Defence portfolio

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, Defence Housing Australia and the Australian Submarine Agency.  The Department of Veterans’ Affairs is discussed separately.

The purpose and mission of the Department of Defence and the Australian Defence Force (ADF) (together the department and the ADF are known as ‘Defence’) are to defend Australia and its national interests in order to advance Australia’s security and prosperity. Further information is available from the department’s website.

The portfolio’s entities include 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 2023–24 Portfolio Budget Statements (PBS) for the Defence portfolio, the aggregated budgeted expenses for 2023–24 total $56.7 billion. The PBS contain budgets for those entities in the general government sector (GGS) that receive appropriations directly or indirectly through 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 of the portfolio are the most material component, representing 83 per cent of the entire portfolio’s expenses.

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

Source: ANAO analysis of 9 May 2023–24 Portfolio Budget Statements.

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

Note b: Australian Signals Directorate staffing levels are not included in the Portfolio Budget Statements.

In determining the 2023–24 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 changes in the operating environment and new investments.

The primary risks identified for the Defence portfolio relate to the implementation of change following the 2023 Defence Strategic Review, in the context of a changing operating environment. This includes Defence’s ability to: anticipate, prepare for and respond to threats to Australia’s interests; manage and implement change on a broad front; acquire and sustain new and existing capability; manage the risk of capability gaps; meet sovereign capability requirements; and address workforce issues.

Specific risks in the Defence portfolio relate to: governance; procurement; asset management and sustainment; and financial management.

Governance

The Australian Government’s 2023 Defence Strategic Review (DSR) set an agenda affecting Australia’s strategic posture, Defence capability and resource requirements, and force design for the Australian Defence Force (ADF). Audit work on enterprise level reforms in Defence has highlighted the value of effective governance, review and reporting arrangements to inform senior leaders and decision-makers on the progress of key activities.  Management assurance processes are also necessary to help mitigate the risk of optimism bias  and non-compliance with requirements. 

Defence has a significant number of systems that it uses to gather information required to conduct its business. Specific risks for Defence include the introduction and governance of enterprise-level systems  and whether its information and communications technology infrastructure is fit-for-purpose to support its business, including its responsibility to deliver effective security vetting services across government. 

The DSR highlighted the importance of non-geographic security threats, including cyber. Entities require effective risk management practices, as weaknesses in the implementation and operation of governance and monitoring processes increase the risk of unauthorised access to systems and data held by entities, and the inappropriate use of entity information. 

The DSR also highlighted workforce risks for Defence, including the management of its contracted workforce. Audit activity has identified probity risks and weaknesses in decision-making when Defence relied heavily on its contracted workforce to deliver outcomes without making necessary adjustments to governance arrangements. 

In the context of reprioritising the Integrated Investment Program (IIP), the DSR observed limited scrutiny for project entry. Audit work on Defence’s IIP administration identified a need to maintain records on when each project in the IIP was authorised and by whom it was authorised. 

Procurement

Defence is undertaking substantial procurement activity. It must also plan for procurements identified as part of the DSR, including accelerated procurements, in the context of planned changes to the capability acquisition process and sovereign capability requirements. Audit work on Defence materiel procurement activity has identified risks relating to: maintaining a value for money focus in procurement;  the completeness of advice, record keeping and design maturity ; the handling of unsolicited procurement proposals ; and partnership arrangements with industry. 

Effective acquisition planning and management is required to manage the risk of a capability gap which may result from delays to the delivery of major platforms.  Activities relating to the AUKUS agreement will also require the development of new expertise within Defence and more broadly.

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. 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. Recent audit work has identified shortcomings in this respect. 

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.

Pending the introduction into service of replacement platforms, Defence has planned to maintain certain platforms beyond their normal lifetime. Audit work has observed limited planning to support the timely transition from the Anzac class to the Hunter class frigates.  For the submarine fleet, the risk of a capability gap has been recognised and a Collins class life-of-type extension was identified as a key risk mitigation strategy.  This strategy remains important for maintaining capability until nuclear powered submarines are procured under AUKUS arrangements. For the Armidale class patrol boats, a planned life-of-type extension was set aside in favour of procuring additional Cape class patrol boats.  Delays in the delivery of the new patrol boats has required Defence to plan for the life-of-type extension of some Armidale class patrol boats, at additional cost. 

Financial management

The military superannuation liabilities associated with Defence personnel are subject to assumptions and calculations underpinning the actuarial assessment of these liabilities.

The ANAO’s performance audit activities involve the independent and objective assessment of all or part of an entity’s operations and administrative support systems. Performance audits may involve multiple entities and examine common aspects of administration or the joint administration of a program or service.

During the performance audit process, the ANAO gathers and analyses the evidence necessary to draw a conclusion on the audit objective. Audit conclusions can be grouped into four categories:

• unqualified;
• qualified (largely positive);
• qualified (partly positive); and
• adverse.

In the period between 2018-19 to 2022-23 entities within the Defence  portfolio were included in tabled ANAO performance audits 31 times . The conclusions directed toward entities within this portfolio were as follows:

• none were unqualified;
• 12 were qualified (largely positive);
• 13 were qualified (partly positive); and
• five were adverse.

