Defense Inventory: Army Needs to Strengthen and Follow Procedures to
Control Shipped Items (Letter Report, 06/23/2000, GAO/NSIAD-00-109).
Pursuant to a congressional request, GAO reviewed the Army's procedures
for tracking and controlling spare parts and other inventory items that
have been shipped from one location to another to support military
forces, focusing on the: (1) extent to which the Army can identify
inventory lost during shipment; and (2) Army's adherence to procedures
for controlling shipped inventory.
GAO noted that: (1) the Army does not know the extent to which shipped
inventory is lost or stolen because of weaknesses in inventory controls
and financial management practices; (2) the Army reported inventory
shipment losses of $297,000 for fiscal year (FY) 1998; (3) however,
GAO's analysis of available logistics and accounting records indicated
that the Army could not account for about $900 million in shipped
inventory in FY 1998; (4) GAO found that many of the shipments it
reviewed had in fact been received, but had not been documented in the
required manner; (5) this unaccounted for inventory included classified
and sensitive items, such as guided missile components and night vision
equipment; (6) GAO's review of shipments made during FY 1998 indicates
that Army personnel did not consistently follow required internal
control procedures for shipped inventory; (7) Army units receiving
inventory items have not always properly entered the receipt of
shipments on inventory records, sent receipt acknowledgements to the
inventory control point, or reported shipment discrepancies; (8) issuing
units also have not consistently sent notifications of shipment
cancellations; (9) no dominant cause for failure to follow internal
control procedures emerged in GAO's discussions with Army officials;
(10) poorly integrated accounting and logistics systems have led to
inaccuracies regarding the status of shipped material; (11) in addition,
personnel at the Army's largest inventory control point have not
adequately monitored receipts of items it reportedly purchased, and they
have not adhered to federal policies and procedures for documenting
follow up on material shipped to warehouses that have not been
acknowledged as received; and (12) moreover, from a broader perspective,
the Army has not routinely assessed shipping discrepancies to maintain
adequate oversight of shipped inventory.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-00-109
TITLE: Defense Inventory: Army Needs to Strengthen and Follow
Procedures to Control Shipped Items
DATE: 06/23/2000
SUBJECT: Financial management
Inventory control systems
Military procurement
Logistics
Spare parts
Federal property management
Property losses
Internal controls
Federal agency accounting systems
IDENTIFIER: DOD Financial Management Improvement Plan
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GAO/NSIAD-00-109
Appendix I: Objectives, Scope, and Methodology
20
Appendix II: Description of Weaknesses That Impaired the Army's Control Over
Shipments
23
Appendix III: Comments From the Department of Defense
24
Appendix IV: GAO Contacts and Staff Acknowledgments
26
27
Table 1: Shipments Without a Notification of Receipt for
Fiscal Year 1998 8
Table 2: Type of Shipments Reported as Lost or Unaccounted
for in Fiscal Year 1998 9
DOD Department of Defense
GAO General Accounting Office
National Security and
International Affairs Division
B-282832
June 23, 2000
The Honorable Richard Durbin
The Honorable Tom Harkin
United States Senate
The Honorable Peter DeFazio
The Honorable Carolyn B. Maloney
House of Representatives
In response to your request, we reviewed the Army's procedures for tracking
and controlling spare parts and other inventory items that have been shipped
from one location to another to support military forces. Specifically, this
report addresses (1) the extent to which the Army can identify inventory
lost during shipment and (2) the Army's adherence to procedures for
controlling shipped inventory.
This is one in a series of reports addressing defense inventory
vulnerabilities to fraud, waste, and abuse. (A list of related GAO products
appears at the end of this report.) Since at least 1990, our office has
considered Department of Defense (DOD) inventory management to be a
high-risk area because inventory management systems and procedures are
ineffective. A lack of control over inventory shipments increases
vulnerability to undetected loss and theft and substantially increases the
risk that millions of dollars will be spent unnecessarily.
Control responsibility for the Army's inventory, including shipped
inventory, is a shared responsibility of the Defense Logistics Agency, the
Army Materiel Command and its four inventory control points, and
Army-managed activities such as repair facilities. The Defense Logistics
Agency operates and manages 22 storage depots; the depots receive, store,
and issue Army inventory and maintain Army inventory records. The Army
Materiel Command administers the Army's supply system and provides
management policies and procedures for controlling shipped inventory.
Through its four inventory control points, the Command initiates purchases
for its customers and directs inventory movement to them from one of the
Defense Logistics Agency's storage depots or vendors. To assess the Army's
adherence to procedures, we primarily focused our work at the Aviation and
Missile Command, which was responsible for the largest portion of the Army's
shipped inventory.
The Army does not know the extent to which shipped inventory is lost or
stolen because of weaknesses in inventory controls and financial management
practices. The Army reported inventory shipment losses of $297,000 for
fiscal year 1998. However, our analysis of available logistics and
accounting records indicated that the Army could not account for about $900
million in shipped inventory in fiscal year 1998. We found that many of the
shipments we reviewed had in fact been received, but had not been documented
in the required manner. This unaccounted for inventory included classified
and sensitive items, such as guided missile components and night vision
equipment.
