Committee view and recommendations

4.1        There is no doubt that the monies spent by Defence on credit and other transaction cards can be too easily overshadowed by the magnitude of its total budget of $32.337 billion. The committee observed throughout the inquiry that the $550 million spent by Defence on operational costs through credit and other transaction cards in 2014-15 is a substantial amount of public monies, noting that access to such privileges as credit and other transaction cards also brings responsibility.

4.2        Defence must demonstrate and pursue a proactive, rigorous and systemic approach to its management of credit and other transaction cards to maintain the confidence of the community and the Parliament. Unfortunately, the committee is not convinced that Defence has put in place the systems and controls to instil confidence in its management of credit and other transaction cards.

4.3        The committee is firmly of the view that irrespective of the size and scope of Defence's resource management, the principles of good governance enshrined in the Public Governance Act (PGPA) apply equally to Defence's management of credit and other transaction cards and the resources it dedicates to achieving a substantial defence capability. This includes the effective, efficient, economic and ethical use of all resources to achieve organisational performance.

4.4        As noted earlier, the devolution of responsibilities to individuals arose through implementation of the recommendations of the Defence Efficiency Review in 1996, in an effort to secure administrative efficiencies through engaging responsibility at the individual levels at which activity occurs. Yet, as noted, a review of the Defence Reform Program in 2001 signalled caution even then, about the actual efficiencies these reforms would generate in the long-term.

4.5        The committee appreciates that moving from a centrally-focused administration to the devolved responsibilities required to reach the standards set by the PGPA presents challenges for an organisation of Defence's size and scale. However, the committee is of the view that it is precisely because of Defence's size and scale that it should be setting a standard of excellence in financial management and accountability across the Commonwealth.

4.6        The committee also notes that a reduction in unit administrative staff (who used to conduct reconciliations) was one of the intended cost saving outcomes of the DER and DRP but that as with many such “efficiency measures”, it has had unintended consequences. When Government imposes future efficiency measures and Defence implements them, lessons such as this (as well as the opportunity cost of highly qualified engineers and other senior personnel spending their time doing a clerical work rather than their core duty) must be considered when assessing whether the measures do in fact represent value for money in the medium to long term.

4.7        The evidence from the inquiry pointed to the need for Defence to put in place systems to manage monies consistent with Defence's duties and responsibilities under the standards set by the PGPA. Yet this inquiry has illustrated shortcomings in Defence's acknowledgement of its responsibility to manage its resources to meet those standards. Whilst fraud prevention and investigation is absolutely necessary, it is not enough, particularly as Defence moves towards a projected investment of 2 per cent of Australia's GDP by 2020.

4.8        During the hearing with Defence, the officials defended irregularities identified by the Australian National Audit Office (ANAO) audit report with the argument that no fraud had occurred or been detected. Yet many of the irregularities, explained by individual bad decision-making or contrary to Defence policy, incurred a significant cost through waste and poor use of economic resources. The challenge for Defence is to find an appropriate balance between the unique operational parameters of a large, varied and mobile workforce which requires ready and frequent access to cash, and the responsibility for ensuring those resources are used sensibly.

4.9        The committee is of the view there needs to be a stronger commitment by Defence to identify and resolve the irregularities and ensure the ANAO report's recommendations are fully implemented. To this end, the committee is of the view that the ANAO should undertake further regular performance audits to monitor Defence's management of credit and other transaction cards and the implementation of its recommendations.

4.10      The committee is also aware that Defence's management of credit and other transaction cards would be a matter of interest to the Joint Committee of Public Accounts and Audit (JCPAA), particularly in light of its ongoing oversight role of the PGPA.

Recommendation 1

4.11      The committee recommends that the Minister for Defence directs the Australian National Audit Office to undertake biennial performance audits of the Department of Defence's management of credit and other transaction cards to ensure:

1. recommendations from the 2015-16 performance audit are implemented in full; and
2. Defence complies with performance standards set by the Public Governance, Performance and Accountability Act 2013.

