GAO

United States General Accounting Office

Report to Congressional Requesters

June 2000 DEFENSE

INVENTORY

Army Needs to

Strengthen and Follow

Procedures to Control

Shipped Items

GAO/NSIAD-00-109

Page 1 GAO/NSIAD-00-109 Defense Inventory

Contents

Letter 3

Appendixes 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

Related GAO Products 27

Tables 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

Abbreviations

DOD Department of Defense

GAO General Accounting Office
Page 2 GAO/NSIAD-00-109 Defense Inventory
Page 3 GAO/NSIAD-00-109 Defense Inventory

United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-282832 Letr

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.
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Results in Brief 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.
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Background 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.

Extent of Shipped

Inventory Loss Cannot

Be Determined

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

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.
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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.

Accounting and Inventory

Management Practices

Obscure Extent of 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

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).
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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

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.
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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.

Table 1: Shipments Without a Notification of Receipt for Fiscal Year 1998

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.

Lost and Unaccounted for

Shipments Include

Classified and Sensitive

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

Dollars in millions

Shipment type

Number of

shipments Value

Actual time

outstanding for 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

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.
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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.

Table 2: Type of Shipments Reported as Lost or Unaccounted for in Fiscal Year 1998

Source: GAO analysis.

Procedures for

Controlling Shipped

Items Are Not

Followed or Are

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

Dollars in millions

Type

Number of

shipments

Number

of items Value

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
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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.

Procedures for Processing

Shipments Not Always

Followed

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

6 Standards for Internal Control in the Federal Government (GAO/AIMD-00-21-3.1, Nov.

1999).
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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.

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).
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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.

Inventory Control Point

Follow-Up on Shipments of

Purchased Items 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
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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
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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.

Controls Over Unaccounted

for Warehoused, End-User,

and Returned 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
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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.

Army Program Oversight Is

Insufficient

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
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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.

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.
B-282832

Page 17 GAO/NSIAD-00-109 Defense Inventory

Conclusions 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.

Recommendations 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.
B-282832

Page 18 GAO/NSIAD-00-109 Defense Inventory

Agency Comments 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.
B-282832

Page 19 GAO/NSIAD-00-109 Defense Inventory

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
Page 20 GAO/NSIAD-00-109 Defense Inventory

Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

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
Appendix I

Objectives, Scope, and Methodology

Page 21 GAO/NSIAD-00-109 Defense Inventory

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
Appendix I

Objectives, Scope, and Methodology

Page 22 GAO/NSIAD-00-109 Defense Inventory

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.
Page 23 GAO/NSIAD-00-109 Defense Inventory

Appendix II

Description of Weaknesses That Impaired the

Army’s Control Over Shipments ApendxiI

Note: Dollar values do not add due to rounding.

a

The Army's accounting and logistics system does not record shipments of purchased material on a

shipment by shipment basis.

Type of material Number of shipments

Number of

items Value

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 inventory control point 29 109 8,959,348

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

acknowledgment codes

4 6 21,029

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 not received at the storage depot 6 12 10,437

End users did not notify inventory control point of shipment cancellation 26 249 381,113

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 reflect receipt 10 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 discrepancies Unknown 46 304,900

Poorly integrated accounting and logistics systems—following the

merger of two inventory control points—resulted in faulty receipt

reporting Unknown 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
Page 24 GAO/NSIAD-00-109 Defense Inventory

Appendix III

Comments From the Department of Defense ApendxiI
Appendix III

Comments From the Department of Defense

Page 25 GAO/NSIAD-00-109 Defense Inventory
Page 26 GAO/NSIAD-00-109 Defense Inventory

Appendix IV

GAO Contacts and Staff Acknowledgments ApendxiIV

GAO Contacts Charles I. Patton, Jr. (202) 512-4412

Lawson Gist, Jr. (202) 512-4478

Acknowledgments 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.
Page 27 GAO/NSIAD-00-109 Defense Inventory

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/NSIAD98-158, 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).

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