DOD Excess Property: Management Control Breakdowns Result in Substantial Waste and Inefficiency
Published: 2005-06-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: GAO was asked to assess the overall economy and efficiency of the Department of Defense (DOD) program for excess property reutilization (reuse). Specifically, GAO was asked to determine (1) whether and to what extent the program included waste and inefficiency and (2) root causes of any waste and inefficiency. GAO was also asked to provide detailed examples of waste and inefficiency and the related causes. GAO's methodology included an assessment of controls, analysis of DOD excess inventory data, statistical sampling at selected sites, and detailed case studies of many items.
section_title: What GAO Found
paragraphs: DOD does not have management controls in place to assure that excess inventory is reutilized to the maximum extent possible. Of $33 billion in excess commodity disposals in fiscal years 2002 through 2004, $4 billion were reported to be in new, unused, and excellent condition. DOD units reutilized only $495 million (12 percent) of these items. The remaining $3.5 billion (88 percent) includes significant waste and inefficiency because new, unused, and excellent condition items were transferred and donated outside of DOD, sold for pennies on the dollar, or destroyed. DOD units continued to buy many of these same items. GAO identified at least $400 million of fiscal year 2002 and 2003 commodity purchases when identical new, unused, and excellent condition items were available for reutilization. GAO also identified hundreds of millions of dollars in reported lost, damaged, or stolen excess property, including sensitive military technology items, which contributed to reutilization program waste and inefficiency. Further, excess property improperly stored outdoors for several months was damaged by wind, rain, and hurricanes. GAO ordered and purchased at little or no cost several new and unused excess commodities that DOD continued to buy and utilize, including tents, boots, power supplies, circuit cards, and medical supplies. GAO paid a total of $2,898, including tax and shipping cost, for these items, which had an original DOD acquisition cost of $79,649. Root causes for reutilization program waste and inefficiency included (1) unreliable excess property inventory data; (2) inadequate oversight and physical inventory control; and (3) outdated, nonintegrated excess inventory and supply management systems. Procurement of inventory in excess of requirements also was a significant contributing factor. Improved management of DOD's excess property could save taxpayers at least hundreds of millions of dollars annually.

section_title: Letter
paragraphs: Thank you for the opportunity to discuss the results of our audit and  investigation of the economy and efficiency of the Department of Defense  (DOD) program for reutilization (reuse) of excess property.  Our related  report, released today and developed at the request of this Subcommittee,  Senator Collins, and Representative Schakowsky, describes significant  breakdowns in management controls that have resulted in substantial  waste and inefficiency in DOD’s excess property reutilization program.   Our previous, limited work identified several examples of waste and  inefficiency in DOD’s excess property reutilization program.  Our  November 2003 report identified several examples that showed that at the  same time DOD excessed biological laboratory equipment items in good or  excellent condition and sold many of them to the public for pennies on the  dollar, it was purchasing the same or similar items.   In June 2002, we  testified that the lack of asset visibility over the Joint Service Lightweight  Integrated Suit Technology (JSLIST) resulted in DOD selling new, unused  JSLIST for $3 per suit (coats and trousers) while at the same time procuring  hundreds of thousands of JSLIST annually at a cost of over $200 per suit.   You were concerned that these limited examples could indicate systemic  problems.
Our current work focused on whether and to what extent we found waste  and inefficiency in DOD’s excess property reutilization program and the  root causes of any waste and inefficiency.  You also asked us to determine  whether the Defense Logistics Agency (DLA) was purchasing new items  when identical items in new, unused, and excellent condition were  available at Defense Reutilization and Marketing Service (DRMS) field  offices (DRMO).   As DOD’s combat support agency, DLA has a mission to  provide best-value logistics support to America’s armed forces.  In carrying  out its mission, DLA manages inventory valued at about $83 billion,  consisting of more than 5 million items of  food, fuel, clothing and other  textiles, medical supplies, industrial use items, and spare and repair parts  supporting over 1,400 weapon systems.  Within DLA, DRMS is responsible  for excess property disposals.  Federal regulations require executive  agencies to ensure that personal property not needed by their activity is  offered for use elsewhere within the agency.  In accordance with federal  regulations, DOD 4160.21-M, Defense Materiel Disposition Manual,  chapter 5, calls for reutilization of excess property to the extent feasible to  fill existing needs and to satisfy additional needs before initiating new  procurement or repair.
