Department of the Navy: Breakdown of In-Transit Inventory Process Leaves
It Vulnerable to Fraud (Letter Report, 02/02/2000, GAO/OSI/NSIAD-00-61).

Pursuant to a congressional request, GAO followed up on its previous
report on the Navy's in-transit inventory management system, focusing
on: (1) determining what happened to the 34 shipments the Navy could not
account for; (2) confirming that the Navy actually had receipt
information for the 45 shipments that it could not account for in the
previous report; and (3) Navy initiatives that address some of the
specific control issues associated with in-transit inventory.

GAO noted that: (1) the Navy does not consider to be lost or stolen all
items that are written off as losses in transit; (2) Navy officials
stated that in many instances the items in question were received but
written off as lost because, contrary to requirements in Navy
regulations, facilities involved in the movement, repair, and storage of
in-transit items did not notify the Naval Inventory Control Point
(NAVICP) in Philadelphia, Pennsylvania, that they had shipped or
received items; (3) the majority of the shipments written off as lost by
NAVICP had in fact been delivered; (4) GAO reviewed 23 of 34 shipments
the Navy could not account for and were able to determine the status of
20 shipments; (5) the shipments had been delivered but, due to
procedural and system problems, were not reported as received; (6) GAO
was unable to determine the disposition of the remaining three shipments
because the Navy could not provide documentary evidence; (7) during
GAO's previous review, Naval Supply Systems Command officials contended
that some items written off as lost had actually been received; (8)
however, they could not provide evidence to validate their contention;
(9) they explained their information was based primarily on telephone
calls and electronic mail messages from the issuing facilities to the
intended recipients; (10) GAO found their information to be primarily
shipping information and not proof of either delivery or receipt; (11)
GAO reviewed 41 of 45 shipments the Navy reported as accounted for and
determined 38 shipments had been delivered; (12) however, GAO found that
the shipments were either not reported or were reported inaccurately to
NAVICP; (13) GAO was unable to determine the disposition of the
remaining three shipments because the Navy could not provide sufficient
documentary evidence; (14) although GAO's investigation disclosed no
evidence of theft in the shipments reviewed, GAO believes that the
inventory process is susceptible to fraud, waste, and abuse; and (15)
in-transit inventory discrepancies reduce the reliability of Department
of Defense inventory financial reports by obscuring true inventory
losses and misstating the number of items on hand.

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

 REPORTNUM:  OSI/NSIAD-00-61
     TITLE:  Department of the Navy: Breakdown of In-Transit Inventory
	     Process Leaves It Vulnerable to Fraud
      DATE:  02/02/2000
   SUBJECT:  Military inventories
	     Inventory control systems
	     Military materiel
	     Reporting requirements
	     Property losses
	     Data integrity
	     Accountability
	     Logistics
	     Internal controls

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GAO/OSI/NSIAD-00-61

Report to Congressional Requesters

February 2000

DEPARTMENT OF THE NAVY

Breakdown of In-Transit Inventory Process Leaves It Vulnerable to
Fraud
*****************

*****************

GAO/OSI/NSIAD-00-61

                                           Office of Special Investigations

B-284112

February 2, 2000

The Honorable Richard J. Durbin
The Honorable Tom Harkin
United States Senate

The Honorable Peter A. DeFazio
The Honorable Carolyn B. Maloney
House of Representatives

In March 1999, we reported that the Department of the Navy was unable to
account for over $3 billion in inventory, including some classified and
sensitive items, that was in transit within and between storage
facilities, repair facilities, and end users./Footnote1/ During that
review, we selected and reviewed 94 shipments, 79 of which the Navy, after
further investigation, could not account for. Following the issuance of
the report, the Navy reportedly obtained receipt information for 45 of the
79 shipments, leaving 34 shipments still unaccounted for. This report
responds to your request that we conduct an investigation to (1) determine
what happened to the 34 shipments that the Navy could not account for and
(2) confirm that the Navy actually had receipt information for the 45
shipments. In subsequent discussions with your offices, we were also asked
to include in our report Navy initiatives that address some of the
specific control issues associated with in-transit inventory.

This report is also part of GAO's continuing effort to address defense
inventory management as a high-risk area/Footnote2/ because of
vulnerabilities to fraud, waste, abuse, and mismanagement.

