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.

• Would accounting and auditing standards require DVD contractors to report individual

transactions through the Transaction Item Reporting (TIR)2 system?

• 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

Page 2 GAO/AIMD-00-312R Direct Vendor Delivery

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

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

March 21, 2000, Briefing

1

Reporting Requirements for DVD

Briefing to Navy Supply Systems

Command

March 21, 2000
Enclosure

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

11

Reporting Exhibit A

NIIN

Balance Value Balance Value Balance Value

Beginning Balance 5 2,500.00 $ 15 2,142.86 $ 4 2,800.00 $

P urcha se s 3 1,500.00 $ 0- $ 7 4,900.00 $

Rec'd from Turn ins 0 - $ 0- $ 3 2,100.00 $

Sales 1 500.00 $ 5 714.29 $ 0- $

Disposa ls 1 500.00 $ 0- $ 0- $

Adjustm e nts 1 500.00 $ -3 428.57 $ 0- $

Ending Balance 7 3,500.00 $ 7 1,000.00 $ 14 9,800.00 $

Note 1 2

Note s:

1 Physical inventory count dated 8/24/2000 showed 1 additional item

2 Records adjusted to match 7 actually 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

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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

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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)