GAO-01-178R Navy Billing Issues

United States General Accounting Office

Washington, DC 20548

January 11, 2001

The Honorable Richard Danzig

The Secretary of the Navy

Subject: Navy Aviation Spare Parts Billing Transaction Issues

Dear Mr. Secretary:

Earlier this year, we conducted a review of price trends for Navy aviation spare parts.1

During the course of the review, we compared the prices customers were billed to the prices

they should have paid according to the parts catalog maintained by the Naval Inventory

Control Point-Philadelphia. In doing so, we identified thousands of billing transactions

where the customers’ price did not match the catalog price. Moreover, we found thousands

of additional transactions in which key information used to generate accurate customer bills

was missing. These findings suggest that the Navy may be incorrectly reporting its sales of

aviation spare parts. This letter discusses our findings in greater detail and provides

suggested actions the Navy can take to improve the accuracy of its billings.

Background

The Naval Inventory Control Point uses billing transaction information to report its annual

sales of spare parts.2 These sales are made either at the net or the standard price. Customers

pay the net price when they turn in a broken item to be repaired; otherwise they pay the

higher standard price. In fiscal year 1999, the average net price was $7,390 and the average

standard price was $29,888.

When customers order parts, they supply an advice code as part of the requisition process.

The Inventory Control Point uses this code to determine whether customers will be billed at

the net or standard price. The most common advice code, "5G," for example, indicates that

the customer will turn in a broken part, in which case a bill is generated at the net price. Over

90 percent of the time, customers turn in a broken part and pay the net price.

We obtained from the Naval Inventory Control Point billing transactions for aviation spare

parts covering fiscal years 1994 through 1999. These transactions, extracted from the Navy’s

Billing History File, were segregated into two categories – net and standard sales – for each

 

1 Defense Acquisitions: Prices of Navy Aviation Spare Parts Have Increased (GAO-01-23, Nov. 6, 2000).

2 A transaction can be a bill or a bill reversal. The latter is used to correct billing errors.
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of the 6 fiscal years. We also obtained catalog prices for each part over the 6-year period

from the Navy’s pricing file.

As a data quality check, we compared the prices customers were billed to the Navy’s catalog

prices. From fiscal year 1994 through 1999, we determined whether billing transactions

identified as net sales matched the net price in the Navy’s catalog. If the price billed to the

customer did not match the catalog's net price, we determined if it matched the standard

price. We performed the same analysis for transactions identified as standard sales.

Billing Transactions Were Mistakenly

Identified As Net or Standard Sales

Of the more than 1.2 million transactions that the Inventory Control Point had identified as

net sales, there were 4,368 transactions (0.4 percent) where the billing price actually matched

the standard price in the catalog. More importantly, of the 347,756 billing transactions

identified as standard price sales, 50,079 (14 percent) matched the net price in the catalog.

As noted above, more than 90 percent of the Inventory Control Point’s transactions are net

sales. These mismatches indicate that transactions were incorrectly categorized as net sales

rather than standard sales and vice versa. Table 1 summarizes our analysis for fiscal year

1994 to 1999.

Table 1: Number of Mismatches

Fiscal

Year

Identified as Net Sale But

Matched Catalog's Standard Price

Identified as Standard Sale But

Matched Catalog's Net Price

1994 1 14,362

1995 37 22,303

1996 0 546

1997 8 618

1998 55 12,131

1999 4,267 119

Total 4,368 50,079

We discussed our findings with officials at the Inventory Control Point, focusing primarily

on 1994, 1995, 1998, and 1999, the years with the largest number of mismatches. The

officials confirmed that all billing transactions with advice codes indicating a turn-in of a

broken part are identified as net sales, while transactions with all other advice codes are

identified as standard sales. Due to resource constraints, the officials could not

systematically determine the reason for all of the mismatches. However, they offered the

following as possible explanations.
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• In 1994 and 1995, we found a total of 36,665 transactions where the net price was billed

but the transactions were identified as standard price sales. One explanation for these

mismatches was that the Inventory Control Point introduced a new automated requisition

system in the early 1990s and some errors may have occurred in the transition. However,

the officials could not verify that this happened, since automated billing records are no

longer available for those years and a substantial amount of manual effort would be

required to research the files.

• In 1998, about 12,000 transactions were identified as standard sales when customers were

actually charged the lower, net price. These 12,000 transactions translated to over $101

million that was mistakenly counted as standard sales. The officials explained that in

1998 the Navy’s automated requisition processing system would not allow a net bill to be

issued for certain designated customers. Therefore, the system failed to properly issue

bills at the net price for these customers. An analyst in the billing department fixed this

problem by manually flagging each of the transactions with the "2J" advice code—a

little-used code chosen to signal that a manual fix had been made. However, when the

Inventory Control Point reported fiscal year 1998 sales, all of these transactions were

identified as standard sales based on the “2J” code. We verified that there were about

12,000 billing transactions in 1998 with the 2J advice code.