Results in Brief

The Navy does not consider to be lost or stolen all items that are written
off as losses in transit. Navy officials stated that in many instances the
items in question were received but written off as lost because, contrary
to requirements in Navy regulations, facilities involved in the movement,
repair, and storage of in-transit items did not notify the Naval Inventory
Control Point (NAVICP) in Philadelphia, Pennsylvania, that they had
shipped or received items. Our investigation showed that the majority of
the shipments written off as lost by NAVICP had in fact been delivered. We
reviewed 23 of 34 shipments that the Navy could not account for and were
able to determine the status of 20 shipments. We found that the shipments
were delivered but, due to procedural and system problems, were not
reported as received. We were unable to determine the disposition of the
remaining three shipments because the Navy could not provide documentary
evidence that would have enabled us to investigate these shipments.

During our previous review, Naval Supply Systems Command (NAVSUP)
officials contended that some items written off as lost had actually been
received. However, they could not provide evidence to validate their
contention. They explained that their information was based primarily on
telephone calls and e-mail messages from the issuing facilities to the
intended recipients. During our investigation, we found their information
to be primarily shipping information and not proof of either delivery or
receipt. We reviewed 41 of 45 shipments that the Navy reported as
accounted for and determined that 38 shipments had been delivered.
However, we found that the shipments were either not reported or were
reported inaccurately to NAVICP. We were unable to determine the
disposition of the remaining three shipments because the Navy could not
provide sufficient documentary evidence.

Although our investigation disclosed no evidence of theft in the shipments
we reviewed, we believe that the inventory process is susceptible to
fraud, waste, and abuse. In-transit inventory discrepancies reduce the
reliability of Department of Defense (DOD) inventory financial reports by
obscuring true inventory losses and misstating the number of items on hand.

Background

NAVSUP administers the Navy supply system and provides in-transit
inventory management policies and procedures. NAVSUP, through its NAVICP,
initiates purchases and directs inventory movement for its customers. Such
inventory includes classified and sensitive items,/Footnote3/ such as
aircraft guided-missile launchers, military night-vision devices, and
communications equipment. Until the inventory reaches its intended
destination and is reported as received, NAVICP refers to it as in
transit. The recipient of the inventory is responsible for notifying
NAVICP that it has been received. Such notification is an internal control
designed to account for all in-transit assets./Footnote4/ If within 45
days of shipment NAVICP has not been notified that a shipment has arrived,
it is required to follow up with the intended recipient. The rationale
behind this procedure is that until receipt of the inventory is confirmed,
the exact status of the shipment is uncertain and therefore vulnerable to
fraud, waste, and abuse. Navy policy stipulates that delinquent shipments
should be written off as inventory losses if their receipts remain
unconfirmed after 6 or 11 months, depending on their value. The Navy
reported that between October 1995 and September 1998, it wrote off, as
lost in transit, inventory valued at over $3 billion.

Implementing inventory control is a shared responsibility of NAVICP and
shipping and receiving facilities, which include the Defense Logistics
Agency/Footnote5/ and Navy-managed facilities and repair facilities.

The accountability problem with in-transit inventory is part of a larger
problem. Since at least 1990, we have considered DOD inventory management
to be a high-risk area because its inventory management systems and
procedures are ineffective. The lack of adequate controls over in-transit
inventory and the resulting vulnerability to undetected loss and theft
have been major areas of concern. That lack of control substantially
increases the risk that millions of dollars will be spent unnecessarily.
Because DOD has not corrected these problems, section 349 of the Strom
Thurmond National Defense Authorization Act for Fiscal Year 1999 required
DOD to submit a comprehensive plan to the Congress addressing how it will
ensure visibility over in-transit inventory./Footnote6/ DOD's Under
Secretary for Acquisition and Technology submitted the plan to the
Congress on September 14, 1999.

Shipments Not Accounted for by the Navy

NAVSUP and NAVICP officials do not consider as lost or stolen all items
that have been written off as in-transit losses. These officials stated
that in many instances the items in question were received but written off
as lost because facilities involved in the movement, repair, and storage
of in-transit items did not notify NAVICP that they had shipped or
received items. Our investigation showed that the majority of the
shipments that NAVICP could not account for had in fact been delivered. We
reviewed 
23 (valued at about $1.7 million) of the 34 shipments and were able to
determine the status of 20 (valued at about $1 million) of them. We found
that the 20 shipments had been delivered but, due to procedural and system
problems, were not reported to NAVICP as being received. The Navy could
not provide us documentary evidence necessary to review the remaining
three shipments.