Our review of shipments made during fiscal year 1998 indicates that Army
personnel did not consistently follow required internal control procedures
for shipped inventory. Specifically, Army units receiving inventory items
have not always properly entered the receipt of shipments on inventory
records, sent receipt acknowledgments to the inventory control point, or
reported shipment discrepancies. Issuing units also have not consistently
sent notifications of shipment cancellations. No dominant cause for failure
to follow internal control procedures emerged in our discussions with Army
officials. Poorly integrated accounting and logistics systems have led to
inaccuracies regarding the status of shipped material. In addition,
personnel at the Army's largest inventory control point have not adequately
monitored receipts of items it reportedly purchased, and they have not
adhered to federal policies and procedures for documenting follow up on
material shipped to warehouses that have not been acknowledged as received.
Moreover, from a broader perspective, the Army has not routinely assessed
shipping discrepancies to maintain adequate oversight of shipped inventory.
To improve controls over the Army's shipped inventory, we are recommending
that the Secretary of the Army (1) maintain accounting records to accurately
report shipment losses; (2) maintain logistics records of unconfirmed
shipments; (3) improve compliance with existing logistics procedures for
controlling shipped inventory, and (4) monitor efforts to provide effective
oversight needed to reduce the vulnerability of shipped inventory to
undetected loss or misplacement. In written comments on a draft of this
report, DOD agreed with all of our recommendations and outlined specific
actions that the Army will take to address the recommendations.
Each year, inventory worth billions of dollars is transported between Army
units, storage depots, and suppliers. This inventory includes classified and
sensitive items1 (such as guided missile remote control systems, night
vision equipment, and optical guided missile launcher sights) and pilferable
items (items that are especially subject to theft because they can be
readily resold or converted to personal use).
Inventory being transported between two locations typically involves the
following types of material:
� End-user material--material ordered from a storage depot or commercial
source by a unit that expects to use it.
� Returned material--excess end-user material returned to a storage depot.
� Warehoused material--material redistributed between storage depots.
� Purchased material--new material purchased but not yet received by a
storage depot from a commercial source, other DOD services or agencies,
non-DOD federal agencies, and foreign governments.
When an item is shipped, a shipping notification is sent to the receiving
unit. The intended recipient of the material is responsible for notifying
the inventory control point once the item has been received or if a
discrepancy exists (e.g., the item was not received or the quantity received
is less than that expected). The notification of receipt and discrepancy
reporting processes are internal controls designed to account for all
shipped assets. If within 45 days of shipment the inventory control point
has not been notified that a shipment has arrived, it is required to follow
up with the intended recipient. The rationale behind this requirement is
that until receipt is confirmed, the exact status of the shipment is
uncertain and therefore vulnerable to fraud, waste, and abuse.
The Army does not know the exact extent to which shipped inventory is lost
or stolen because of weaknesses in inventory controls and financial
management practices. The Army records show shipment losses of about
$297,000 during fiscal year 1998. However, our review of available records
indicated that the Army had lost at least another $29.5 million that was not
specifically identified as shipment losses during fiscal year 1998. Army
records also showed additional items valued at $883 million had been shipped
but were not acknowledged as received. Some of these shipments that had not
been acknowledged as received may represent additional lost or stolen items.
Shipments reported as lost or unaccounted for include
(1) classified items that require the highest degree of protection in the
interest of national security and (2) sensitive items that warrant a high
degree of protection and control because of their high value and/or their
hazardous or highly technical nature.
Losses
While the Army has reported shipment losses and available records indicate
that the Army may have incurred additional losses that were not reported as
such, its underlying records are not sufficiently reliable to determine the
extent of losses actually incurred. As part of our audit of DOD's fiscal
year 1998 financial statements, we found continuing problems with DOD's
inventory management and control systems and practices that affected its
ability to maintain accurate and complete inventory data. Specifically, we
testified that auditors were unable to confirm the amount of reported
shipped inventory. The auditors identified weaknesses that, in addition to
hampering financial reporting, impaired the Department of Defense's ability
to safeguard these assets from theft or loss. For example, the Army Audit
Agency reported that they could not determine the reasonableness of almost
$600 million of the Army's reported inventory shipments of purchased
material.2
The Army's accounting management practices obscure the full extent of items
lost during shipment. For fiscal year 1998, the Army reported shipment
losses totaling $296,577 based on information recorded in its accounting
records under an account titled "incoming shipments loss account". This
account is intended for inventory losses resulting from shortages in
shipments, and it is used by only a few Army depots.3 Shortages in Army
shipments to Defense Logistics Agency warehouses are recorded in its
accounting records under an account titled "accounting adjustments loss
account," which totaled about $2.2 billion for fiscal
year 1998. This account is intended for losses resulting from differences
between inventory balances at the depot and the inventory control point.
To determine what portion of the $2.2 billion related to shipment losses, we
reviewed accounting records from three of the Army's four inventory control
points.4 Using shipment tracking codes, we identified shipment losses of
$29.5 million in the accounting adjustments loss account.
