Financial Management: Financial Reporting Issues Related to the Navy's
Direct Vendor Delivery Initiative (Correspondence, 09/13/2000,
GAO/AIMD-00-312R).

GAO provided information on how a Direct Vendor Delivery (DVD) contract
would affect the Navy's financial reporting, focusing on: (1) whether
accounting and auditing standards would require DVD contractors to
report individual transactions through the Transaction Item Reporting
(TIR) system; and (2) what level of reporting would be required under a
DVD contract to meet accounting and auditing standards.

GAO noted that: (1) accounting standards or audit requirements would not
necessitate TIR reporting; (2) the needs of inventory managers and the
Department of Defense (DOD)'s Total Asset Visibility requirements should
be the primary consideration when considering the timeliness and method
of updating inventory records; (3) as for the level of detail necessary
to meet audit requirements, the briefing outlines the information
necessary to provide a sufficient audit trail for DOD management and
external auditors; and (4) more specifically, if periodic reporting
under a DVD contract is timely, accurate, and creates an audit trail
back to a source document, it would be acceptable for audit purposes.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-00-312R
     TITLE:  Financial Management: Financial Reporting Issues Related
	     to the Navy's Direct Vendor Delivery Initiative
      DATE:  09/13/2000
   SUBJECT:  Financial statement audits
	     Auditing standards
	     Financial management
	     Reporting requirements
	     Financial records
	     Accounting standards
	     Federal agency accounting systems
	     Department of Defense contractors
IDENTIFIER:  Navy Direct Vendor Delivery Program
	     Navy Transaction Item Reporting System

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GAO/AIMD-00-312R

Direct Vendor Delivery

United States General Accounting Office Washington, DC 20548

Accounting and Information Management Division

B-286184 September 13, 2000 Mr. Nelson Toye Deputy Chief Financial Officer
Office of the Under Secretary of Defense (Comptroller)

Subject: Financial Management: Financial Reporting Issues Related to the
Navy's Direct Vendor Delivery Initiative

Dear Mr. Toye: As a part of our ongoing efforts to work with the Department
of the Navy to prepare auditable financial statements, we have participated
in several of the Navy's “clean financial statement” working
groups. The Office of the Assistant Secretary of the Navy (Financial
Management and Comptroller) established these working groups to address
problems in financial management and reporting.

During our participation in the Inventory Held for Sale working group, the
concept of Direct Vendor Delivery (DVD) 1 was discussed as a way to improve
supply chain management and its impact on financial reporting.
Representatives from the Navy Supply Systems Command (NAVSUP) had questions
regarding how a DVD contract would affect the Navy's financial reporting.
NAVSUP requested input from the audit community regarding DVD requirements.
Specifically, they asked the following questions.

ï¿½ Would accounting and auditing standards require DVD contractors to report
individual transactions through the Transaction Item Reporting (TIR) 2
system?

ï¿½ What level of reporting would be required under a DVD contract to meet
accounting and auditing standards?

We presented the attached briefing to the working group to address these
questions. We are sending this information to you because it has come to our
attention that other DOD components currently use DVD or are considering
similar initiatives. For example, similar programs include (1) the Defense
Logistic Agency's Medical and Food Prime Vendor

1 The DVD initiative involves awarding contracts to commercial vendors to
provide inventory directly to Navy customers in time to meet their needs,
thus reducing use of Navy resources. 2 The Navy TIR system provides daily,
electronic processing of inventory transactions which allows inventory
managers on- line visibility of inventory on hand.

B- 286184 GAO/ AIMD- 00- 312R Direct Vendor Delivery Page 2 initiatives,
which are aimed at reducing agency inventory levels and related costs while

improving customer service and (2) the Air Force's Virtual Prime Vendor
initiative, which uses a single contractor to supply parts to repair shops
and depot maintenance facilities for its aircraft.

In response to the first question, accounting standards or audit
requirements would not necessitate TIR reporting. The needs of inventory
managers and DOD's Total Asset Visibility requirements should be the primary
consideration when considering the timeliness and method of updating
inventory records.

As for the level of detail necessary to meet audit requirements, the
briefing outlines the information necessary to provide a sufficient audit
trail for DOD management and external auditors. More specifically, if
periodic reporting under a DVD contract is timely, accurate, and creates an
audit trail back to a source document, it would be acceptable for audit
purposes. We outlined in the briefing how those criteria could be met.
Additionally, the briefing presents other opportunities that the DVD concept
may provide to address financial management and reporting issues.

