The report has heightened public scrutiny of the Defense Ministry, which, unlike other government departments, has long operated with great autonomy and with minimal accountability given the sensitivity surrounding national security in Israel.
Defense exports are vital to Israel's economy. In 2010, these totaled $7.6 billion, with the Israeli military buying another $2.4 billion worth. Exports in 2009 were $6.9 billion.
Four companies account for most of the 2010 total: Israel Aerospace Industries, Elbit Systems, Rafael Advanced Defense Systems and Israel Military Industries.
For many years, it has long been understood in Israel that the ministry, and particularly its export division, have been involved in dubious arms sales to unsavory regimes through shady weapons dealers licensed by the ministry.
The May 1 report by State Comptroller Micha Lindenstrauss does not directly address that issue, but it concluded the Defense Ministry director-general, Udi Shani, violated defense export laws by approving several deals without consulting other departments.
Lindenstrauss also said Shani arbitrarily changed the ministry's policy in 2010 on how it provides export licenses to companies selling their products overseas.
According to regulations, disagreements between the Defense and Foreign Ministries must go before representatives of both departments and if they cannot agree, export applications must be taken before a ministerial committee headed by the prime minister for resolution.
On May 3, the government's quality watchdog agency, Ometz, called on Defense Minister Ehud Barak to suspend Shani immediately in light of Lindenstrauss' report until Attorney-General Yehuda Weinstein rules on whether Shani can continue as director-general at the ministry.
Shani, a former head of the military's C4I directorate that combines intelligence and command and control systems, has been director-general at the Defense Ministry since 2010 and is seen as a possible CEO of state-owned IAI, flagship of Israel's defense sector later this year.
Lindenstrauss said that in at least three cases Shani had ignored export procedures and approved export licenses to companies to sell "military platforms" abroad even though the Foreign Ministry opposed them.
"The director-general and head of the Defense Ministry export agency overstepped their authority and acted against the law," Lindenstrauss said.
"The director-general … cannot decide what the law will be on his own … There is no justification for unilateral steps by him that are against the law."
Lindenstrauss did not identify the weapons systems, their manufacturers or the intended buyer.
But his report was also critical of other aspects of how defense contracts are allocated.
The ministry's Defense Exports Control Department disclosed in April that in 2011 it awarded more than 8,000 export licenses to Israeli defense companies selling to 130 countries.
It said that in 43 cases there were suspicions about breaches of the Defense Export Control Law, including promoting deals that contravene restrictions on the sale of some systems to foreign countries.
On March 8, India's Defense Ministry blacklisted state-owned IMI, along with five Indian and foreign companies, for 10 years over a 2009 bribery scandal. IMI denies any wrongdoing.
India is a one of Israel's major arms customers and that ban could have an impact on defense exports.
Israel's Defense Ministry ordered all defense companies to sign onto a "compliance program" to eradicate corruption in defense deals.
But all the evidence indicates that the ministry keeps its registered arms dealers, who are invariably former officers, on a remarkably loose leash.
Yossi Melman, an Israeli journalist who specializes in intelligence and military affairs, observes that shady arms deals proliferate because "Israel is a small country based on an old boy network and there is insufficient supervision of the system …
"You can't supervise arms deals if you're promoting them."
U.S. author Andrew Feinstein noted in his 2011 book "The Shadow World," which addressed corruption in the arms business, that in Israel in 2007 "supervision and marketing were separated and in theory there is now extensive supervision.
"However, the new regime is not implemented with great conviction The Defense Ministry is under huge pressure from the industry not only to give contracts but also to ensure that it can operate unhindered and unscrutinized."