When we informed Army officials that shipment losses had been reported as
inventory accounting adjustments, they pointed out that Army policies did
not preclude them from processing and reporting shipment losses in
accounting records as something other than lost shipments. However, the
Department of Defense Financial Management Regulation for supply activities
states that separate accounts may be established and used to capture
recurring and significant inventory events. Having losses during shipments
reported in two different accounts, one of which also contains other types
of loss, impairs the Army's ability to fully use its accounting records to
account for shipment losses.
The Army's inventory management practices also obscure the full extent of
items lost during shipment. When an inventory control point directs a
shipment to end users (e.g., Army units), the inventory control point is
required to track the shipment and the end user is required to acknowledge
receipt of the item. After a specified period of time, inventory control
points are required by Department of Defense and Army policy to close their
logistics records on outstanding shipments to and from Army end users even
when the intended recipient did not acknowledge receipt of the shipment. For
fiscal year 1998, Army logistics records for all inventory control points
indicate that items worth about $862.6 million had not been acknowledged as
received--some portion of which could have been lost or stolen. These
shipments included items shipped to end users and material returned to
storage depots. Table 1 shows the shipments that were outstanding for more
than 90 days without a notification of receipt.
Dollars in
millions
Shipment type Number of Value Actual time outstanding for
shipments each shipment
End-user material 738,094 $846.4 over 90 days
Returned material 2,169 16.2 over 160 days
Total 740,263 $862.6
Source: Army Logistics Intelligence File and Material Returns Data Base.
The Army does not maintain accounting records for purchased material that
are comparable to end-user and returned material.5 However, as of May 31,
1999, the Aviation and Missile Command reported that unacknowledged
shipments of purchased material totaled over
$62.2 million, of which $20.1 million had been unacknowledged from
60 days to over 4 years. Although these items are not necessarily lost, they
are vulnerable to loss as long as they remain unaccounted for.
Items
Our review showed that the Army's inability to track lost and unacknowledged
shipments affects thousands of shipments, including classified and sensitive
items. We reviewed 5,283 shipments reported as lost or unaccounted for
(representing 203,837 items worth about
$400 million) in fiscal year 1998 to identify the types of shipped items
involved. Our review included (1) all 2,045 shipment losses reported in the
inventory accounting adjustment loss account (valued at $29.5 million),
(2) all 1,069 shipments of end-user material valued at over $100,000 each
that were outstanding for more than 90 days without a notification of
receipt (valued at $354.9 million), and (3) all 2,169 shipments of returned
material that were outstanding for more than 160 days without a notification
of receipt (valued at $16.2 million). Our review showed that about 3,000 (58
percent) of these shipments contained nonsensitive items valued at $188.1
million. However, about 1,800 shipments (35 percent) contained classified
items (valued at $185.4 million) such as guided missile remote control
systems and sensitive items (valued at $4 million) such as night vision
equipment and optical guided missile launcher sights. The remaining 358
shipments (7 percent) contained pilferable items such as panel clocks and
tire wheels and items that were not identified by type of security
classification. Table 2 shows the security type, number of items, and dollar
value of sample shipments reported as lost or unaccounted for.
Dollars in millions
Type Number of shipments Number Value
of items
Classified military items 1,816 58,428 $185.4
Sensitive military items 50 2,204 4.0
Pilferable items 269 42,199 21.0
Nonsensitive items 3,059 100,074 188.1
Items with unknown security
classification 89 932 2.0
Total 5,283 203,837 $400.5
Source: GAO analysis.
Ineffective
As a result of several significant inventory control weaknesses, the Army's
shipped inventory is highly vulnerable to loss or theft. Army units have not
adequately recorded and reported receipt and return of items to the
inventory control point as required. In addition, our work at a primary
inventory control point, the Aviation and Missile Command, indicated that
the Command had not adequately followed up on delinquent receipt
notifications for purchased items or maintained records of warehoused
material shipment losses. Overall, the Army and its Army Material Command
have not routinely monitored and assessed shipping discrepancies as
required, and they lack sufficient and reliable information for such
assessments.
The Department of Defense and Army regulations contain specific internal
control procedures to help ensure that shipped inventory is controlled. The
regulations require that, upon receipt of an item, a receiving unit enter
the shipment into its inventory records and notifies the inventory control
point within 5 calendar days that the items were received in full or that a
discrepancy exists between the items ordered and the items received. When a
discrepancy is identified and reported by the receiving unit, the inventory
control point is required to initiate research to resolve the circumstances
surrounding the discrepancy. In situations when end users have excess
inventory on hand and it is determined that the material is needed
elsewhere, an inventory control point is required to direct them to return
the material to a storage depot. When returning material, the end users are
to send a shipping notification to the inventory control point. When the
storage depot receives the shipment, it is required to record its receipt
and notify the inventory control point within 10 days that the material has
been received. If the material is not shipped to the depot, end users are to
submit a cancellation notice to the inventory control point. These
procedures are consistent with the federal government standard for internal
controls that requires accurate, complete, and timely recording of
transactions and events.6
As we previously indicated, end-user and returned material shipments valued
at $862.6 million and purchased items valued at $20.1 million had not been
acknowledged as received. Army officials told us that the lack of proper
receipt notifications for shipped inventory items does not necessarily mean
that the items were lost or stolen. They stated that, in most cases, the
items were probably received but not reported as being received because Army
units or depots did not (1) notify the inventory control points that they
received the items as required by Army regulations or (2) respond to
follow-up inquiries made by the inventory control points. As part of our
review, we sought to determine whether such items had in fact been received
and to identify reasons why their receipts were not reported to the relevant
inventory control point.
