Audit of Defence contract with IBM highlights conflict of interest issues

By Shannon Jenkins

Tuesday August 17, 2021

ANAO has a bumper reporting month in September, with performance audits into Defence, Health and Australian National University due for release.
ANAO has a bumper reporting month in September, with performance audits into Defence, Health and Australian National University due for release. (Department of Defence; Defence)

The Department of Defence’s governance of a major ICT reform initiative has been undermined by the involvement of contractors in decision-making arrangements, the Australian National Audit Office has found.

The department’s enterprise resource planning (ERP) program involves the streamlining of business processes associated with hundreds of separate Defence ICT applications into one SAP S/4HANA system. The program aims to enable better governance, faster processing and lower maintenance and support costs, and is still in its early stages of implementation.

In its latest audit report, the ANAO has focused on the first ‘tranche’ of the program, worth $364 million. This includes the contract established with the systems integrator, IBM, that ‘represents more than 50% of the total program budget from 2019–20 onward’.

While Defence’s administration of tranche one has been ‘largely effective’ so far, there is room to improve the management of probity and conflicts of interest ‘in decision-making arrangements for varying contracts’, ANAO found.

The audit also identified a number of probity issues in the ERP program more generally. For example, in September 2020, Defence leaders were alerted to allegations that a senior ERP program contractor had discussed their partner’s employment situation with another contractor in the program.

“Subsequent to the discussion, the senior ERP contractor’s partner was employed by that contractor’s company,” ANAO said.

“This resulted in an investigation by Defence’s Audit and Fraud Control Division. The investigation identified that there had been a breach of Defence policy by the contractor through a failure to identify and declare a perceived conflict of interest, as required by the contractor’s contract.”

ANAO noted that it took the contractor five months to complete a new conflict of interest after the investigation concluded. The declaration also hadn’t been registered in the conflict of interest declaration log for the ERP program which had been provided to the ANAO by Defence.

“The ANAO also identified that this individual was a company director of a SAP consulting firm, and that the directorship had not been documented in Defence’s conflict of interest documentation provided to the ANAO. Defence advised the ANAO in July 2021 that it had taken action on this matter,” the audit office said.

Read more: Defence signs $95.5 million contract with IBM to lead billion-dollar IT project

Another issue the audit highlighted related to Defence procurement panels which included ‘above the line’ contractors that were largely recruited through labour hire firms.

ANAO found instances of individuals being recommended for roles in the ERP program by a program contractor they had previously worked with.

“The available evidence indicates that these individuals were subsequently matched by the program with labour hire firms appearing on Defence procurement panels, and subsequently engaged as contractors on the program through those firms. This approach reduces competition for roles in the program,” it said.

While Defence has developed an appropriate contract with IBM, program and contract governance has been ‘undermined by conflicts of interest embedded in decision-making arrangements’.

The audit found that the department’s Change Control Board — a decision-making and approval body for program change requests (PCRs) — had IBM representation at each of the 31 meetings reviewed by the ANAO.

“The meeting minutes document that PCRs relating to price-impacting variations to IBM’s contract were approved to progress to the next stage (commercial assessment or contract variation proposal) at six of the 31 meetings, resulting in four contract variations with a total value of $483,902.77,” ANAO said.

“The relevant meeting minutes do not record any conflict of interest declarations being made by any participants. Further, the minutes do not document any participants recusing themselves from the board’s deliberations and decision-making.”

During the procurement process, ANAO found two instances of non-compliance with the Commonwealth Procurement Rules, including that AusTender reporting was seven days late ‘due to a technical issue’, and there was no record of consideration of environmental sustainability.

Analysis of AusTender entries during the audit also identified a number of additional issues with Defence’s AusTender reporting, including incorrect dates, and incorrect values, ANAO said.

The report also highlighted two instances of non-compliance with financial delegations and Defence financial policy related to the commitment of public money.

Read more: Microsoft to host Defence’s new SAP ERP system


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