o Fourteen shipments containing unclassified cockpit video recorders and
  generators (valued at $660,020) were delivered to repair facilities.
  However, the repair facilities did not report their receipt of the
  items to NAVICP because they were not contractually required to do so.
  For example, the Fleet and Industrial Supply Center in Norfolk,
  Virginia, sent 10 shipments containing aircraft cockpit video recorders
  to a commercial repair facility in Santa Clara, California. NAVICP
  officials explained that the repair facility at that time was not
  required to report shipment receipts. The officials further explained
  that they had not sought proof of shipment, delivery, or receipt for
  these shipments because they did not meet the specified dollar value
  threshold for follow-up. According to NAVICP officials, they had no way
  of knowing whether shipments to the contractor were received. Instead
  of obtaining proof of receipt, the officials periodically ran a special
  program that performs presumptive receipts for shipments. Using this
  program, a presumptive receipt is accomplished by posting a
  transaction, "administratively" indicating that material was received
  without NAVICP actually assuring its receipt. Records of some
  outstanding shipments are then closed based on presumed receipt even
  though there is no indication that the intended recipient actually
  received the material. However, NAVICP officials acknowledged that they
  either failed to run the program or the program failed to update the
  records of the 10 outstanding shipments. In any event, the shipments
  were written off.

o Four shipments containing classified aircraft guided-missile launchers
  and unclassified generators (valued at $305,900) were sent from the
  Fleet and Industrial Supply Center and the Defense Distribution Depot
  in Norfolk, Virginia, to the Defense Distribution Depot in San Diego,
  California, for storage. Records show that receiving personnel signed
  for the shipments, but we found no evidence that they were subsequently
  recorded as received into inventory. In addition, depot personnel were
  unable to provide evidence that these shipments were properly stored
  and that the receipt of the shipments had been reported to NAVICP.

o Two shipments containing an unclassified aircraft guided-missile
  launcher and generator (valued at $36,000) were delivered and reported
  to NAVICP, but NAVICP's internal files did not contain receipt
  information. In regard to one shipment, NAVICP officials explained that
  the Fleet and Industrial Supply Center in Norfolk, Virginia, reported
  that it had sent a shipment to the depot in San Diego, California, for
  storage. In actuality, the shipment had been sent to storage at the
  depot in Norfolk, Virginia. According to NAVICP officials, the Norfolk
  depot reported receiving the shipment; but NAVICP's in-transit
  inventory tracking system showed that the shipment had not been
  received. The officials could not explain why NAVICP's internal files
  did not contain receipt information on the second shipment.

o We were unable to review three shipments--one containing a classified
  aircraft guided-missile launcher and two containing unclassified
  alternating current generators--because the Navy could not provide us
  necessary documentary evidence. That information pertained to the names
  of the shipments' commercial carriers, their mode of shipment, and
  their date of shipment.

The above examples demonstrate some of the procedural and system problems
regarding in-transit inventory that have led to a lack of accountability.
This lack of accountability could cause the inventory to become vulnerable
to theft or loss and could cause managers to implement inefficient,
ineffective decisions and practices regarding purchases that could lead to
waste. NAVSUP and NAVICP officials acknowledged that it is possible that
purchases could have been made as a result of items being written off.

While Navy officials are uncertain regarding whether purchases of
inventory resulted from write-offs, our investigation showed that
subsequent purchases may have been made for some of the sample items
written off. We determined this by investigating 14 shipments that the
Defense Distribution Depot in Norfolk, Virginia, had sent to repair
facilities. For example, a commercial repair facility in Singapore
received 3 shipments of 67 generators (valued at $593,620). In fiscal year
1997, the inventory was written off as an in-transit loss. On October 12,
1999, NAVICP purchased 88 generators valued at $13,625 each ($1.2 million
total) and, on October 22, 1999, initiated a purchase request for an
additional 145 generators valued at $13,000 each ($1.9 million total). The
generators are used in Navy aircraft.

In another example, 10 of the 14 shipments contained 11 cockpit video
recorders (valued at $56,650) that were sent to a commercial repair
contractor in Santa Clara, California. Because of NAVICP's failure to
adequately follow up on proof of shipment, delivery, or receipt with the
appropriate facilities, the inventory was written off as an in-transit
loss in fiscal year 1997. On September 30, 1997, NAVICP purchased 185
cockpit video recorders valued at $5,398 each ($998,630 total) and, on
June 29, 1998, purchased 40 cockpit video recorders valued at $6,850 each 
($274,000 total).