Our review indicated that receiving units had not adequately recorded and
reported receipt of items, and some items had not in fact been received. Of
the $883 million of inventory shipped but not acknowledged as received, we
selected 81,151 items (valued at $45.1 million) for review.7 We found that
11,558 of these items (valued at $4 million) could not be accounted for
because Army units had not detected or reported shipment discrepancies at
the time of our review. The remaining 69,593 items (valued at
$41.1 million) were actually received, but erroneously remained on the
Army's record as unaccounted for because they had not been processed in the
required manner.
Specifically, 54,189 of the 69,593 items (valued at over $28.5 million) had
in fact been received but were considered unaccounted for because Army units
reported receipt of the items using incorrect receipt acknowledgment codes.
Army officials at one location--which was responsible for the largest
portion of the unaccounted for shipments in our sample--said that incorrect
receipt acknowledgement codes were used because the Army had not yet changed
its automated logistics system and procedures to conform with DOD's receipt
acknowledgement codes. Poorly integrated accounting and logistics systems
following the merger of two inventory control points also contributed to
faulty receipt acknowledgment reporting.8 For example, the Army's general
ledger system, which ties its accounting systems to its logistics and other
key management systems and is used to identify the receipt of shipments, did
not update both accounting and logistics records with purchased material
receipts.
The remaining 15,404 items (valued at $12.7 million) were unaccounted for
because Army units either did not (1) record the receipt of shipments on
inventory records, (2) routinely report receipt of shipments to the
inventory control point, or (3) properly notify the inventory control point
when shipments of returned material were canceled. These three types of
problems were identified at most of the Army units we reviewed. No dominant
cause for these failures to follow procedures emerged in our discussions
with Army unit and depot officials. However, in our interviews with end-user
personnel, some of them said that they were not familiar with the shipment
processing procedures we had asked them about. Without proper receipt
notification and discrepancy reporting, the Army has no reasonable assurance
that at least some of the items are not lost or stolen. Appendix II
summarizes by material type the Army's explanation of issues that impaired
the Army's visibility over these shipments and made them vulnerable to theft
and loss.
Not Adequate
DOD policies require the inventory control point to follow up on unconfirmed
receipts of shipped items and on shipment discrepancies, but our work at the
Aviation and Missile Command shows that it had not adequately complied with
these policies. To ensure proper reporting and accounting of material
receipts, DOD requires inventory control points to follow up on overdue
shipments with the intended recipient within 45 days from the date of
shipment. As previously shown, the Aviation and Missile Command had not
followed up on $20.1 million of purchased shipments outstanding as of May
31, 1999, which had not been acknowledged for 60 or more days. During our
work at the Aviation and Missile Command, material and financial management
officials told us that they were not aware of specific DOD or Army
procedures for researching outstanding shipments of purchased material,
assigning responsibility for carrying out these procedures, and prescribing
related accountability.
As we previously mentioned, at the end of May 1999, the Aviation and Missile
Command reported unacknowledged shipments of purchased material valued at
$62.2 million, of which $20.1 million had been outstanding from 60 days to
over 4 years. At the Aviation and Missile Command, we judgmentally selected
and reviewed reported shipments of purchased material (valued at $4.6
million) that were over 60 days old to determine the nature and extent of
the Command's follow-up efforts. Among the internal controls that DOD
requires the Army to incorporate in their accounting systems is
reconciliation of receipt and payment data to ensure that (1) material paid
for is received and (2) payments are recovered for items the Army never
receives. We found that the Aviation and Missile Command had not reconciled
the financial records that identified these shipments as overdue with
inventory records. As a result, no follow-up research was initiated by the
Aviation and Missile Command to track these shipments. We reviewed the
Command's receipt and payment data and found that over $3 million of these
outstanding shipments represented shipments of purchased material that had
actually been received. Of the remaining $1.6 million, we identified the
following discrepancies:
� Payments in the amount of $1,319,357 for purchased items were recorded
incorrectly. According to an Aviation and Missile Command official, these
payments included duplicate payments for some purchased material
transactions and payments against the wrong contract line items for other
transactions.
� Records for two shipments of purchased material valued at
$234,685 were unavailable to determine whether or not these materials
represented actual shipments. One shipment had been outstanding for over 4
months and the other for more than 4 years. We were told that contract files
were unavailable because they were either retired to storage or could not be
located.
� A payment of $56,242 was made for an item never received in the Army's
inventory. In this case, the item recorded as outstanding purchased material
in the Aviation and Missile Command's automated financial records had been
shipped to the Aviation and Missile Command's test and evaluation lab for
inspection. The item failed inspection, and the Aviation and Missile Command
terminated the contract for default in August 1998. When we informed
Aviation and Missile Command officials that the contractor had been paid for
the item in August 1997, they said that the contractor should not have been
paid. In June 1999, the Defense Finance and Accounting Service issued a
demand letter requesting the erroneous payment be returned.