Recommendation 2

4.12      The committee recommends that the Joint Committee of Public Accounts and Audit include the Department of Defence's management of credit and other transaction cards and its compliance with the Public Governance, Performance and Accountability Act 2013, as part of its ongoing work program.

Controls on credit and other transaction cards

4.13      Although the committee accepts that Defence is implementing a new policy on card activation, it was concerned that Defence appeared lax about implementing such controls in the past, even when its own Fraud Control Plans recognised the risk was present.

4.14      The committee supported Defence's move to finally implement a more rigorous approach to merchant blocking. But the committee was not satisfied with Defence's responses during the inquiry. The committee required additional information from Defence to explain how $15,000 was spent over eight years using travel cards on a category which was supposedly blocked; and a further $3.3 million was spent using purchase cards in the same category without any blocks in place. The committee wanted to know how transactions in blocked categories could be accepted for payment without triggering 'red flags' in Defence's own monitoring systems. Defence is yet to provide this information to the committee.

4.15      Defence was unable to advise the committee whether, or how often, travel was not conducted in accordance with approvals and over-payments reimbursed accordingly. The committee asked Defence to provide this information but it was not made available before this report was finalised.

4.16      The committee was concerned that Defence's response to the apparent 'seasonality' of end of financial year payments, and the ensuing increases to card limits, reflected a disregard for efficient and effective resource management. Sound and rigorous corporate planning and performance is essential to ensure resources are spent wisely.

4.17      During the hearing with Defence, officials did not adequately respond to the committee's concern that a very high number of transactions are signed off by the individual incurring the expenses, with no other checks on the integrity of the transactions.

4.18      Although Defence expanded on the controls in place to acquit travel allowances, the committee was not reassured that there was sufficient rigour to the processes to ensure that travel approvals were always appropriately acquitted. The after-travel certification process relied primarily on an individual's verification that travel had been conducted in accordance with the approval. The extent of Defence's reliance on card holder verification of transactions or auto-acceptance of transactions led, in the committee's view, to a softness in the acquittals process which is unacceptable.

4.19      According to the ANAO audit, the cost of advancing cash to Defence personnel for travel during 2014-15 was nearly $900,000 in interest charged to the Department. The committee is concerned that Defence persists with this practice, especially in the absence of independent checks on travel acquittals. The committee did not find Defence's rationale for cash advances persuasive and is of the view that the cost to the Commonwealth is unacceptable. Defence's argument that the interest generated by cash advances is justified because cash advances are a condition of members' employment does not reflect best practice in the public and private sectors and should be re-examined.

4.20      The committee was surprised by Defence's apparent inability to accept the inherent financial risks associated with cash advances through the lens of Defence's obligations under the PGPA. This concern related to both the physical and virtual use of travel and purchase cards. The committee was not persuaded by Defence's explanation that the interest generated through cash advances, on either travel or purchase cards, could be justified as a reasonable cost to the Commonwealth.

4.21      Whilst some of these concerns could be allayed through the implementation of more rigorous controls and stronger performance management, the committee formed the view that the use of credit cards for cash advances and the opportunity for independent verification of the integrity of transactions for both travel and purchase cards should be re-examined by Defence in collaboration with the Department of Finance and the ANAO. This is particularly pertinent in light of the expectation that the Department of Finance will re-tender arrangements for credit and other transaction cards across whole-of-government in the next 12 months.

Recommendation 3

4.22      The committee recommends that the Department of Defence re-examine the use of credit cards for cash advances and their acquittal processes, including independent verification of transactions for travel and purchase cards, in collaboration with the Department of Finance and the Australian National Audit Office.

Taxis and car hire

4.23      The committee accepts that Defence requires access to some form of Cabcharge vouchers and e-tickets for the use of recruits and trainees, particularly those below the age of 18 years. During the inquiry, the committee sought reassurance that Defence had in place processes which would ensure that personnel incurring taxi and car hire costs made proper use of public money and used taxis at public expense only for official purposes and where it is the most cost effective means of travel, and with due consideration for security, reliability and access. This reassurance was not provided to the committee.