In performing our work, we reviewed applicable laws and regulations; DOD  policies and procedures; and current and planned systems, processes, and  management controls.  To identify potential waste and inefficiencies, we  analyzed the universe of recorded commodity purchase and disposal  transactions and compared DOD commodity purchases to disposals of  identical items in new, unused, and excellent condition (A condition).  To  assure ourselves that DOD data were sufficiently reliable for the purpose of  our work, we performed a number of electronic and statistical tests of DOD  databases and excess inventory and data used in our work.  We conducted  our work, including follow-up work related to this testimony, from  November 2003 through May 2005 in accordance with U.S. generally  accepted government auditing standards and investigative standards  prescribed by the President’s Council on Integrity and Efficiency.  We  obtained DOD comments on a draft of our report, and we briefed DOD  officials on new findings included in this testimony.
Today, my testimony will focus on (1) summarizing the results of our audit  and updating our analysis for fiscal year 2004 excess commodity disposal  activity; (2) describing additional case study acquisitions of new, unused  excess DOD commodity items from December 2004 through April 2005;  and (3) discussing  management control breakdowns that contributed to  reutilization program waste and inefficiency and the results of our  investigations of selected excess property losses noted in our audit report.
subsections: section_title: Analysis of Reutilization Program Identifies Billions of Dollars in Waste and Inefficiency
paragraphs: Overall, our analysis of the $33 billion in reported excess commodity  disposals in fiscal years 2002 through 2004 showed that $4 billion related to  items in new, unused, and excellent condition.  Of the $4 billion, we  determined that $3.5 billion (88 percent) included substantial waste and  inefficiency because new, unused, and excellent condition items were  being transferred or donated outside of DOD, sold on the Internet for  pennies on the dollar, or destroyed rather than being reutilized.  As  discussed in our report, our analysis of $18.6 billion in fiscal year 2002 and  2003 excess commodity disposal activity identified $2.5 billion in excess  items that were reported to be in new, unused, and excellent condition (A  condition).  Although federal regulations and DOD policy require  reutilization of excess property in good condition, to the extent possible,  our analysis showed that DOD units only reutilized $295 million (12  percent) of these items.  The remaining $2.2 billion (88 percent) of the $2.5  billion in disposals of A-condition excess commodities were not reutilized,  but instead were transferred, donated, sold, or destroyed.  Similarly, our  analysis of $14.3 billion in fiscal year 2004 disposal activity identified $1.5  billion in excess commodity items that were reported to be in A condition.   Of the $1.5 billion in A-condition excess items, DOD units reutilized $200  million (13 percent) and transferred, donated, sold, or destroyed the  remaining $1.3 billion (87 percent).   We also found that during fiscal years  2002 and 2003, DOD purchased at least $400 million (over $200 million each  year) of identical items instead of reutilizing available excess items in A  condition.  To illustrate continuing reutilization program waste and  inefficiency, we purchased several new and unused excess DOD  commodity items that were being purchased by DLA, were currently in use  by the military services, or both.  Our analysis of transaction data and our  tests of controls for inventory accuracy indicate that the magnitude of  waste and inefficiency could be much greater due to military units  improperly downgrading condition codes of excess items that are in new,  unused, and excellent condition to unserviceable and the failure to  consistently record national stock numbers (NSN) needed to identify like  items.