In order to determine if items were purchased as a result of inventory
write-offs, additional work, such as an audit, would need to be conducted.

Shipments Later Accounted for by the Navy

During our previous review, NAVSUP officials contended that some items
written off as lost had actually been received. However, they could not
provide evidence to validate this contention. They explained that their
information was based primarily on telephone calls and e-mail messages by
the issuing facilities to intended recipients. During our investigation,
we found that this information was primarily shipping information and not
proof of either delivery or receipt. We reviewed 41 of the 45 shipments
valued at $226,834 that the Navy reported as accounted for and were able
to determine that 38 shipments valued at $222,044 had been delivered.
However, we found that the shipments either had not been reported or had
been reported inaccurately to NAVICP. The Navy could not provide us
documentary evidence necessary to review the remaining three shipments.

o Twenty-five shipments containing a classified gyro assembly, a
  classified electronic control servo, and classified infrared turret
  windows (valued at $129,350) were delivered to repair or storage
  facilities. Records show that the facilities did not accurately process
  shipping documents to indicate that they had received shipments. When
  the facilities reported the receipts to NAVICP, they did not cite the
  document numbers being used by NAVICP to track the shipments. For
  example, the Fleet and Industrial Supply Center in Norfolk, Virginia,
  sent a shipment to a commercial repair facility under document number
  N65886-6145-0FN3. However, the commercial repair facility reported the
  receipt to NAVICP under document number N65886-6145-1FN3. Because
  NAVICP's system was tracking the shipment under document number N65886-
  6145-0FN3, the system did not show that the items had been received;
  and the items were subsequently written off as lost.

o Eight shipments of classified aircraft guided-missile launchers (valued
  at $83,684) were sent from the Fleet and Industrial Supply Center in
  Norfolk, Virginia, to the Army depot in Anniston, Alabama. Records show
  that the shipments were delivered to the Anniston depot. However,
  NAVICP officials explained that the depot was not required to
  acknowledge shipment receipts. A presumptive receipt program was
  supposed to close the records of outstanding shipments to the Anniston
  depot. However, NAVICP officials acknowledged that either they had
  failed to run the program or the program had failed to close the
  records; and the shipments were written off.

o Records showed that five shipments of classified nitrogen receiver
  assemblies (valued at $9,010) were sent from the Fleet and Industrial
  Supply Center in Norfolk, Virginia, to the Defense Distribution Depot
  in San Diego, California. Upon delivery of the shipments, receiving
  personnel signed for and processed them; but depot personnel were
  unable to provide evidence that the shipments were properly stored and
  that their receipts had been reported to NAVICP. In fiscal year 1997,
  the material was written off as an in-transit loss.

o We were unable to review three shipments--containing classified
  nitrogen receiver assemblies--because the Navy could not provide us
  necessary documentary evidence. That documentation pertained to the
  names of the shipments' commercial carriers, their mode of shipment,
  and their date of shipment.

Navy and DOD Efforts to Address In-Transit Inventory Deficiencies

In March 1999, we reported that the Navy was unable to account for over $3
billion in in-transit inventory during fiscal years 1996 through 1998. In
response, DOD stated that the Navy had taken steps to resolve internal
control weaknesses identified in the March 1999 report. Among other
things, the Commander, NAVSUP, (1) chartered an Integrated Process Team to
review the current systems, policies, and processes to investigate
material receipt acknowledgment problems and (2) proposed short-term
solutions. NAVSUP officials explained that as part of this reengineering
effort, they had determined that additional staff should be used to
reconcile in-transit write-offs. They cite NAVICP efforts to avoid write-
offs by tracking and investigating all shipment transactions over $700,000
and over 45 days old. In July 1999, NAVSUP officials began documenting the
results of their follow-up efforts. As of September 1999, they have
resolved over 100 shipments valued at over $136 million. Based on these
results, NAVSUP has allocated $1.7 million for additional staff to work on
avoiding potential write-offs. It anticipates being able to decrease the
level of review to below the current $700,000 level. The additional
funding is budgeted for 1 year.

