Ltd

Company

Low

Royal Australian Air Force Welfare Recreational Company

Company

Low

Royal Australian Air Force Veterans’ Residences Trust Fund

Corporate

Low

Royal Australian Air Force Welfare Trust Fund

Corporate

Low

Royal Australian Navy Central Canteens Board

Corporate

Low

Royal Australian Navy Relief Trust Fund

Corporate

Low

Other audit engagements (including Auditor-General Act 1997 section 20 engagements)

Australian Defence Force Superannuation Scheme (ADF Super)

ADF Super – Australian Prudential Regulation Authority (APRA) reporting and prudential standards

Military Superannuation and Benefits Scheme (MilitarySuper)

MilitarySuper – APRA reporting and prudential standards

     

Material entities

Department of Defence

The Department of Defence is responsible for protecting and advancing Australia’s strategic interests through the promotion of security and stability; the provision of military capabilities to defend Australia and its national interests; and the provision of support for the Australian community and civilian authorities as directed by the government.

The department’s total budgeted expenses for 2021–22 are $44 billion, with supplier expenses and employee benefits representing 38 per cent and 29 per cent, respectively, of the total budgeted expenses, as shown in Figure 2.

Figure 2: Department of Defence’s total budgeted expenses by category ($’000)

Source: ANAO analysis of 2021–22 PBS.

There are five key risks for Defence’s 2020–21 financial statements that the ANAO has highlighted for specific audit coverage, including four risks that the ANAO considers potential key audit matters (KAMs).

  • Valuation and accuracy of specialist military equipment, which includes defence weapons platforms, assets under construction, and associated military support items. The measurement of specialist military equipment at fair value involves a high degree of management judgement, due to the specialised nature of the assets and the subjectivity of the valuation. The balance of specialist military equipment as at 30 June 2020 was $71.8 billion. (KAM – Valuation and accuracy of specialist military equipment)
  • Valuation and disclosure of administered employee provisions, due to the complexity of the calculations and high degree of judgement in selecting key long-term assumptions. Defence operates four defined benefit superannuation funds, and the disclosures required for each fund are very detailed. The provision balance as at 30 June 2020 was $188.2 billion. (KAM – Valuation and disclosure of administered employee provisions)
  • Valuation of general assets, which includes land and buildings, infrastructure, plant and equipment, heritage and cultural assets, and intangibles. These assets include long-term projects and complex cost allocation processes with multiple rollouts that are managed and accounted for by various service groups. The valuations involve a high degree of management judgement in applying assumptions. The balance of general assets as at 30 June 2020 was 29.6 billion. (KAM – Valuation of general assets)
  • Existence and completeness of inventories, due to the variety and quantity of inventory, which is managed across a large number of geographically dispersed locations. A large volume of transactions are processed daily, inventory is managed through multiple systems and is subject to complex system interfaces and manual stock adjustments, which affect the reported balances. The balance of inventory as at 30 June 2020 was $7.4 billion. (KAM – Completeness and existence of inventories)
  • Major reform projects in Defence’s complex information technology network, with the continuing work to design and deliver the enterprise resource planning program that underpins the financial management information systems.

Australian Signals Directorate

The purpose of the Australian Signals Directorate (ASD) is to defend Australia from global threats and advance Australia’s national interest through the provision of foreign signals intelligence, cybersecurity and offensive cyber operations, as directed by government. The Australian Cyber Security Centre, which is a part of ASD, provides support to government and the Australian community to improve Australia’s cyber resilience.

ASD’s total budgeted expenses for 2021–22 are just over $1 billion, with 52 per cent of these expenses attributable to supplier expenses, as shown in Figure 3.

Figure 3: Australian Signals Directorate’s total budgeted expenses by category ($’000)

Source: ANAO analysis of 2021–22 PBS.

There are two key risks for ASD’s 2020–21 financial statements.

  • The valuation of non-financial assets, particularly those assets under construction, as the complex technological nature of the development projects makes the judgement about whether costs are capitalised or expensed more difficult.
  • The reliance on the Department of Defence for financial processing services, including payroll, due to the significance of ASD’s reliance on internal controls established by Defence in support of these processes.

Defence Housing Australia

Defence Housing Australia (DHA) is responsible for providing housing and related services to members of the Australian Defence Force and their families, consistent with Defence’s operational requirements. To meet these requirements, DHA is responsible for constructing, purchasing and leasing houses for Australian Defence Force personnel. Each year, DHA sells a portion of its properties through a sale and leaseback program, and those revenues are DHA’s primary source of capital funding to acquire new properties.

DHA’s total budgeted expenses for 2021–22 are just under $852 million, with 62 per cent attributable to employee benefits and supplier expenses, as shown in Figure 4.

Figure 4: Defence Housing Australia’s total budgeted expenses by category ($’000)

Source: ANAO analysis of 2021–22 PBS.

There are four key risks for DHA’s 2020–21 financial statements.

  • The valuation and significant judgements applied in management’s assessment of the net realisable value of DHA’s inventory.
  • The assessment of impairment of DHA’s investment properties, given the volume, complexity and judgement applied in calculating the required inputs.
  • The accounting for, and reporting of, DHA’s revenue from housing services provided to Defence. The sale of inventories and the proceeds from the sale of investment properties, due to the number of revenue streams, the volume and complexity of transactions, and the impact of the application of Australian accounting standard AASB 15 Revenue from Contracts with Customers on revenue recognition, measurement and disclosure.
  • The accounting for DHA’s leases, due to the complexity involved in calculating the value of leased assets and liabilities in accordance with Australian accounting standard AASB 16 Leases.

Potential audits

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