subsections: section_title: Fiscal Year 2002-2004 Excess Commodity Disposal Activity
paragraphs: DRMS is responsible for disposing of unusable items, often referred to as  “junk,” as well as facilitating the reutilization of usable items.  Although the  majority of DOD’s excess property disposals relate to items in  unserviceable condition, DOD also disposed of billions of dollars of  serviceable items, including excess commodities in A condition from fiscal  years 2002 through 2004.  Our analysis of DRMS data showed that $28.1  billion of the $33 billion in excess DOD commodity disposals from fiscal  year 2002 through fiscal year 2004 consisted of items listed in unserviceable  condition, including items needing repair, items that were obsolete, and  items that were downgraded to scrap.  The remaining $4.9 billion in excess  commodity disposals consisted of items reported to be in serviceable  condition, including $4 billion in excess commodities reported to be in A  condition.  However, of the $4 billion, DOD units reutilized only $495  million (12 percent) of these items during the 3-year period.  The data  reliability issues noted above and our interviews, case studies, and  statistical sample results indicate that the magnitude of waste and  inefficiency associated with disposals of A-condition items could be much  greater.  As shown in figure 1, items that were not reutilized by DOD were  transferred to federal agencies or special programs, donated to states, sold  to the public, or destroyed by demilitarization or through scrap and  hazardous materials contractors.
We found that the percentage of DOD reutilization of excess property was  higher in fiscal year 2002 than in fiscal years 2003 and 2004.  According to  DRMO officials, reutilization was higher in fiscal year 2002 because excess  items were pulled back to support deployment to Afghanistan and Iraq.  In  fiscal year 2003, procurement to support the war on terrorism began to  keep up with the demand for supplies, and reutilization of excess property  decreased.  DRMS officials attribute the fiscal year 2004 increase in DOD  reutilization to the establishment of the Joint Services Nuclear, Biological,  and Chemical Equipment Assessment Program (JEAP) to inspect excess  military clothing, tents, and other textile items and reissue items in good  condition.  The increase in disposal activity in fiscal years 2003 and 2004  relates to turn-ins of property used in support of Operation Enduring  Freedom and Operation Iraqi Freedom.  Table 1 shows disposal activity  related to A-condition excess commodities for fiscal years 2002 through  2004.
section_title: Unnecessary Commodity Purchases
paragraphs: Our analysis of fiscal year 2002 and 2003 DLA commodity purchases and  DRMS excess property inventory data identified numerous instances in  which the military services ordered and purchased items from DLA at the  same time identical items—items with the same NSN—that were reported  to be in new, unused, and excellent condition were available for  reutilization.  We found that DOD purchased at least $400 million of  identical items during fiscal years 2002 and 2003—over $200 million each  year—instead of using available excess A-condition items.   The magnitude  of unnecessary purchases could be much greater because NSNs needed to  identify identical items were not recorded for all purchase and turn-in  transactions.  For example, we determined that DLA buyers and item  managers did not record NSNs for 87 percent (about $4.9 billion) of the  nearly $5.7 billion in medical commodity purchases by military units during  fiscal years 2002 and 2003.  Further, as discussed later, improper  downgrading of condition codes to unserviceable could also result in an  understatement of the magnitude of unnecessary purchases.  While our  statistical tests found a few instances of inaccurate serviceable condition  codes, most condition code errors related to the improper downgrading of  condition to unserviceable.
section_title: Fiscal Year 2004 and 2005 Requisitions and Purchases Demonstrate Continuing Waste and Inefficiency
paragraphs: To determine whether the problems identified in our analysis were  continuing, we monitored DRMS commodity disposal activity from May  2004 through April 2005.  We found that DOD continued to transfer, donate,  and sell excess A-condition items instead of reutilizing them.  To illustrate  these problems, we requisitioned several excess new and unused items at  no cost and purchased other new and unused commodities at minimal cost.   We based our case study selections on new, unused items that DOD  continued to purchase.  As discussed in our report, we used the GSA  Federal Disposal System, available to all federal agencies, to requisition  several new and unused excess DOD commodity items during our audit in  fiscal year 2004 and the first half of fiscal year 2005, including a medical  instrument chest, two power supply units, and two circuit cards, at no  charge.  These items had an original DOD acquisition cost of $55,817, and  we paid only $5 shipping cost to obtain all of them.  We also purchased, at  minimal cost, several excess DOD commodity items in new and unused  condition over the Internet at govliquidation.com—the DRMS liquidation  contractor’s Web site.  The items we purchased included tents, boots,  three gasoline burners (stove/heating unit), a medical suction apparatus,  and bandages and other medical supply items with a total reported  acquisition cost of $12,310.  We paid a total of $1,466 for these items, about  12 cents on the dollar, including buyer’s premium, tax, and shipping cost.
