The Australian National Audit Office has raised the alarm about Defence's handling of the program, saying the company, IBM, had staff at meetings deciding on changes to the program that later grew contract values by $483,900.

But the audit, released on Monday afternoon, found no evidence that the IBM staff declared a conflict of interest, or recused themselves from the meetings.

The auditor has called for Defence to change how it manages the program after it found that no department staff were present in four of 26 meetings it examined where decisions were made by the board approving changes to the IT program.

Defence had tasked officials with overseeing the IT overhaul, and had three departmental staff working alongside 11 contractors on the Change Control Board.

However, on average, there was one departmental official present at board meetings out of nine attendees, according to meeting minutes.

"A low level of Commonwealth representation across a contractor-led program can create oversight risk for the responsible entity," the audit said.

"Further, Defence's program change arrangements give rise to both real and perceived conflicts of interest, as contractors are involved in the department's substantive decision-making processes relating to their contracts, including contract variations with financial consequences for the Commonwealth."

The audit said the Change Control Board was a decision-making and approval body for requests to alter the project. It meets fortnightly or as required, and includes 14 program personnel, including one public servant, two military personnel, four IBM contractors and seven non-IBM contractors.

IBM staff were at each of the 31 meetings minutes reviewed by the watchdog.

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Meeting minutes show that at six of the meetings, the board sent requests to the next stage of decision-making. The requests resulted later in changes to the value of IBM's contracts, the audit report said.

The audit raised major red flags about Defence's oversight of the project, which is part of a larger overhaul to the department's IT that, when announced, was costed at between $1 billion and $2 billion.

Defence embarked on the IT reform in 2016 after a major department review the previous year found it should stop operating as "federation of separate parts" and should integrate its systems.

Defence white papers and reform plans later said it needed to overhaul its IT to operate more effectively. The audit office described the project as strategically important for the nation.

The overhaul, known as the Enterprise Resource Planning program, will streamline the department's systems and is due to finish in 2025.

But the national auditor raised multiple other problems with the Defence Department's handling of conflicts of interest, contractor timesheets and information security.

Defence staff working on the IT program had accepted hospitality from contractors but failed to declare this on a gifts and benefits register.

Senior program personnel had sent Defence information relating to the tech program from their work email accounts to external email accounts.

The audit office found more than 400 emails, up to "protected" classification and relating to the program, had been sent from Defence accounts to personal, business or other government entity email addresses.

Most of the emails included attachments and personnel were able to send emails to an external account by misusing security classifications in a number of emails.

The audit also raised problems with Defence's approval of timesheets, saying that three subordinate APS or ADF staff had been responsible for approving their manager's timesheets.

On two occasions, contractors had their timesheets approved by someone in the same team and at the same level of seniority. In 13 instances, contractors had their timesheets approved by people who could not see the work they performed.

The audit office recommended the Defence Department review its decision-making to avoid real and perceived conflicts of interest where contractors are potentially involved in decision-making regarding their contracts.

It also urged changes in its approvals of timesheets, giving authority to people in position to make independent judgments, and developing more robust processes for on-boarding contractors, including ensuring awareness of probity and information security.

The department agreed to the recommendations.

In a letter to the audit office, Defence Department secretary Greg Moriarty and ADF chief Angus Campbell said the department had responded to the audit findings by changing how it inducts contractors, reviewing transparency for its approval of timesheets and introducing training to improve contractors' understanding of rules about conflicts of interest.

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