Figure 2 shows the number of audit conclusions for entities within the Defence portfolio that were included in ANAO performance audits between 2018–19 and 2022–23 compared with all audits tabled in this period. A clear conclusion was not published for one audit (three per cent of audits) completed in the 2018–19 to 2022–23 period. 

Figure 2: Audit conclusions 2018–19 to 2022–23: entities within the Defence portfolio compared with all audits tabled

Note: A clear conclusion was not able to be published for one audit in the Defence portfolio in the period of 2018–19 to 2022–23.

Source: ANAO data.

The ANAO’s annual audit work program is intended to deliver a mix of performance audits across seven audit activities: governance; service delivery; grants administration; procurement; policy development; regulation and asset management and sustainment. These activities are intended to cover the scope of activities undertaken by the public sector. Each performance audit considers a primary audit activity. Figure 3 shows audit conclusions by primary audit activity for audits involving entities in the Defence portfolio.

Figure 3: Audit conclusions by activity for audits involving entities within the Defence portfolio, 2018–19 to 2022–23

Note: A clear conclusion was not able to be published for one audit in the Defence portfolio in the period of 2018–19 to 2022–23.

Source: ANAO data.

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 Australian Government.

The Department of Defence’s total budgeted assets for 2023-24 are just over $146.7 billion, with specialist military equipment, land and buildings and inventory representing 63 per cent, 18 per cent and 6 per cent, respectively, as shown in Figure 4. Employee provisions, encompassing the defined benefit superannuation provisions, are attributable to 92 per cent of total budgeted liabilities.

Figure 4: Department of Defence’s total budgeted financial statements by category ($’000)

Source: ANAO analysis of 9 May 2023–24 Portfolio Budget Statements.

There are four key risks for the Department of Defence 2022–23 financial statements that the ANAO has highlighted for specific audit coverage, including three risks that the ANAO considers potential key audit matters (KAMs).

• The valuation and accuracy of specialist military equipment, which includes defence weapons platforms, assets under construction, and associated spare parts. 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 subjectivity in the valuation assessment is due to the difficulty in obtaining the replacement costs of assets with a similar capability in the absence of an active market, the selection and application of appropriate indices, the determination and assessment of appropriate useful lives, and the identification of indicators of impairment. There is also complexity, and a high degree of judgement is exercised in the cost attribution model that allocates accumulated capitalised costs on large scale acquisition projects between individual platform assets, associated spares and inventory. The balance of specialist military equipment as at 30 June 2022 was $81.0 billion. (KAM – Valuation and accuracy of specialist military equipment)
• The 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 (including such matters as salary growth and discount rates, pension indexation rate, pension take-up rate and invalidity retirements). The provision balance as at 30 June 2022 was $140.7 billion. (KAM – Valuation and disclosure of administered employee provisions)
• The 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. The balance of inventory as at 30 June 2022 was $7.9 billion. (KAM – Completeness and existence of inventories)
• The valuation of general assets, which includes land and buildings, infrastructure, plant and equipment, heritage and cultural assets, and intangibles. The valuation involves a high degree of management judgement in applying assumptions in respect of classifying project costs as capital or expense and the selection of valuation methods to measure fair value. Significant judgements applied in the valuation process relate to the selection capitalisation rates, current replacement costs, discount rates, and conditions of the assets. Where observable market data is not available, the valuation is subject to a higher level of judgement. There is also subjectivity in determining appropriate useful lives and the assessment of the financial impact of indicators of impairment. The balance of general assets as at 30 June 2022 was $33.8 billion.

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, cyber security 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 assets for 2023-24 are just under $2.1 billion, with property, plant and equipment, land and buildings and intangible assets accounting for 56 per cent, 24 per cent and 8 per cent, respectively, as shown in Figure 5.

Figure 5: Australian Signals Directorate budgeted financial statements by category ($’000)

Source: ANAO analysis of 9 May 2023–24 Portfolio Budget Statements.

There are two key risks for ASD’s 2022–23 financial statements.

• The valuation, allocation and accuracy of non-financial assets, particularly assets under construction. ASD is undertaking a number of complex projects which are progressively capitalised in assets under construction. The nature of these projects requires the increased application of judgement about whether costs are capitalised or expensed. Additionally, each balance date ASD must determine whether these non-financial assets are appropriately recorded at fair value or exhibit indicators of impairment which also requires judgement and estimation.
• The reliance on the Department of Defence for corporate shared services, including financial processing and payroll. The risk arises due to the significance of ASD’s reliance on internal controls established by Defence in support of these processes which influence financial management and reporting by ASD.

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.

DHA’s total budgeted assets for 2023-24 are $5.1 billion, with inventories and land and buildings attributable to seven per cent and 89 per cent, respectively, as shown in Figure 6. Sales of goods and rendering of services account for almost all revenue.

Figure 6: Defence Housing Australia budgeted financial statements by category ($’000)

Source: ANAO analysis of 9 May 2023–24 Portfolio Budget Statements.

There are five key risks for DHA’s 2022–23 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. Accounting for properties acquired during the year as investment properties has been assessed as a risk primarily due to a change in management’s policy of deviating away from sale and lease back of properties.
• Completeness and accuracy in classification of inventory in light of a recent decision undertaken by management to invest in properties for investment purposes and not inventory.