From December 2004 through April 2005, we purchased several new,  unused excess DOD commodity items, including over 8,000 military  badges, medals, and insignias; 8 new, unused Cooper Trendsetter SE tires;  and Class A military uniforms.  Although these items had a total reported  acquisition cost of $11,522, we paid a total of $1,427 for these items,  including tax, buyer’s premium, and shipping cost.
New, unused DOD badges, medals, and insignias.  On December 6,  2004, we purchased 8,526 excess DOD badges, medals, and insignias that  are used to indicate rank, the unit or program to which a military member  or civilian employee is assigned, or service awards.  These items had a  reported acquisition cost of $9,518.  We paid a total of $1,102, including  buyer’s premium and tax, for these items—about 12 cents on the dollar.   Units and program areas designated by the badges and insignias include  Army Rangers, Mountain, and Airborne; Air Force Air Traffic Controller;  and DOD Scientific Consultant.  Rank insignias include Air Force Chief  Master Sergeant and Air Force Technical Sergeant; Navy Captain,  Midshipman Lieutenant, and Midshipman Lieutenant Commander; and  Army Command Sergeant Major and Master Sergeant.  The listed condition  code of these items ranged from A4 (serviceable, usable condition) to H7  (unserviceable, condemned condition).  However, our inspection of the  badges and insignias that we purchased showed that none of them had  been used, and many of them were in original manufacturer packages.   Further, DOD is continuing to purchase and use most of these items.  The  photograph in figure 2 shows examples of some of the badges, medals, and  insignias that we purchased.
New, unused excess DOD tires.  We purchased eight new, unused  Cooper Trendsetter SE 13-inch steel-belted radial tires on February 18,  2005.  According to the Army project officer, these tires are used on over- the-road passenger vehicles, and one customer ordered them for use on a  forklift.  DOD units are continuing to purchase and use these same tires.   The most recent purchase of 50 of these tires was made in April 2005.   The  eight tires had a total reported acquisition value of $404.  We paid $113 for  the tires, including buyer’s premium and tax, and an additional $154  shipping cost.  The tires were listed in A4 condition (usable, with some  wear).  However, we found that the tires still had manufacturer labels on  the tread and blue paint over the whitewalls, indicating that they were new  and unused.  The tires were turned in as excess by the North Island Naval  Air Station’s Aircraft Intermediate Maintenance Detachment.  According to  the Army Tank Automotive and Armaments Command Project Officer, the  NSN listed on the turn-in document was incorrect.  We found that  inaccurate item descriptions, including NSNs, prevent items from being  selected for reutilization.  Figure 3 is a photograph of the excess DOD tires  that we purchased over the Internet in February 2005.
New, unused Class A military uniforms.  We purchased several Class A  military uniforms over the Internet on April 7, 2005.  The uniforms were  listed as being in H7 (unserviceable, condemned) condition.  Although the  uniforms that we purchased over the Internet from DOD’s liquidation  contractor had a listed acquisition cost of $1,600, we paid a total of $58,  including buyer’s premium and sales tax, to acquire them—about 4 cents  on the dollar.  After receiving our purchase we determined that we had in  fact purchased 27 new, unused uniform coats; 4 pairs of new, unused  uniform trousers; 54 jackets in excellent condition; 45 pairs of trousers in  excellent condition; and 5 women’s uniform skirts and 1 pair of slacks in  excellent condition.  DOD is continuing to purchase and issue two of the  four types of trousers that we purchased over the Internet.  According to  the DLA clothing and textiles product manager for dress uniforms, the  Army switched from a matte finish gold button to a shiny sta-briteTM gold  button on October 1, 2003.  Although the Army ordered and paid for the  new replacement buttons for existing dress uniforms, it later determined  that hiring a contractor to replace the buttons or sending the coats back to  the manufacturers for button replacement would be very expensive.  The  Army decided to use the coats with the older buttons to fill Reserve and  Junior Reserve Officer Training Corps (ROTC and JROTC) orders until  current supplies are exhausted.  However, our monitoring of DOD  liquidation sales found that many class A uniforms with the older buttons  are being sold over the Internet for pennies on the dollar instead of being  issued to ROTC and JROTC.  In addition, we observed the new sta-briteTM  buttons being sold over the Internet in May 2005.  Figure 4 is a photograph  of one of the excess new, unused Class A uniforms with the matte finish  buttons that we purchased over the Internet in April 2005.