� The Aviation and Missile Command's records indicated that shipments of
purchased material (valued at $21,257) were outstanding, but in fact there
were no such shipments. Instead, expenses of $21,257 had been incurred to
terminate a contract for nine items and were erroneously processed as
outstanding purchased material. According to an Aviation and Missile Command
official, action was taken in July 1999 to correct the invalid record of
purchased material.
These examples are similar to problems previously identified in a May 1997
report from the Army Audit Agency on the Army's fiscal year 1996 Defense
Business Operations Fund Financial Statements. To improve controls over
shipments of purchased material, the Army Audit Agency recommended that the
Assistant Secretary of the Army (Financial Management and Comptroller), in
coordination with the Defense Finance and Accounting Service, develop a
memorandum of understanding that would (1) clarify each activity's goals and
what they require to accomplish the goals,
(2) explain the interrelationship of the financial and logistical systems
and the importance of transactions being entered and cleared from both
records, and (3) require a person in each activity to provide an avenue for
continued improvements in the working relationship and interrelated
processes. The Office of the Assistant Secretary agreed to these
recommendations, but as of April 2000, the Office acknowledged that it had
not yet taken recommended actions but planned to do so by October 2000.
Material Shipments Are Impaired
We could not assess Aviation and Missile Command follow up on warehoused
material shipments because the Army system does not retain records of
unconfirmed warehoused material, and the records cannot be reconstructed.
This lack of documentation is in itself an internal control weakness. Among
the federal government's standards for internal controls is the need to
clearly document transactions and to have that documentation readily
available for examination. Aviation and Missile Command officials told us
that prior to deleting such records, they extensively researched the items
to ensure that the warehoused material was actually received. However, they
acknowledged that documentation was not maintained of their research
results.
We did not assess the Aviation and Missile Command's follow-up of
end-user receipt of shipments because, under current DOD policy, inventory
control points simply assume that material shipped to end users is received
by them. After 90 days, whether or not they have confirmation of material
receipt, inventory control points close the shipment on their records. They
become aware that material has not been received only if the intended
recipient inquires about the shipment. Similarly, we did not assess the
Aviation and Missile Command's follow-up of returned material because, under
Army policy, the inventory control points assume material returned from end
users was never shipped. After 210 days, inventory control points no longer
carry the records of returned material shipments, assuming that they have
not been shipped.
In the course of our review of end-user receipt acknowledgment practices, we
found some examples in which the inventory control point closed the records
on shipments even though all items had not been accounted for. In one case,
the end user expected a shipment of one rotary wing blade (valued at
$102,259), but did not receive the shipment. The end user did not report the
discrepancy to the Aviation and Missile Command (the relevant inventory
control point), and after 90 days, the Aviation and Missile Command closed
its record on the shipment, assuming the wing blade had been received.
Similarly, we identified six shipments of returned material (valued at
$10,437) that the Aviation and Missile Command had assumed had not been
shipped and had been closed out. However, the material remains unaccounted
for even though it had been shipped.
As long as accountability is transferred to the customer in this way,
inventory control points have little motivation to follow up on and resolve
unacknowledged end-user and returned shipments. The result is a situation in
which unaccounted for end-user shipments are officially considered delivered
(or returned material not shipped), an assumption which in turn places this
material at risk of fraud, waste, abuse, and theft.
The Army Materiel Command and the Aviation and Missile Command have not been
routinely assessing shipping discrepancies between various logistics records
as required to maintain proper program oversight. To assess supply
operations, Army policy requires inventory control points to record,
summarize, and report to a single point within the Army (i.e., the Army
Materiel Command) the volume and dollar value of shipment discrepancies,
including shipment shortages and shipment nonreceipts. The policy requires
the Army Materiel Command to analyze data from logistics records for the
purpose of identifying the cause, source, and magnitude of discrepancies in
shipped inventory so that corrective actions can be taken. This policy is
consistent with the federal government standards for internal control that
require ongoing monitoring to assess the quality of performance over time
and to ensure that the findings of audits and other reviews are promptly
resolved.
While reviewing fiscal year 1998 logistics record shipment discrepancies, we
found that the Aviation and Missile Command had not summarized the required
data, and the Army Materiel Command had not asked for the required data.
Even if the Aviation and Missile Command had summarized the data, it
probably would not have produced meaningful results. Our review showed that
items included in the shipment shortage and shipment nonreceipt category at
the Aviation and Missile Command turned out to be other types of shipping,
packaging, and transportation discrepancies. As a result, the data needed to
identify the cause, source, and magnitude of shipment discrepancies were not
reliable and could not be used for these purposes. The lack of this
information impedes the Army's ability to determine which activities are
responsible for lost or misplaced items.
In addition, the Army's accounting and logistics systems are not effectively
integrated for discrepancy assessments. Establishing such an integrated,
general ledger controlled system that ties together the Army's accounting
and logistics systems is critical to effectively overseeing inventory
shipments. Such an integrated system structure is required by the Chief
Financial Officers Act of 1990. When accounting and logistics systems are
effectively integrated, both sets of records are automatically updated with
transaction data on a shipment-by-shipment basis--the accounting records
with summary level data and the logistics records with detailed transaction
data. Any differences between these two sets of records should be
periodically identified and research conducted to alert management to a
possible undetected loss or theft of shipped items.