Representatives from the DOD Office of the Inspector General, Naval Audit
Service, Office of the Assistant Secretary of the Navy (Financial Management
and Comptroller), and Navy Supply Systems Command attended the working group
briefing. The officials thanked us and indicated that the briefing had been
very helpful. They generally agreed that the briefing accurately presented
the issues and the options for addressing the questions that had been raised
regarding how DVD contracts would affect the Navy's financial reporting.

This briefing was presented to support the Navy's efforts to improve its
supply chain management. We hope that other DOD components will also find
these comments and suggestions regarding DVD contract structure to be
useful. Thank you for your consideration of these comments and for the
opportunity to contribute to DOD efforts to improve supply chain management
and financial reporting.

We are also providing copies of this briefing to James R. Speer, Principal
Deputy Assistant Secretary of the Air Force, Financial Management; Ernest J.
Gregory, Deputy Assistant Secretary of the Army (Financial Operations); and
Anthony A. Tisone, Director, Office of Financial Operations, Assistant
Secretary of the Navy (Financial Management and Comptroller). Copies will be
made available to others on request. If you have further questions regarding
the contents of the briefing, please contact me at (202) 512- 9095. Key
contributors to this assignment were William Cordrey, Rod Hogan, and Lisa
Warde.

Sincerely yours, Lisa G. Jacobson Director, Defense Audits

Enclosure

Enclosure GAO/ AIMD- 00- 312R Direct Vendor Delivery Page 3

March 21, 2000, Briefing

1 Reporting Requirements for DVD

Briefing to Navy Supply Systems Command

March 21, 2000

Enclosure GAO/ AIMD- 00- 312R Direct Vendor Delivery Page 4

2 Background

Congress required DOD to adopt best commercial practices to improve
inventory management. As a part of this, Navy designated Direct

Vendor Deliver (DVD) as one initiative to improve supply chain management.
DVD initiative would involve awarding

contracts to commercial vendors to manage Navy owned inventory and ship
directly to Navy customers in time to meet their needs (and thereby reduce
Navy's handling costs).

Enclosure GAO/ AIMD- 00- 312R Direct Vendor Delivery Page 5

3 Background (Cont.)

During meetings with the Inventory Logistics Working Group, NAVSUP requested
input from the audit community regarding DVD requirements. What level of
reporting would be required

under a DVD contract to meet accounting and auditing standards? Would
accounting and auditing standards

require DVD contractors to report individual transactions (through
Transaction Item Reporting- TIR)?

Enclosure GAO/ AIMD- 00- 312R Direct Vendor Delivery Page 6

4 Financial Management vs. Audit

Requirements The reporting and visibility of inventory are

primarily financial management issues. If the periodic reporting is timely
and accurate,

and the data can be supported by original documents, such reporting would
meet audit requirements.

Enclosure GAO/ AIMD- 00- 312R Direct Vendor Delivery Page 7

5 Required Timing of Reporting

Required levels of reporting to meet accounting and auditing standards do
not necessitate TIR reporting. Monthly (summary) reporting is acceptable if:

controls are in place to ensure timely and accurate information is provided
an audit trail is maintained contract includes audit clauses to allow for

counts and other testing procedures if selected under a financial (or other)
audit

Enclosure GAO/ AIMD- 00- 312R Direct Vendor Delivery Page 8

6 Required Detail of Reporting

Information from contractors would need to include the same key information
provided under TIR, but at a summary level. Report by NIIN, include number
and value:

on- hand at beginning of period inventory additions (purchases, turn- ins)
inventory reductions (sales, disposals) adjustments (for physical counts,
etc,) on- hand at end of period Reconcilable to other records such as

billings for new purchases.

Enclosure GAO/ AIMD- 00- 312R Direct Vendor Delivery Page 9

7 Required Support of Reporting

Monthly reports would need to be maintained by Navy and contractor for
audit. Contractors would need to maintain support for

each element in the monthly report (i. e., support for number and value of
items purchased, disposed of, or sold in a month). Need to be able to
support federal financial

reporting standards including reporting cost of sales, etc. Retain support
in accordance with the

government's record retention standards.