• In 1999, we identified 4,267 transactions that were reported as net sales where the price

billed to the customer matched the catalog's standard—rather than net--price. Inventory

Control Point officials explained that the catalog price is sometimes changed during the

fiscal year. They stated that this situation could account for the discrepancies we found,

because the database provided to us by the Navy reflects catalog prices at the start of the

fiscal year and does not capture the updated prices. For this reason, we were not able to

validate whether the updated prices matched the price at which customers were billed.

The officials said that when there is a mid-year price change, the Inventory Control Point

is supposed to issue a bill reversal, which credits the customer for the old price. The

customer would then receive a new bill based on the updated catalog price.

Billing Transactions

Lacked Advice Codes

As noted earlier, when customers requisition parts, they supply an advice code to the Navy’s

automated requisition processing system. From the processing system, the advice code is

perpetuated to other databases for supply and billing actions. We asked Inventory Control

Point officials to provide us with a breakdown of transactions by advice code from fiscal

years 1997 through 1999. In the 3-year period, about 36,000 of the more than 750,000

transactions did not have an advice code. These 36,000 billing records translated to $168

million in sales.

In cases where the customer neglects to supply an advice code, bills are automatically

generated at the standard price by default. If the standard price is mistakenly charged--that

is, the customer turned in a broken part--the Inventory Control Point issues a bill reversal and

then charges the customer the net price.
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The Inventory Control Point has issued a substantial number of bill reversals. Of the billing

transactions we obtained for our price trend review covering fiscal years 1994 through 1999,

nine percent were bill reversals. These bill reversals totaled $2.3 billion over the 6 years.

Based on the data provided by the Navy, we cannot determine the extent to which these bill

reversals were to correct billing errors resulting from missing advice codes. The Inventory

Control Point also issues bill reversals for other purposes, such as canceled orders or

inaccurate billing amounts.

Conclusion

We identified thousands of transactions that were mistakenly identified as net or standard

sales based on incorrect or missing advice codes. As a result of these errors, some customers

have been billed at the incorrect price. Further, a substantial amount of administrative work

at the Inventory Control Point has been required to issue bill reversals to correct the billing

errors. These errors also raise questions regarding the accuracy of the Inventory Control

Point’s reported sales of spare parts. Because the advice code provides an important piece of

information for supply and billing actions, the Inventory Control Point should take actions to

ensure that this code is correct. A further concern is that, to the extent that net and standard

sales are part of the calculation used to establish Working Capital Fund spare part prices for

future years, these prices could be set too high or too low if the reported sales are incorrect.

Recommendations For Executive Action

Since in the vast majority of cases customers turn in a broken part and are billed the net

price, we recommend that the Navy Inventory Control Point-Philadelphia set the billing

default to the net rather than the standard price when the advice code is missing. Taking this

action would decrease the number of bill reversals and thus reduce the additional work and

resources required to issue reversals. Furthermore, we recommend that customer requisitions

without an advice code be flagged and tracked to ensure that the customers are billed at the

appropriate price.

Agency Comments

In written comments on a draft of this report, the Department of Defense (DOD) concurred

with our recommendations. The Inventory Control Point has submitted a proposal to set the

default to the net price when the advice code is blank. An automatic error notification will be

triggered in this circumstance so that Inventory Control Point personnel can determine if the

net price charge is valid. DOD stated that the time frame for implementing these changes has

not yet been determined. DOD’s written comments are enclosed.

We conducted our review from April 2000 to October 2000 in accordance with generally

accepted government auditing standards. In conducting our review we met with officials and

analysts at the Naval Inventory Control Point-Philadelphia, Pennsylvania.
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This report contains recommendations to the Naval Inventory Control Point-Philadelphia.

We are asking the Commander of the Inventory Control Point to inform us within 60 days of

actions taken on our recommendations.

We are sending copies of this letter to the Honorable William S. Cohen, Secretary of

Defense, and interested congressional committees. This letter will also be available on

GAO’s home page at http://www.gao.gov. Please contact me at (202) 512-4841 or Karen S.

Zuckerstein at (202) 512-6785 if you or your staff have questions. Major contributors to this

letter were Michele Mackin and Yeewan Tom.

Sincerely yours,

David E. Cooper, Director

Acquisition and Sourcing Management

Enclosure
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