A breakdown in controls over purchased material receipts is illustrative of
the problems created by not effectively linking accounting and logistics
records. For example, Aviation and Missile Command officials explained that
they were not alerted to receipts of purchased items because existing
systems did not automatically update both accounting and related logistics
records. Failure to automatically update these two sets of records results
in unreconciled discrepancies which reduces the reliability of reported
inventories, losses, and on-hand balances.
As part of the Department of Defense's 1999 Financial Management Improvement
Plan,9 the Department has stated that it is developing systems that will
meet the federal government's financial management systems requirements. If
properly designed and implemented as part of a Department of Defense-wide
system structure that will provide general ledger control, such a structure
will help to effectively oversee the Army's inventory shipments.
Because of weaknesses in its internal controls and financial management
practices, the Army does not know the extent of its inventory shipment
losses and has not sufficiently tracked and controlled inventory shipments.
For months and even years at a time, inventory worth millions of dollars
goes unaccounted for because Army units fail to record and report receipt of
items. Also, the primary inventory control point has failed to follow up on
delinquent shipments and maintain records of shipment losses in accordance
with established internal control procedures, even when classified or
sensitive items are involved. The Army and its Materiel Command have not
sufficiently assessed practices for safeguarding shipped inventory and
weaknesses in the Army's ability to adequately oversee and protect shipped
inventory places it at risk of waste, fraud, or abuse.
More specifically, Army personnel have (1) mixed numerous shipment losses in
with other inventory adjustments, masking the extent of such losses; (2) not
retained the proper records associated with unconfirmed warehoused
shipments; (3) not carried out existing Army and Defense Department
logistics procedures for controlling shipped inventory; and
(4) not provided adequate oversight to safeguard shipped inventory. The
cumulative result has been that about $900 million worth of shipped
inventory, including classified and sensitive items, is unaccounted for and
is vulnerable to loss or theft.
To acquire accurate and complete data on inventory losses and to improve the
control of inventory being shipped, we recommend that the Secretary of
Defense direct the Secretary of the Army to
� revise accounting procedures in order to establish a separate account to
capture all shipment losses in one place;
� modify the Army's logistics and accounting systems so that they retain
records of unconfirmed warehoused material shipments consistent with federal
internal control standards;
� emphasize to the Army Materiel Command, Aviation and Missile Command, and
Army unit personnel the need to comply with existing Army and DOD internal
control procedures for shipped inventory; and
� maintain proper program oversight as required to reduce the vulnerability
of shipped inventory to undetected loss or misplacement.
In written comments on a draft of this report, DOD agreed with all of our
recommendations and stated that the Army will work with the Defense
Logistics Agency and the Defense Finance and Accounting Service to resolve
the issues. DOD outlined specific actions that the Army will take to address
our recommendations. First, DOD stated that our recommendation to capture
all shipment losses in one place will require extensive evaluation and study
to determine the most cost-effective solution to this recommendation. The
potential solution will be applied to the Army's Logistics Systems
Modernization effort and will entail changes to the Defense Finance and
Accounting System. Second, the Army is in the process of changing its
automation systems so that they retain records of unconfirmed warehoused
material shipments consistent with federal internal control standards.
Third, the Army will publish guidance
Army-wide emphasizing the need to comply with existing Army and DOD internal
control procedures for shipped inventory. Lastly, the Army will increase
oversight of shipped inventory to reduce the vulnerability of such inventory
to undetected loss or misplacement.
Appendix I contains the scope and methodology for this report. DOD's written
comments on this report are reprinted in their entirety in
appendix III.
As arranged with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
its issue date. At that time, we will send copies of this report to the
Honorable William Cohen, Secretary of Defense; the Honorable Louis Caldera,
Secretary of the Army; Lieutenant General Henry T. Glisson, Director,
Defense Logistics Agency; and the Honorable Jacob Lew, Director, Office of
Management and Budget.
If you or your staff have any questions regarding this report, please
contact me at (202) 512-8412. GAO contacts and key contributors to this
report are listed in appendix IV.
David R. Warren, Director
Defense Management Issues
Objectives, Scope, and Methodology
Our objectives for this report were to determine (1) the extent to which the
Army can identify inventory lost during shipment and (2) the Army's
adherence to procedures for controlling shipped inventory. To determine the
extent to which the Army could identify inventory lost during shipment, we
took the following steps:
� We reviewed Department of Defense and Army policies and procedures and
obtained other relevant documentation related to shipped inventory, and we
discussed financial inventory accounting and management procedures with
officials at the following locations:
(1) Headquarters, Department of the Army, Arlington, Virginia;
(2) Headquarters, U.S. Army Materiel Command, Alexandria, Virginia; (3) the
Logistics Systems Support Center, St. Louis, Missouri; (4) the Logistics
Support Activity, Redstone Arsenal, Alabama; (5) the Defense Finance and
Accounting Service, Indianapolis, Indiana; (6) the Defense Finance and
Accounting Service, St. Louis, Missouri; and (7) the Defense Finance and
Accounting Service, Columbus, Ohio.