Enclosure GAO/ AIMD- 00- 312R Direct Vendor Delivery Page 10

8 Total Asset Visibility and DVD

Because the items transferred or held under the DVD contract would remain
Navy- owned assets, there are other considerations beyond the accounting and
auditing concerns. The Department of Defense has established

an initiative to gain “Total Asset Visibility” (TAV) for its
inventory. Since these items would remain under the ownership of Navy, they
would need to meet the standards established under the DOD initiative. TAV
requirements would need to be considered

in any future DVD contracts.

Enclosure GAO/ AIMD- 00- 312R Direct Vendor Delivery Page 11

9 Possible DVD Opportunities

Navy may be able to use DVD to improve other areas of inventory management.

Navy DVD contracts could leverage contractor systems to improve financial
accountability and reporting.

Enclosure GAO/ AIMD- 00- 312R Direct Vendor Delivery Page 12

10 Possible DVD Opportunities (cont.)

Since vendor would completely manage the inventory for an item, its systems
could maintain “historical cost” for the inventory. Contractor
should have an existing system

that provides historical cost (sales price) information for financial
reporting. Contractor systems could provide inventory

value at an acceptable historic cost basis. The contractor could provide
this historic

cost information to improve Navy's financial reporting.

Enclosure GAO/ AIMD- 00- 312R Direct Vendor Delivery Page 13

11 Reporting Exhibit A

NIIN

Balanc e Value Balanc e Value Balanc e Value

Be gi nni ng Ba la nce 5 2, 500. 00 $ 15 2, 142. 86 $ 4 2,800.00 $

Purcha se s 3 1, 500. 00 $0 - $ 7 4,900.00 $

Re c'd from Turn i ns 0 - $0 - $ 3 2,100.00 $

Sal e s 1 500. 00 $ 5 714. 29 $0 - $

Di sposa l s 1 500. 00 $0 - $0 - $

Adjustme nts 1 500. 00 $ -3 428. 57 $0 - $

Ending Ba l a nce 7 3, 500. 00 $ 7 1,000.00 $ 14 9, 800. 00 $

Note 1 2

Note s:

1 Phys ic al invent ory c ount dat ed 8/ 24/ 2000 showed 1 addit ional it em
2 Records adjus t ed t o matc h 7 ac t ually on hand

01- 234- 5678 00- 123- 4567 LL- 123- 4568 If all items of inventory are not
maintained in a serviceable condition, the number of items in each condition
would need to be indicated.

Enclosure GAO/ AIMD- 00- 312R Direct Vendor Delivery Page 14

12 Reporting Exhibit B

NIIN Beginning Rec'd from Ending Balance Purchases Turn- ins Sales Disposals
Adjustments Balance

Balance 5 3 0 1 1 1 7 Value 2, 500. 00 $1, 500. 00 $-$ 500. 00 $500. 00
$500. 00 $3, 500. 00 $

Balance 15 0 0 5 0 -3 7 Value 2, 142. 86 $-$-$ 714. 29 $-$ 428. 57 $1, 000.
00 $

Balance 4 7 3 0 0 0 14 Value 2, 800. 00 $4, 900. 00 $2, 100. 00 $-$-$-$ 9,
800. 00 $

Notes: 1 Physical inventory count dated 8/ 24/ 2000 showed 1 additional item
2 Records adjusted to match 7 actually on hand 00- 123- 4567

LL- 123- 4568 01- 234- 5678

If all items of inventory are not maintained in a serviceable condition, the
number of items in each condition would need to be indicated.

Enclosure GAO/ AIMD- 00- 312R Direct Vendor Delivery Page 15

13 Reporting Exhibit C

NIIN Beginning Rec'd from Ending Balance Purchases Turn ins Sales Disposals
Adjustments Balance

01- 234- 5678 Value 2, 500.00 $ 1, 500.00 $-$ 500.00 $ 500.00 $ 500.00 $ 3,
500.00 $ 00- 123- 4567 Value 2, 142.86 $-$-$ 714.29 $-$ 428.57 $ 1, 000.00 $
LL- 123- 4568 Value 2, 800.00 $ 4, 900.00 $ 2, 100.00 $-$-$-$ 9, 800.00 $

01- 234- 5678 Balance 5 3 0 1 1 1 7 00- 123- 4567 Balance 15 0 0 5 0 -3 7
LL- 123- 456 Balance 4 7 3 0 0 0 14

Notes: 1 Physical inventory count dated 8/ 24/ 2000 showed 1 additional item
2 Records adjusted to match 7 actually on hand

If all items of inventory are not maintained in a serviceable condition, the
number of items in each condition would need to be indicated.

(919533)
*** End of document. ***