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

The purpose and mission of the Department of Defence and the Australian Defence Force (ADF) (collectively known as ‘Defence’) is 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 while are independent, reside administratively within the Defence portfolio. 

In the 2026–27 Portfolio Budget Statements (PBS) for the Defence portfolio, the aggregated budgeted expenses for 2026–27 total $68.6 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 84 per cent of the entire portfolio’s expenses.

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

Source: ANAO analysis of 2026–27 Portfolio Budget Statements.

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

Note b: The Australian Signals Directorate does not publish average staffing levels in the Portfolio Budget Statements.

In determining the 2026–27 audit work program for the Defence portfolio, the ANAO considered prior audit findings, current portfolio risks and emerging pressures associated with the scale and complexity of Defence’s investment and reform. The ANAO also considered changes in Defence’s operating environment and the delivery approaches being used to achieve capability and sustainment outcomes.

The Defence portfolio faces rapidly evolving strategic circumstances, characterised by increasing uncertainty, competition and complexity. The ANAO’s audit focus is risk-based and directed to areas that are critical to delivery confidence, value for money and accountability. These include Defence’s governance and assurance arrangements, management of large-scale acquisition and sustainment activity, stewardship of assets and infrastructure, and the integrity of financial and performance information used to support decision-making and parliamentary oversight.

Defence’s primary risks centre on its ability to mobilise its people, funding and systems fast enough to deliver capability in a complex, technology-driven strategic environment. The 2026 updates to the National Defence Strategy and Integrated Investment Program largely reinforce and mature the key concepts and commitments made in 2024 and draw on lessons learned from the war in Ukraine and conflicts in the Middle East.   The government committed an additional $14 billion over the next four years and an additional $53 billion over the decade in the 2026 Integrated Investment Program. This brings the total allocation for the accelerated delivery of capability for the ADF to $425 billion. 

Significant growth in Defence investment, particularly where delivery timeframes are compressed or acquisition approaches are adapted in response to strategic circumstances, can increase exposure to risk across acquisition and sustainment activities. Reflecting this risk environment, the ANAO’s 2026–27 annual audit work program places increased emphasis on Defence acquisition and sustainment activities.

Governance

Effective governance and assurance underpin Defence’s ability to deliver capability at pace while maintaining accountability. Defence’s current reform agenda, including enterprise-level system changes and the establishment of the Defence Delivery Agency, increases the need for clear responsibilities, robust oversight, and reliable information for senior decision makers. The pace of reform increases the risk that governance frameworks, records management and assurance mechanisms lag implementation.

Recent audit work has highlighted ongoing risks relating to record keeping, information management, governance and assurance practices.   These foundations are important to demonstrate compliance with requirements, support transparency, and enable informed scrutiny of complex acquisition and sustainment decisions.

Governance and assurance considerations feature across the ANAO’s 2026–27 audit program for the Defence portfolio.

Procurement

Defence is undertaking substantial procurement activity across all domains, involving both traditional and accelerated acquisition pathways. Planned and ongoing procurements are intended to give effect to the National Defence Strategy and Integrated Investment Program, and include large, complex and, in some cases, high risk and developmental projects. The 2026 National Defence Strategy places greater emphasis on alliance-based capability development, strategic industrial partnerships and tailored procurement pathways.

Risks associated with procurement include maintaining a clear value for money focus, managing contractual risk and performance, and ensuring appropriate records and assurance arrangements are in place, particularly where innovative or developmental approaches are used. Effective procurement governance is central to achieving intended capability outcomes and supporting accountability.

Previous audit work on Defence materiel procurement activity has identified instances where these risks were evident, including: maintaining a value for money focus in procurement ; the completeness of advice, record keeping and design maturity ; the handling of rapid   and unsolicited procurement proposals ; partnership arrangements with industry ; the monitoring of program and project performance ; effective management of prepayments including for Foreign Military Sales ; and the delivery of all approved capability in accordance with the approved budget and schedule. 

Asset management and sustainment

Defence manages and sustains a substantial portfolio of specialist military equipment, infrastructure and other assets. Accurate planning, valuation and sustainment decisions are important to maintaining force readiness and managing the transition between existing platforms and future capability. Valuation of assets and capability at a point in time involves significant judgement, particularly for specialist military equipment, inventory , infrastructure and land.

The possibility of protracted operations, as documented in the 2026 National Defence Strategy, elevates sustainment risk across equipment, estate, fuel, munitions, health and logistics. Ongoing risks include sustaining ageing platforms beyond original design life, managing capability gaps during transition, and ensuring sustainment arrangements deliver intended outcomes and value for money.   These risks may be heightened where acquisition delays or design changes place additional pressure on sustainment systems.

Financial management

Defence’s financial management remains a significant focus due to the scale and complexity of its operations, investment program and asset base. Accurate financial reporting relies on effective internal controls, reliable systems and sound judgement in areas such as asset valuation, inventory management and employee provisions.

As Defence progresses major reforms and large-scale investments, there is a continued need to ensure that financial systems keep pace with organisational reforms and that financial information faithfully reflects underlying activity and supports transparency, accountability and informed oversight.

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 2021–22 to 2025–26 entities within the Defence portfolio   were included in tabled ANAO performance audits 21 times.   The conclusions directed toward entities within this portfolio were as follows:

• none were unqualified;
• six were qualified (largely positive);
• 14 were qualified (partly positive); and
• One was adverse.

Figure 2 shows the number of audit conclusions for entities within the Defence portfolio that were included in ANAO performance audits between 2021–22 and 2025–26 compared with all audits tabled in this period.