We also purchased an earlier sales lot of the same Class A military uniforms  over the Internet on February 16, 2005.  Our winning bid was $81 for 166  uniform jackets and trousers, which had a listed acquisition cost of $10,424.   However, when we arrived at the Great Lakes sales location near Chicago  to pick up the uniforms, DOD liquidation contractor personnel were unable  to locate them.  Contractor personnel explained that our purchase may  have been mistakenly given to another customer.  To compensate, we were  offered other items available for sale.  However, these items were not in A  condition.  Instead of accepting them, we requested and received a refund.   As discussed later, another of our Internet purchases was damaged due to a  leaky roof at the Norfolk liquidation sales location.
section_title: Management Control Breakdowns Resulted in Reutilization Program Waste and Inefficiency
paragraphs: The $3.5 billion in DOD waste and inefficiency that we identified in our  analysis of fiscal year 2002 through 2004 excess property disposal activity  stemmed from management control breakdowns across DOD.  Key factors  in the overall DRMS management control environment that contributed to  waste and inefficiency in the reutilization program included (1) unreliable  excess property inventory data; (2) inadequate DRMS oversight,  accountability, physical control, and safeguarding of property; and  (3) outdated, nonintegrated excess inventory and supply systems.  In  addition, for many years our audits of DOD inventory management have  reported that continuing unresolved logistics management weaknesses  have resulted in DOD purchasing more inventory than it needed.  DOD  reutilization program waste and inefficiency is symptomatic of the  inventory and supply chain management issues that have been considered  high risk by GAO since 1990.  Our analysis of fiscal year 2002 through fiscal  year 2003 excess commodity turn-ins showed that $1.4 billion (40 percent)  of the $3.5 billion of A-condition excess items consisted of new, unused  DLA supply depot inventory.  Our analysis of fiscal year 2004 excess  commodity turn-ins showed that $1.3 billion (48 percent) of the $2.7 billion  of A-condition excess items consisted of new, unused DLA supply depot  inventory.
subsections: section_title: Unreliable Data Impair the Economy and Efficiency of the Reutilization Program
paragraphs: Our interviews, case studies, screening visits, and statistical tests of excess  commodity inventory led us to conclude that unreliable data are a key  cause of the ineffective excess property reutilization program.  GAO’s  internal control standards require assets to be periodically verified to  control records.  In addition, DRMS policy requires DRMO personnel to  verify turn-in information, including item description, quantity, condition  code, and demilitarization code, at the time excess property is received and  entered into DRMO inventory.  However, we found that DRMS and DLA  supply depot management have not enforced this requirement.  Further,  Army, Navy, and Air Force officials told us that unreliable data are a  disincentive to reutilization because of the negative impact on their  operations.  DLA item managers told us that because military units have  lost confidence in the reliability of data on excess property reported by  DRMS, for the most part they have requested purchases of new items  instead of reutilizing excess items.  Military users also cited examples of  damage to excess items during shipment that rendered the items unusable.   In addition, other reutilization users advised us of problems related to  differences in quantities and the types of items ordered and received that  could have a negative impact on their operations.
subsections: section_title: Problems with Excess Inventory Items Noted by Military Services and Other Users
paragraphs: Military service officials also told us about the types of problems they have  experienced with property acquired from DRMOs.  Army, Navy, and Air  Force medical officials, in particular, told us that they do not reutilize  excess medical items stored at DRMOs because items can become  damaged during shipment to and movement within the DRMO warehouses.   Other users of excess DOD property, including special program, federal  agency, and state officials gave us numerous examples of problems they  encountered with requisitions of excess DOD property.  Several officials  noted that these problems have caused them to lose confidence in the  reutilization process.  The following examples are typical of what we were  told.
An Army official told us that he requisitioned 20 excess padlock sets.
