GAO

United States General Accounting Office

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

Page 1 GAO/OSI/NSIAD-00-61 Navy In-Transit Inventory

United States General Accounting Office

Washington, D.C. 20548

Office of Special Investigations

B-284112 Letr

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.1

 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 area2

 because of vulnerabilities to 

fraud, waste, abuse, and mismanagement.

1 Defense Inventory: Navy’s Procedures for Controlling In-Transit Items Are Not Being 

Followed (GAO/NSIAD-99-61, Mar. 31, 1999).

2

 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.
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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.
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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,3

 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.4

 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 

Agency5

 and Navy-managed facilities and repair facilities.

3

 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.

4

 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.

5

 The Defense Logistics Agency operates and manages storage facilities. It receives, stores, 

and issues inventory and maintains inventory records.
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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.6

 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 intransit 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.

• 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 

6

 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.
B-284112

Page 5 GAO/OSI/NSIAD-00-61 Navy In-Transit Inventory

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.

• 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.

• 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.

• 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 
B-284112

Page 6 GAO/OSI/NSIAD-00-61 Navy In-Transit Inventory

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.
B-284112

Page 7 GAO/OSI/NSIAD-00-61 Navy In-Transit Inventory

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.

• 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.

• 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.

• 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 
B-284112

Page 8 GAO/OSI/NSIAD-00-61 Navy In-Transit Inventory

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.

• 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.
B-284112

Page 9 GAO/OSI/NSIAD-00-61 Navy In-Transit Inventory

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.7

 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 

7

 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.

i
B-284112

Page 10 GAO/OSI/NSIAD-00-61 Navy In-Transit Inventory

nvestigation 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) Letr
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