Navy Aviation Spare Parts Billing Transaction Issues (Correspondence,
01/11/2001, GAO/GAO-01-178R).

During its review of the Navy's aviation spare parts billing
transactions, GAO compared the prices that customers were billed for to
the prices they should have paid according to the parts catalog
maintained by the Naval Inventory Control Point-Philadelphia. GAO found
thousands of transactions in which the customers' price did not match
the catalog price. Also, thousands of additional transactions were
discovered in which key information used to generate accurate customer
bills was missing. On the basis of these findings, GAO concludes that
the Navy may be incorrectly reporting its sales of aviation spare parts.

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

 REPORTNUM:  GAO-01-178R
     TITLE:  Navy Aviation Spare Parts Billing Transaction Issues
      DATE:  01/11/2001
   SUBJECT:  Naval procurement
	     Spare parts
	     Inventory control systems
	     Reporting requirements
	     Billing procedures
	     Prices and pricing

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GAO-01-178R

Navy Billing Issues

United States General Accounting Office Washington, DC 20548

January 11, 2001 The Honorable Richard Danzig The Secretary of the Navy

Subject: Navy Aviation Spare Parts Billing Transaction Issues Dear Mr.
Secretary: Earlier this year, we conducted a review of price trends for Navy
aviation spare parts. 1 During the course of the review, we compared the
prices customers were billed to the prices they should have paid according
to the parts catalog maintained by the Naval Inventory Control Point-
Philadelphia. In doing so, we identified thousands of billing transactions
where the customers' price did not match the catalog price. Moreover, we
found thousands of additional transactions in which key information used to
generate accurate customer bills was missing. These findings suggest that
the Navy may be incorrectly reporting its sales of aviation spare parts.
This letter discusses our findings in greater detail and provides suggested
actions the Navy can take to improve the accuracy of its billings.

Background The Naval Inventory Control Point uses billing transaction
information to report its annual sales of spare parts. 2 These sales are
made either at the net or the standard price. Customers pay the net price
when they turn in a broken item to be repaired; otherwise they pay the
higher standard price. In fiscal year 1999, the average net price was $7,390
and the average standard price was $29,888.

When customers order parts, they supply an advice code as part of the
requisition process. The Inventory Control Point uses this code to determine
whether customers will be billed at the net or standard price. The most
common advice code, "5G," for example, indicates that the customer will turn
in a broken part, in which case a bill is generated at the net price. Over
90 percent of the time, customers turn in a broken part and pay the net
price.

We obtained from the Naval Inventory Control Point billing transactions for
aviation spare parts covering fiscal years 1994 through 1999. These
transactions, extracted from the Navy's Billing History File, were
segregated into two categories – net and standard sales – for
each

1 Defense Acquisitions: Prices of Navy Aviation Spare Parts Have Increased
(GAO- 01- 23, Nov. 6, 2000).

2 A transaction can be a bill or a bill reversal. The latter is used to
correct billing errors.

GAO- 01- 178R Navy Billing Issues Page 2

of the 6 fiscal years. We also obtained catalog prices for each part over
the 6- year period from the Navy's pricing file.

As a data quality check, we compared the prices customers were billed to the
Navy's catalog prices. From fiscal year 1994 through 1999, we determined
whether billing transactions identified as net sales matched the net price
in the Navy's catalog. If the price billed to the customer did not match the
catalog's net price, we determined if it matched the standard price. We
performed the same analysis for transactions identified as standard sales.

Billing Transactions Were Mistakenly Identified As Net or Standard Sales

Of the more than 1.2 million transactions that the Inventory Control Point
had identified as net sales, there were 4,368 transactions (0.4 percent)
where the billing price actually matched the standard price in the catalog.
More importantly, of the 347,756 billing transactions identified as standard
price sales, 50,079 (14 percent) matched the net price in the catalog. As
noted above, more than 90 percent of the Inventory Control Point's
transactions are net sales. These mismatches indicate that transactions were
incorrectly categorized as net sales rather than standard sales and vice
versa. Table 1 summarizes our analysis for fiscal year 1994 to 1999.

Table 1: Number of Mismatches Fiscal Year

Identified as Net Sale But Matched Catalog's Standard Price

Identified as Standard Sale But Matched Catalog's Net Price 1994 1 14,362
1995 37 22,303 1996 0 546 1997 8 618 1998 55 12,131 1999 4,267 119 Total
4,368 50,079

We discussed our findings with officials at the Inventory Control Point,
focusing primarily on 1994, 1995, 1998, and 1999, the years with the largest
number of mismatches. The officials confirmed that all billing transactions
with advice codes indicating a turn- in of a broken part are identified as
net sales, while transactions with all other advice codes are identified as
standard sales. Due to resource constraints, the officials could not
systematically determine the reason for all of the mismatches. However, they
offered the following as possible explanations.

GAO- 01- 178R Navy Billing Issues Page 3

ï¿½ In 1994 and 1995, we found a total of 36,665 transactions where the net
price was billed but the transactions were identified as standard price
sales. One explanation for these mismatches was that the Inventory Control
Point introduced a new automated requisition system in the early 1990s and
some errors may have occurred in the transition. However, the officials
could not verify that this happened, since automated billing records are no
longer available for those years and a substantial amount of manual effort
would be required to research the files.

