Audit finds conflicts of interest in IBM Defence work

Denham Sadler
National Affairs Editor

IBM representatives were present and involved in decisions at several meetings related to a major Defence information technology project which resulted in the company receiving contract amendments worth nearly $500 million, the national audit office has found.

The Australian National Audit Office (ANAO) tabled its audit of the Department of Defence’s enterprise resource planning (ERP) program tranche one, a streamlining of the department’s business processes associated with about 500 separate IT applications into one SAP system, at a cost of at least $1 billion over nearly a decade.

The audit found that the department’s administration of this part of the major IT project had been “largely effective”, but there was scope for improvements in governance arrangements around the management of probity and the management of conflicts of interest in decision-making.

It’s a mostly positive audit for Defence, with the ANAO finding the planning, governance, monitoring and reporting arrangements to be “largely fit for purpose”, and there had been a “largely effective” procurement process, which saw IBM beating out Accenture for the contract eventually worth $112 million.

Conflicts: ANAO revelations on Defence ERP project

But the audit did find issues around the involvement of contractors in the decision-making process relating to their own contracts.

The ANAO found that a Change Control Board was established, which was “substantively responsible” for decisions in relation to the ERP program, consisting of three department officials and 11 contractors, including four from IBM.

“The ERP program involves a large number of contractors working across all parts of the program and at all levels of program decision-making,” the report said.

“Defence has interspersed its officials across the ERP program to discharge its departmental responsibilities.”

There was on average only one Defence department representative at each of the meetings, and on four occasions none were present at meetings where decisions were made, the audit found.

“A low level of Commonwealth representation across a contractor-led program can create oversight risk for the responsible entity, which remains accountable for the proper use and management of public resources and for decision-making in the Commonwealth interest,” the ANAO said.

IBM, the lead contractor on the project, had a representative at every meeting, including six where decisions were made to increase IBM’s contract by a total of $484 million, according to the ANAO.

“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,” the report said.

“The board’s decision-making arrangements give rise to actual conflicts of interest as the systems integrator is part of the decision-making process for variations to its contract.”

Defence has accepted the ANAO’s recommendation to review its probity arrangements to avoid contractors being involved in decisions on their own contracts to manage real and perceived conflicts of interest.

While the auditor found the department had led a “largely effective” procurement process, two breaches of procurement rules and two breaches of Defence policy were identified, including late public reporting and no record of consideration of environmental sustainability.

Earlier this year IBM was awarded a further contract worth $128 million for the second phase of the ERP program, which launched this year and wasn’t covered by this audit.

The first capability under the program was launched at the end of last year, with initial finance reporting capabilities rolled out in December.

Despite running since 2016, the ANAO found that the program is still at an “early stage of implementation” and “substantial work remains for Defence to fully implement the program”.

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