When he received the padlocks the keys were missing.  After his second  attempt to requisition excess DOD padlocks with keys failed, he threw  the padlocks in a dumpster because they were useless to him and it  would cost too much to return them to the DRMO.
An Army official told us that items may be in new, unused condition  when they leave the DRMO, but are damaged during shipment.  The  official cited his experience with an order of thin copper sheets for use  in testing electronic equipment.  The sheeting was shipped on a pallet  that was too small and other material was stacked on top of it.
A Fairchild Air Force Base official told us that the 92nd Logistics  Readiness Squadron requisitioned 80 sleeping bags from the Hawaii  DRMO but only received 56 of them.  The official told our investigators  that the sleeping bags were sealed in heavy-duty plastic bags and were  in excellent condition.  However, some of the boxes the sleeping bags  were shipped in had been damaged by rain and handling by the time he  received them.
section_title: Statistical Samples Identified Problems with Excess Inventory Accuracy
paragraphs: Our statistical tests found significant problems with controls for assuring  the accuracy of excess property inventory.  Estimated error rates for the  five DRMOs we tested ranged from 8 percent at one DRMO to 47 percent at  another, and estimated error rates for the five DLA supply depots we  tested ranged from 6 percent to 16 percent, including errors related to  physical existence of turn-ins and condition code.  Our condition code  tests determined whether the condition code was accurately recorded as  serviceable or unserviceable.  We estimated that errors related to condition  code accuracy ranged from 6 percent to 26 percent at the 5 DRMOs we  tested.  Overall, we found that DRMO errors were caused by erroneous  turn-in documentation prepared by military units and the failure of DRMO  personnel to verify turn-ins at the time they were received and correct  errors before recording the receipts in excess inventory.  Most DLA supply  depot errors related to untimely recording of transactions for changes in  inventory status and inaccurate quantities.  We did not find problems with  condition codes at the DLA depots.
An example from our Norfolk DRMO statistical sample illustrates how  erroneous inventory data can result in waste and inefficiency.  On June 30,  2004, the Navy’s Environmental Health Center in Portsmouth, Virginia,  turned in six new, unused Level III biological safety cabinets with a total  acquisition cost of $120,000.  The Navy unit turned in the Level III cabinets  as excess because of erroneous specifications that resulted in ordering  cabinets that were too large and cumbersome to meet deployment needs.
The Navy unit improperly used a local stock number (LSN) to describe  the safety cabinets on the turn-in document and a demilitarization code  that indicated there were no restrictions on the disposal of these items.   However, Level III safety cabinets are subject to trade security controls,  and therefore they are required to be identified by an NSN or other  information that accurately describes the item, the end item application,  and the applicable demilitarization code.  Further, the DOD risk  assessment performed in response to a recommendation in our November  2003 report called for Level III biological safety cabinets to be destroyed  when no longer needed by DOD.  Although Norfolk DRMO personnel  advised DRMS officials of the need to correct the turn-in document errors  in July 2004, as of the end of our audit in February 2005, the information  had not been corrected and the safety cabinets had not been posted to the  DRMS reutilization Web page to indicate that they were available for  reutilization.
Our in-house scientists who often meet with DOD scientists at the U.S.  Army Biological Warfare Research Center at the Dugway Proving Ground  learned that the DOD scientists were planning to purchase a Level III safety  cabinet and informed them of the availability of the six Level III safety  cabinets at the Norfolk DRMO.  The DOD scientists told us that they were  unaware the Navy had excessed the safety cabinets and said that they  could use all six of them.  We subsequently confirmed that as a result of our  efforts, the DOD scientists at Dugway had requisitioned the six Level III  safety cabinets for reutilization.
section_title: Weaknesses in Reutilization Program Oversight and Physical Inventory Control
paragraphs: We found hundreds of millions of dollars in potential waste and inefficiency  associated with the failure to safeguard excess property inventory from  loss, theft, and damage.  As previously discussed, our statistical tests of  excess commodity inventory at five DRMOs and five DLA supply depots  identified significant numbers of missing items.  Because the DRMOs and  DLA supply depots had no documentation to show that these items had  been requisitioned or sent to disposal contractors, they cannot assure that  these items have not been stolen.  According to DRMS data, DRMOs and  DLA supply depots reported a total of $466 million in excess property  losses related to damage, missing items, theft, and unverified adjustments  over a period of 3 years.  However, as discussed below, we have indications  that this number is not complete.  Also, because nearly half of the missing  items reported involved military and commercial technology that required  control to prevent release to unauthorized parties, the types of missing  items were often more significant than the number and dollar value of  missing items.