4.24      The committee was also concerned by the evidence contained in the ANAO report of irregularities including the high use of specific individual taxis, multiple expensive taxi fares and 'small hours' travel. The committee asked Defence to investigate the specific situations cited in the ANAO report.

Recommendation 4

4.25      The committee recommends that the Department of Defence ensure that it fully addresses the issues identified in the Australian National Audit Office audit report on the use of taxis and car hire, including:

1. ensuring adequate controls are in place to effectively manage taxi and car hire for those unable to use the Defence travel card; and
2. investigating the high use of specific individual taxis, multiple expensive taxi fares and 'small hours' travel. The results of this investigation should be made publicly available on the Defence website.

Fuel cards management

4.26      The committee was encouraged by Defence's advice on the steps taken to investigate and redress outstanding traffic infringements and improve fleet management, including reducing the risk of fuel fraud. The committee welcomed the opportunity for updated information, when available, on the outcomes of the review of fuel management arrangements currently underway.

Governance framework

4.27      The committee commends the changes arising from the introduction of the new governance framework under the PGPA. The committee acknowledges, however, that the evidence indicates Defence still has much work to do to strengthen the effectiveness of controls and fully implement the findings of the ANAO audit.

4.28      Lack of accountability in relation to Defence's proper use of relevant monies was a major concern for the committee during the inquiry. The committee is concerned by examples which show an individual's use of a credit card was not consistent with Defence or Commonwealth policy. Too often, irregularities in credit card use suggested either a disregard for, or intention to circumvent, Defence policy. Yet these irregularities did not trigger any 'red flags' in Defence's management systems.

4.29      Some instances, such as the occasion where over $1.1 million was spent on provisions for a major military exercise, resulting in interest charges of $18,278 to the Commonwealth taxpayer, are of major concern.

4.30      The committee recognises that Defence has taken steps to implement the recommendations of the ANAO audit. However, the committee believes it is critical that Defence continues to engage in the management of credit and other transaction cards and attend to the risks identified by the ANAO audit. A key step which Defence should take is to share its experiences with the Department of Finance as it scopes the new arrangements for the forthcoming whole-of-government tender in relation to travel cards.

4.31      Beyond the new arrangements for travel cards, it is important that Defence take steps to ensure that its governance of credit and other transaction cards also aligns with the move to a stronger performance-oriented culture under the changes instigated through the One Defence business model.

4.32      The ANAO audit did not identify actual occasions of fraud. The audit did, however, find that in the absence of effective controls Defence remains vulnerable to the risk of fraud, especially in a payments environment which is moving increasingly towards the use of virtual cards. Despite evidence of convictions for fraud in military jurisdictions, the committee is of the view that this information is not readily available publicly. Any deterrence value across the Defence community arising from awareness of such convictions may therefore be limited.

Recommendation 5

4.33      The committee recommends that the Department of Defence be more transparent in reporting disciplinary action taken against individuals found to have committed credit card fraud, whether steps taken are administrative or judicial in nature. This should include publishing the outcomes of disciplinary or criminal action on the Defence website and in service newspapers.

4.34      The extent of instances where the use of cards indicates either a disregard or ignorance of Defence policy and procedures raises questions about the effectiveness of current programs for education, training and communication across Defence. While the committee did not receive evidence on the effectiveness of Defence's training and education programs around the use of credit and other transaction cards, the committee is of the view that Defence should be doing more to educate its workforce in this area. Specifically, Defence should strengthen its education programs to ensure that officers issued with a credit card receive clear written and verbal directives regarding their obligations and responsibilities in using Commonwealth resources.

Recommendation 6

4.35      The committee recommends that the Department of Defence evaluate its current training, education and information programs in relation to the use of credit and other transaction cards to ensure compliance with the performance standards set by the Public Governance, Performance and Accountability Act 2013.

Senator Alex Gallacher
Chair

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