� We obtained computerized financial records of all inventory shipment
losses reported in the Army's incoming shipments loss account between
October 1997 and September 1998 from the Defense Finance and Accounting
Service in Indianapolis, Indiana. We also obtained available financial
records of all transactions reported in the Army's accounting adjustments
loss account between October 1997 and September 1998. Using shipment
tracking codes, we identified all shipment losses that were reported in the
accounting adjustments loss account from the Defense Finance and Accounting
Service in St. Louis, Missouri. At the Logistics Support Activity, we
obtained computerized inventory records of all end-user shipments to Army
activities and returned material shipments from Army activities between
October 1997 and September 1998 that had not been acknowledged as received.
At the Aviation and Missile Command, we obtained financial reports of
purchased material shipments that were outstanding as of May 31, 1999, the
most current and complete shipment information available.
� To determine the security type of selected shipments reported as lost or
unaccounted for in fiscal year 1998, we identified the national stock number
for (1) all shipments reported in the inventory accounting adjustment loss
account as lost, (2) all shipments of end-user material valued at over
$100,000 that were outstanding for more than 90 days without a notification
of receipt, and (3) all shipments of returned material that were outstanding
for more than 160 days without a notification of receipt. We then matched
the national stock number with security classification codes in the
Department of Defense Federal Logistics Information System.
To assess the Army's adherence to procedures for controlling shipped
inventory, we took the following steps:
� Using the computerized data obtained from the Logistics Support Activity
and the Aviation and Missile Command, we judgmentally selected and reviewed
81,151 end-user, returned, and purchased items that were not reported as
received. We selected end-user and returned material items at selected Army
units that had a high incidence of unacknowledged receipts. Our review
included 80,635 end-user items valued at over $100,000 each that had been
outstanding over 90 days without a notification of receipt and 393 returned
material items that had been outstanding over 160 days without a
notification of receipt. For purchased material items, we selected 123 items
to review that had been outstanding from over 60 days to 4 years without a
notification of receipt. We did not independently verify the overall
accuracy of the databases from which we obtained data, but used them as a
starting point for selecting shipments that we then tracked back to records
and documents on individual transactions.
For the sample items, we reviewed available computer-generated shipment and
receipt data, analyzed inventory records, and held discussions at the
Aviation and Missile Command; Corpus Christi Army Depot, Corpus Christi,
Texas; Defense Distribution Depots (located in Susquehanna, Pennsylvania;
MeClellan Air Force Base, California; and Tobyhanna, Pennsylvania); Red
River Army Depot, Texarkana, Texas; Letterkenny Army Depot, Chambersburg,
Pennsylvania; Defense Automated Addressing System Office, Dayton, Ohio; U.S.
Army Aviation Center, Fort Rucker, Alabama; COBRO Corporation, Huntsville,
Alabama; National Guard Bureau, New Orleans, Louisiana; U.S. Army Air
Defense Artillery Center, Fort Bliss, Texas; Tennessee Army National Guard,
Nashville, Tennessee; the National Guard Bureau, Augusta, Maine; Florida
Army National Guard, Jacksonville, Florida; Mississippi Army National Guard,
Gulfport, Mississippi; Hunter Air Force Base, Savannah, Georgia; Sikorsky
Aircraft, Stratford, Connecticut; and U. S. Army Forces Command, Fort
McPherson, Georgia.
� To learn whether issues associated with overdue shipments were adequately
resolved, we reviewed Department of Defense, Army, and Aviation and Missile
Command implementing guidance. Such information provided the basis for
conclusions regarding the adherence to procedures for controlling shipped
inventory.
� To determine whether the Army had emphasized shipped inventory as part of
its assessment of internal controls, we reviewed assessments from the
Aviation and Missile Command for fiscal year 1998, the Army Missile Command
for fiscal years 1996-97, and the Department of the Army for fiscal years
1995-98.
We performed our review from April 1999 through April 2000 in accordance
with generally accepted government auditing standards.
Description of Weaknesses That Impaired the Army's Control Over Shipments
Type of material Number of Number of Value
shipments items
End-user material
End users reported receipt of items
using incorrect receipt
acknowledgment codes 52 54,112 $25,713,018
End users received but did not enter
items into inventory records 6 15,005 1,989,250
End users entered items into
inventory records, but did not send
a receipt notification to the 29 109 8,959,348
inventory control point
End users did not detect or research
and report shipment discrepancies 6 11,409 3,015,705
Subtotal 93 80,635 39,677,320
Returned materials
Storage depots reported receipt of
material using wrong receipt 4 6 21,029
acknowledgment codes
Storage depot did not report receipt
of shipment 3 19 138,698
End users did not reconcile
discrepancies by following up on
inquiries when returned items were 6 12
not received at the storage depot 10,437
End users did not notify inventory
control point of shipment 26 249 381,113
cancellation
End users sent items to wrong
storage depot 8 8 1,177,419
End-user records lack sufficient
documentation to prove that items
had been returned 29 85 605,261
Storage depot used correct receipt
acknowledgment code, but inventory
control point records did not 10
reflect receipt 14 76,051
Subtotal 86 393 2,410,009
Purchased materials
Storage depots reported receipt of
shipment using the wrong receipt
acknowledgment code Unknowna 48 848,389
Recipients--foreign military
customers and depots--did not
confirm receipt of items or shipment 46
discrepancies Unknown 304,900
Poorly integrated accounting and
logistics systems--following the
merger of two inventory control
points--resulted in faulty receipt Unknown
reporting 23 1,876,944
Storage depots made recording errors
that prevent the inventory control
point from determining the status of
shipped items Unknown 6 6,546
Subtotal Unknown 123 3,036,779
Total 179 81,151 $45,124,108
Note: Dollar values do not add due to rounding.