In March 1999, NAVSUP issued policy guidance that requires follow-up and
research on all shipments of classified and sensitive items prior to
writing them off or reporting the items as lost. In addition, the revised
procedures require that a list of all items that have reached the write-
off time frame be forwarded to the Commander, NAVICP, for write-off
approval. In September 1999, NAVSUP modified the Navy's in-transit
tracking system to provide NAVICP (1) visibility, or tracking capability,
over classified and sensitive in-transit items and (2) automated access to
the files of issuing and receiving facilities for proof of shipment and
receipt./Footnote7/ NAVSUP officials explained that the Navy has initiated
a new process in which the commanding officer of the last traceable holder
of classified in-transit inventory will be held responsible for items that
cannot be accounted for. Under the new process, the commanding officer is
required to provide proof of either shipment or receipt. Otherwise, the
officer must conduct a formal investigation to determine whether the
unaccounted-for items are missing, lost, or stolen. It is too early to
assess the impact of these initiatives.

Scope and Methodology

We conducted our investigation from July 1999 through October 1999 and
began by reviewing our prior work. We then obtained shipment information
from the Defense Distribution Depot, Fleet and Industrial Supply Center in
Norfolk, Virginia, and NAVICP in Philadelphia, Pennsylvania. Using the
information obtained, we selected shipments to investigate according to
their location.

In addition to interviewing employees at the Defense Distribution Depot in
Norfolk, we talked to Advanced Traceability and Control Hub employees to
obtain proof of shipment information. We also visited depots in Anniston,
Alabama; Letterkenney, Pennsylvania; and San Diego, California, to track
down shipments and the Fleet and Industrial Supply Center in San Diego. We
visited a commercial contractor in McKinney, Texas, and contacted
commercial contractors in Santa Clara, California, and Singapore.

We met with NAVICP and NAVSUP officials to obtain an explanation of the
Navy's write-off process and how it affects the financial and inventory
accounts. On September 29, 1999, we discussed the results of our
investigation with NAVSUP officials; and they agreed with our findings.
NAVSUP officials also briefed us on the reengineering efforts being
undertaken in response to our March 1999 report.

As arranged with your office, unless you announce its contents earlier, we
plan no further distribution of this report until 30 days from the date of
this letter. At that time, we will send copies of this report to the
Honorable William S. Cohen, Secretary of Defense; the Honorable Richard
Danzig, Secretary of the Navy; Lieutenant General Henry T. Glisson,
Director, Defense Logistics Agency; and the Honorable Jacob J. Lew,
Director, Office of Management and Budget. We will also make copies
available to others upon request. If you have questions concerning this
report, please contact me on (202) 512-7455 or Assistant Director John
Ryan on (202) 512-6722. Norman Burrell, Sandra Bell, and Kenneth Feng are
key contributors to this case.

*****************

*****************

Robert H. Hast
Acting Assistant Comptroller General
 for Special Investigations

(600603)

--------------------------------------
/Footnote1/-^ Defense Inventory: Navy's Procedures for Controlling In-
  Transit Items Are Not Being Followed (GAO/NSIAD-99-61, Mar. 31, 1999).
/Footnote2/-^ In 1990, GAO began a special effort to review and report on
  the federal program areas that it identified as high risk because of
  vulnerabilities to fraud, waste, abuse, and mismanagement. This effort,
  which was supported by the Senate Committee on Governmental Affairs and
  the House Committee on Government Reform, resulted in a much-needed
  focus on problems that were costing the government billions of dollars.
  GAO identified the Department of Defense's inventory management as a
  high-risk area at that time because levels of unneeded inventory were
  too high and systems for determining inventory requirements were
  inadequate.
/Footnote3/-^ Classified items require the highest degree of protection in
  the interest of national security. Sensitive items--those items that
  have high values and that are highly technical or hazardous in nature--
  require a high degree of protection and control due to statutory
  requirements or regulations.
/Footnote4/-^ Receipt notifications are generally recorded in NAVICP's
  accounting and logistics records. Item managers use the receipt
  notifications in the records to maintain visibility, or keep track, of
  the items.
/Footnote5/-^ The Defense Logistics Agency operates and manages storage
  facilities. It receives, stores, and issues inventory and maintains
  inventory records.
/Footnote6/-^ The Authorization Act requires that the Comptroller General
  review the plan and submit any appropriate comments to the Congress.
  That review is the subject of a separate GAO report that will be issued
  later this year.
/Footnote7/-^ These actions were in response to a GAO recommendation
  concerning further integration of the Navy's accounting and logistics
  systems. (See GAO/NSIAD-99-61, Mar. 31, 1999.) GAO has not assessed the
  effectiveness of these changes.

*** End of document. ***