ï¿½ In 1998, about 12,000 transactions were identified as standard sales when
customers were actually charged the lower, net price. These 12,000
transactions translated to over $101 million that was mistakenly counted as
standard sales. The officials explained that in 1998 the Navy's automated
requisition processing system would not allow a net bill to be issued for
certain designated customers. Therefore, the system failed to properly issue
bills at the net price for these customers. An analyst in the billing
department fixed this problem by manually flagging each of the transactions
with the "2J" advice code- a little- used code chosen to signal that a
manual fix had been made. However, when the Inventory Control Point reported
fiscal year 1998 sales, all of these transactions were identified as
standard sales based on the “2J” code. We verified that there
were about 12,000 billing transactions in 1998 with the 2J advice code.

ï¿½ In 1999, we identified 4,267 transactions that were reported as net sales
where the price billed to the customer matched the catalog's standard-
rather than net-- price. Inventory Control Point officials explained that
the catalog price is sometimes changed during the fiscal year. They stated
that this situation could account for the discrepancies we found, because
the database provided to us by the Navy reflects catalog prices at the start
of the fiscal year and does not capture the updated prices. For this reason,
we were not able to validate whether the updated prices matched the price at
which customers were billed. The officials said that when there is a mid-
year price change, the Inventory Control Point is supposed to issue a bill
reversal, which credits the customer for the old price. The customer would
then receive a new bill based on the updated catalog price.

Billing Transactions Lacked Advice Codes

As noted earlier, when customers requisition parts, they supply an advice
code to the Navy's automated requisition processing system. From the
processing system, the advice code is perpetuated to other databases for
supply and billing actions. We asked Inventory Control Point officials to
provide us with a breakdown of transactions by advice code from fiscal years
1997 through 1999. In the 3- year period, about 36,000 of the more than
750,000 transactions did not have an advice code. These 36,000 billing
records translated to $168 million in sales.

In cases where the customer neglects to supply an advice code, bills are
automatically generated at the standard price by default. If the standard
price is mistakenly charged-- that is, the customer turned in a broken
part-- the Inventory Control Point issues a bill reversal and then charges
the customer the net price.

GAO- 01- 178R Navy Billing Issues Page 4

The Inventory Control Point has issued a substantial number of bill
reversals. Of the billing transactions we obtained for our price trend
review covering fiscal years 1994 through 1999, nine percent were bill
reversals. These bill reversals totaled $2.3 billion over the 6 years. Based
on the data provided by the Navy, we cannot determine the extent to which
these bill reversals were to correct billing errors resulting from missing
advice codes. The Inventory Control Point also issues bill reversals for
other purposes, such as canceled orders or inaccurate billing amounts.

Conclusion We identified thousands of transactions that were mistakenly
identified as net or standard sales based on incorrect or missing advice
codes. As a result of these errors, some customers have been billed at the
incorrect price. Further, a substantial amount of administrative work at the
Inventory Control Point has been required to issue bill reversals to correct
the billing errors. These errors also raise questions regarding the accuracy
of the Inventory Control Point's reported sales of spare parts. Because the
advice code provides an important piece of information for supply and
billing actions, the Inventory Control Point should take actions to ensure
that this code is correct. A further concern is that, to the extent that net
and standard sales are part of the calculation used to establish Working
Capital Fund spare part prices for future years, these prices could be set
too high or too low if the reported sales are incorrect.

Recommendations For Executive Action Since in the vast majority of cases
customers turn in a broken part and are billed the net price, we recommend
that the Navy Inventory Control Point- Philadelphia set the billing default
to the net rather than the standard price when the advice code is missing.
Taking this action would decrease the number of bill reversals and thus
reduce the additional work and resources required to issue reversals.
Furthermore, we recommend that customer requisitions without an advice code
be flagged and tracked to ensure that the customers are billed at the
appropriate price.

Agency Comments In written comments on a draft of this report, the
Department of Defense (DOD) concurred with our recommendations. The
Inventory Control Point has submitted a proposal to set the default to the
net price when the advice code is blank. An automatic error notification
will be triggered in this circumstance so that Inventory Control Point
personnel can determine if the net price charge is valid. DOD stated that
the time frame for implementing these changes has not yet been determined.
DOD's written comments are enclosed.

We conducted our review from April 2000 to October 2000 in accordance with
generally accepted government auditing standards. In conducting our review
we met with officials and analysts at the Naval Inventory Control Point-
Philadelphia, Pennsylvania.

GAO- 01- 178R Navy Billing Issues Page 5

This report contains recommendations to the Naval Inventory Control Point-
Philadelphia. We are asking the Commander of the Inventory Control Point to
inform us within 60 days of actions taken on our recommendations.

We are sending copies of this letter to the Honorable William S. Cohen,
Secretary of Defense, and interested congressional committees. This letter
will also be available on GAO's home page at http:// www. gao. gov. Please
contact me at (202) 512- 4841 or Karen S. Zuckerstein at (202) 512- 6785 if
you or your staff have questions. Major contributors to this letter were
Michele Mackin and Yeewan Tom.

Sincerely yours, David E. Cooper, Director Acquisition and Sourcing
Management

Enclosure

GAO- 01- 178R Navy Billing Issues Page 6

GAO- 01- 178R Navy Billing Issues Page 7
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