subsections: section_title: Excess Property Losses
paragraphs: Weaknesses in accountability that resulted in lost and stolen property  contributed to waste and inefficiency in the excess property reutilization  program.  As shown in table 2, our analysis of reported information on  excess property losses at DRMOs and DLA supply depots found that  reported losses for fiscal years 2002 through 2004 totaled $466 million.   Because 43 percent of the reported losses related to military technology  items that required demilitarization controls, these weaknesses also  reflect security risks.  GAO Standards for Internal Control in the Federal  Government require agencies to establish physical control to secure and  safeguard assets, including inventories and equipment, which might be  vulnerable to risk of loss or unauthorized use.  Our investigations of  reported losses found that the failure to verify and accurately document  transactions and events at the beginning of the disposal process and report  and investigate losses as they occur obscures or eliminates the audit trail.   Weaknesses in accountability leave DOD vulnerable to the risk of theft, and  fraud, waste, and abuse with little risk of detection.
DRMO losses.  Our statistical samples identified missing turn-ins at two of  the five DRMOs we tested and missing quantities at all five DRMOs tested,  including many items that were in new, unused, and excellent condition.   Because DRMO officials did not have documentation to show whether  these items had been reutilized, transferred, sold, or destroyed, there is no  assurance of whether the missing items reflected bookkeeping errors or if  they related to theft.  Missing items in our statistical samples included turn- ins of 72 chemical and biological protective suits, 21 pairs of chemical and  biological protective gloves, 47 wet weather parkas that were subject to  demilitarization controls, and 7 sleeping bags, a cold weather coat,  computer equipment, and various other items.  Reported DRMO losses  included 76 units of body armor, 75 chemical and biological protective suits  (in addition to those identified in our Columbus DRMO sample), 5 guided  missile warheads, and hundreds of military cold weather parkas and  trousers and camouflage coats and trousers.  Three DRMOs— Kaiserslautern, Meade, and Tobyhanna—accounted for $840,147, or about  45 percent, of the nearly $1.9 million in reported fiscal year 2004 losses of  military clothing and equipment items requiring demilitarization.
Our follow-up investigations found a pervasive lack of physical  accountability over excess inventory, which leaves DOD vulnerable to the  risk of theft and fraud, waste, and abuse.  In many cases, it is not possible  to determine whether discrepancies represent sloppy recordkeeping or the  loss or theft of excess property due to the failure to verify turn-in  documents and correct errors at the time excess items were received at the  DRMOs.
In the case of our Columbus DRMO sample, we found that inventory  records were not adjusted for missing quantities in our sample.  Instead,  DRMO personnel recorded the entire amount of the listed quantities as  being transferred to either the liquidation sales contractor or the Joint  Service Nuclear Biological and Chemical Equipment Assessment Program  (JEAP) for inspection and reissue of military clothing and equipment.  Our  review of transaction data for Columbus DRMO transfers showed that  JEAP did not confirm most of the items reported as transferred.  For  example, JEAP confirmed receiving only 7 of the 17 turn-ins of clothing and  textile items.  Further, the Columbus DRMO recorded a transaction to  show that the 72 chemical and biological protective suits identified as  missing during our statistical tests of Columbus DRMO inventory were  transferred to JEAP on November 10, 2004.  However, our follow-up with  JEAP officials found that they have no record of receiving the protective  suits.  The Columbus DRMO’s apparent manipulation of the inventory data  avoided reporting the missing items as losses.
Our follow-up investigations of other selected DRMO losses found the  following.
