In the wake of embarrassing revelations of financial mismanagement, the Department of Defence (DoD) has launched a major financial controls project to address financial and audit issues and to build a best practice financial management environment for Defence.

DoD hopes to transform its financial management, remediate business process deficiencies, and embed and sustain systemic reform to support more effective planning, management and reporting of Defence finances.

The initiative follows revelations in November that DoD couldn't account for $500 million worth of defence stock, from aircraft engines to army boots. Defence Department Secretary Richard Smith admitted in the annual report the department's financial management practices were not up to scratch, and pledged to introduce reforms aiming at remedying the mess.

In December, in the Consolidated Financial Statements for 2003-04, the Auditor-General's qualified report noted: "Total revenues are known to be understated by $35.3 billion (16 per cent of total revenue). And total expenses are known to be understated by $34.4 billion (16 per cent of total expenses)."

And as Kenneth Davidson reported in last week's The Age, the report noted significant deficiencies of financial management systems and accounting records persisted in the Tax Office and Defence Department. In fact, the auditor said the accounts had deteriorated to such an extent that he had taken the unprecedented step of announcing "an inability to form an opinion" for the Department of Defence (DoD), with its $52 billion worth of assets.

DoD Secretary Ric Smith says the adoption of the framework will be a significant cultural change for all staff working in finance-related roles across Defence. "At its core the framework will provide all Defence personnel with access to a comprehensive and integrated source of the policies, processes and procedures necessary to manage all financial aspects of our business.

"Another key element of the framework is a structured program of internal reviews to look for and rectify problems. This will allow Defence to avoid ongoing adverse external audit findings by addressing issues in business operations before they are discovered and documented by the external auditors.

"Many of the policies already exist and there are a number that are currently under development, but in general they are difficult to access, vary in format and are quite dispersed in their location. Within the framework all policies will be made readily available to users with clearly defined linkages to both associated processes and procedures."

Smith says Defence had invested a great deal of time and effort in a major set of remediation projects to address significant deficiencies in its financial statements over several years.

"We have made some good progress but we still have a long way to go.

"I should stress that the Financial Controls Framework Project is not just another remediation project. This is a very significant change management program."

Outgoing Chief of the Defence Force, General Peter Cosgrove says efficient, effective and competent financial management is not just the preserve of the finance domain experts.

"This responsibility rests with all of us, whether military or civilian.

"If we don't get the fundamentals of our finances fixed, then operational success will not be sustained."

Accounting firm Ernst & Young will also take on a lead role as overseer.

In its annual report last year Defence said it recognizes that it must constantly seek to achieve best practice to ensure it is recognized by the Government and stakeholders as a respected financial manager. Defence was committed to addressing deficiencies and pursuing new opportunities in a more structured and coordinated way by implementing continuous improvement through financial transformation, the report said.