aThe Army's accounting and logistics system does not record shipments of
purchased material on a shipment by shipment basis.
Comments From the Department of Defense
GAO Contacts and Staff Acknowledgments
Charles I. Patton, Jr. (202) 512-4412
Lawson Gist, Jr. (202) 512-4478
In addition to the above contacts, Sandra F. Bell, Carleen C. Bennett,
Joseph F. Murray, Jeanett H. Reid, Robert C. Sommer, and
Susan K. Woodward made key contributions to this report.
Related GAO Products
Defense Inventory: Plan to Improve Management of Shipped Inventory Should Be
Strengthened (GAO/NSIAD-00-39, Feb. 22, 2000).
Department of the Navy: Breakdown of In-Transit Inventory Process Leaves It
Vulnerable to Fraud (GAO/OSI/NSIAD-00-61, Feb. 2, 2000).
Defense Inventory: Property Being Shipped to Disposal Is Not Properly
Controlled (GAO/NSIAD-99-84, July 1, 1999).
Defense Inventory: Navy's Procedures for Controlling In-Transit Items Are
Not Being Followed (GAO/NSIAD-99-61, Mar. 31, 1999).
Performance and Accountability Series: Major Management Challenges and
Program Risks--Department of Defense (GAO/OCG-99-4, Jan. 1999).
High-Risk Series: An Update (GAO/HR-99-1, Jan. 1999).
Department of Defense: Financial Audits Highlight Continuing Challenges to
Correct Serious Financial Management Problems (GAO/T-AIMD/NSIAD-98-158, Apr.
16, 1998).
Department of Defense: In-Transit Inventory (GAO/NSIAD-98-80R, Feb. 27,
1998).
High-Risk Series: Defense Inventory Management (GAO/HR-97-5, Feb. 1997).
High-Risk Series: Defense Financial Management (GAO/HR-97-3, Feb. 1997).
(709405)
Table 1: Shipments Without a Notification of Receipt for
Fiscal Year 1998 8
Table 2: Type of Shipments Reported as Lost or Unaccounted
for in Fiscal Year 1998 9
1. Classified items are those that require the highest degree of protection
in the interest of national security. Sensitive items are those that require
a high degree of protection and control because of their high value and/or
hazardous or technical nature.
2. Department of Defense: Status of Financial Management Weaknesses and
Actions Needed to Correct Continuing Challenges (GAO/T-AIMD/NSIAD-99-171,
May 4, 1999).
3. In 1992, the Defense Logistics Agency took over management of the Army's
storage depots, but the Army continues to manage several depots itself.
4. The Aviation and Missile Command, the Communications-Electronics Command,
and the Tank-automotive and Armaments Command. Comparable records were not
readily available at the Soldier and Biological Chemical Command.
5. The Army's accounting and logistics system does not record shipments of
purchased material on a shipment by shipment basis. In addition, the
shipments identified in table 1 did not include warehoused material (i.e.,
material distributed between storage depots) because the Army's system does
not retain records on the number of, value of, or reasons for unconfirmed
shipments of warehoused material, nor does it archive this data for future
reference.
6. Standards for Internal Control in the Federal Government
(GAO/AIMD-00-21-3.1, Nov. 1999).
7. We selected end-user and returned material items at Army units that had a
high incidence of unacknowledged receipts. Our review included 80,635
end-user items valued at over $100,000 each that had been outstanding over
90 days without a notification of receipt (valued at $39.7 million) and 393
returned material items that had been outstanding over
160 days without a notification of receipt (valued at $2.4 million). We
selected 123 purchased items to review that had been outstanding from over
60 days to 4 years without a notification of receipt (valued at $3 million).
8. Our prior reports have pointed out similar deficiencies in DOD's existing
accounting and related systems, including its logistics systems. See Defense
Inventory: Navy's Procedures for Controlling In-transit Items Are Not Being
Followed (GAO/NSIAD-99-61, Mar. 31, 1999), High-Risk Series: Defense
Financial Management (GAO/HR-97-3, Feb. 1997), and Inventory Management:
Vulnerability of Sensitive Defense Material to Theft (GAO/NSIAD-97-175,
Sept. 19, 1997).
9. Under section 1008 of the National Defense Authorization Act for Fiscal
Year 1998 (Public Law 105-85), the Department is to submit to the Congress
it's strategic plan for improving financial management. The Department's
Financial Management Plan was dated September 1999.
*** End of document. ***