Figure 2: Audit conclusions 2021–22 to 2025–26: entities within the Defence portfolio compared with all audits tabled

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, 2021–22 to 2025–26

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’s total budgeted assets for 2026–27 are $180.5 billion, with specialist military equipment, land and buildings, and infrastructure, plant and equipment representing 58 per cent, 17 per cent and 7 per cent, respectively, as shown in Figure 4. Inventories account for 7 per cent of total budgeted assets for 2026–27 and are included in the total budgeted assets ‘Others’ category. Employee provisions, encompassing the defined benefit superannuation provisions, are attributable to 93 per cent of total budgeted liabilities.

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

Source: ANAO analysis of 2026–27 Portfolio Budget Statements.

The engagement risk rating reflects the number and quantum of key areas of financial statements risk that will be a focus of the audit as well as the: nature, magnitude and complexity of the department’s operations and strategic environment, including a highly decentralised control environment and the use of various IT systems that operate independently of each other; the high level of public interest and scrutiny of the department’s activities; and the number and financial significance of complex accounting estimates in the financial statements, including the fair value of specialist military equipment and military defined benefit superannuation liabilities, which are subject to higher levels of estimation uncertainty.

There are seven key risks for the Department of Defence 2025–26 financial statements that the ANAO has highlighted for specific audit coverage, two being 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 2025 was $93.7 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 2025 was $141.1 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 is processed daily, inventory is managed through multiple systems and is subject to complex system interfaces. The balance of inventory as at 30 June 2025 was $11.4 billion.
• Management override of controls. Fraud, including management override of established control processes, is a presumed significant risk of material misstatement according to ASA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of a Financial Report due to management’s unique position and ability to commit fraud by manipulating accounting records or overriding controls that otherwise may appear to be operating effectively.
• The valuation of general assets that comprise land and buildings, infrastructure, plant and equipment, heritage and cultural assets and intangible assets. The valuation of general assets involves a high degree of management judgement due to the selection and application of valuation methodologies, subjectivity in determining appropriate useful lives, and the assessment of the financial impact of indicators of impairment.
• Capitalisation and impairment of assets under construction given the complexity of the projects. There is a risk that capitalisation decisions and impairment assessments for assets under construction may not be appropriately determined or recognised in a timely manner.
• General controls of IT systems supporting the preparation of financial statements as Department of Defence operates within a highly complex IT environment comprising multiple systems hosted across various platforms. Deficiencies in IT general controls or application controls may adversely impact underlying business processes and the integrity, accuracy, and completeness of financial statement preparation and reporting.

Australian Signals Directorate

The purpose of the Australian Signals Directorate (ASD) is to defend Australia from global threats and advance Australia’s national interests through the provision of foreign signals intelligence, cyber security and offensive cyber operations, as directed by government. To achieve its purpose, ASD needs to keep pace with the latest technology trends and invest in cutting-edge capabilities to gain asymmetric advantage. ASD’s activities are enabled by innovative techniques, including specialist tools to probe large volumes of data to detect threats. ASD’s mastery of technology also underpins the formulation of sound advice to protect Australia from sophisticated threats.

ASD’s total budgeted assets for 2026–27 are $2.9 billion, with property, plant and equipment, lands and buildings, and intangible assets accounting for 33 per cent, 36 per cent and 13 per cent, respectively, as shown in Figure 5.

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

Source: ANAO analysis of 2026–27 Portfolio Budget Statements.

There are two key areas of risk for ASD’s 2025–26 financial statements.

• Measurement and recognition of non-financial assets, particularly related to the valuation and capitalisation of assets under construction. Investment in technology is central to ASD’s core operations and this will be supported through the REDSPICE program which is a significant, multi-year investment in ASD’s cyber and intelligence capabilities. ASD is required to comply with requirements for the capitalisation of expenditure as prescribed by the Australian Accounting Standards, and complexity of this judgement is increased by the compartmentalised nature of operational assets, and increasing capital projects associated with REDSPICE.
• Transactions managed through shared service arrangements with the Department of Defence (Defence), particularly given the significance of the outlays managed by Defence and weaknesses identified in Defence’s ITGC environment. Defence will assist ASD in administering an estimated $1.70 billion of cash outlays in 2025–26. ASD is supported by Defence through the provision of a corporate shared services agreement that covers a significant proportion of financial management processes and supports the preparation of the annual financial statements. This is a focus area due to the significance of the transactional processing that is undertaken by Defence, and the reliance on the internal controls implemented by Defence to appropriately manage transactions on behalf of 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. Recent amendments to the Defence Housing Australia Act 1987 have also expanded DHA’s functions to support additional classes of persons, including foreign government and defence personnel, in support of meeting the operational needs of the Defence Force. To meet these requirements, DHA constructs, purchases and leases housing for Australian Defence Force personnel and other authorised persons.

DHA’s total budgeted assets for 2026–27 are $6.6 billion, with inventories and land and buildings attributable to three per cent and 94 per cent, respectively, as shown in Figure 6. Sales of goods and rendering of services account for almost all revenue and lease liabilities account for 75 per cent of total budgeted liabilities.

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

Source: ANAO analysis of 2026–27 Portfolio Budget Statements.

There are three key risks for DHA’s 2025–26 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.
• Management override of controls. Fraud, including management override of established control processes, is a presumed significant risk of material misstatement according to ASA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of a Financial Report due to management’s unique position and ability to commit fraud by manipulating accounting records or overriding controls that otherwise may appear to be operating effectively.