An Air Force turn-in of 75 chemical and biological protective suits was  received, placed in the Shaw RIPL (a receipt in place location under  authority of the Jackson DRMO) warehouse on May 28, 2002, and  subsequently disappeared.  DRMO personnel told DRMS investigators  that the 75 protective suits may have been included in a November 15,  2002, shipment to the Jackson DRMO in South Carolina.  However,  because DRMO personnel recorded box counts instead of turn-in  document numbers and item counts, there is no detailed record of the  items that were shipped between the two excess property warehouses.
Twenty units of body armor reported lost at the Meade DRMO initially  had been ordered by Israel on November 8, 2000.  Our investigators  confirmed that the body armor was never picked up for shipment to  Israel.  According to the loss report, the items were relocated from the  shipping area to the demilitarization storage area of the DRMO on May  8, 2002.  A loss investigation was initiated by the Area Manager for the  Meade DRMO in March 2004.  However, because the Meade DRMO  contractor had improperly destroyed inventory records after 2 years,  attempts to determine the events surrounding the loss were fruitless.
Our investigation of 18 reports on a total of 52 units of body armor  missing from the Hood DRMO during fiscal years 2002 and 2003  determined that these items were stored outside in an unsecure area  resulting in the theft of at least 48 units of body armor.  A DRMS  investigative report noted that items requiring demilitarization had been  stored in this area over a 2-year period, even though the security fence  had barbed wire that was cut or missing and the high ground level  outside the fence provided easy access.  According to a DRMO official, a  work order for the fence repair had been submitted but the repairs had  not been made.
The Naval Operational Logistics Support Center-Ammo, which was  responsible for a turn-in of guided missile warheads, the DRMO that  received these items, and the Demilitarization Center each recorded a  different quantity for the turn-in.  However, quantity discrepancies were  not resolved at any point during the turn-in and disposal process.  As a  result, there is no audit trail to determine whether or where, when, or  how the reported loss or a recordkeeping error occurred.  For example,  the Navy unit reported a turn-in of 24 warheads that had been used in  testing but were certified as inert.  DRMO personnel counted canisters  and loose components and determined there were 32 warheads.  The  Anniston Demilitarization Center reported that a total of 27 warheads  were received for destruction.
DLA supply depot losses.  Our statistical samples showed missing items  at four of the five DLA supply depots that we tested.  Because depot  officials did not have documentation showing that these items had been  reutilized or sold, there is no assurance that the missing items did not relate  to theft.  Missing items in our DLA depot statistical samples included  several sensitive items, such as classified radio frequency amplifiers and  circuit boards, aircraft parts, and computer equipment that required trade  security or demilitarization controls.
We obtained DRMS data on DLA supply depot reports of excess property  losses, including missing and damaged property and unverified  adjustments.  We investigated reported losses of selected aircraft parts at  two DLA supply depots—Oklahoma City and Warner Robins—that  reported the largest amount of depot losses.  DLA Directive 5025.30, DLA  One Book, includes a section on Inventory Adjustment Research (dated  October 21, 2004), which sets inventory accuracy goals for DLA supply  depots and requires causative research—an in-depth investigation—of  adjustments for selected items and suspected fraud, waste, and abuse to  determine why they occurred.  A Financial Liability Investigation of  Property Loss is required if the adjustment meets specific criteria,  including (1) gains or losses of classified or sensitive material; (2) an  adjustment in excess of $2,500 for pilferable material; and (3) a loss where  there is a suspicion of fraud, theft, or negligence.  However, we found that  DLA depot personnel did not thoroughly investigate most adjustments  related to reported losses of sensitive items with demilitarization controls  that we selected for investigation.  Supply depot officials told us that they  assumed the losses represented inventory recordkeeping errors, even  though causative research results were inconclusive.
section_title: Property Damage
paragraphs: In addition to reported losses, we found significant instances of property  damage at DRMS liquidation contractor sales locations.  Because the terms  and conditions of liquidation sales specify that all property is sold “as is”  and assigns all risk of loss to buyers, the buyers have no recourse when  property is damaged after being sold or is not in the advertised condition.   As a result, customers who have lost money on bids related to damaged  and unusable items might not bid again, or they may scale back on the  amount of their bids in the future, affecting both the volume of excess DOD  items liquidated and sales proceeds.  On October 7, 2004, we purchased  numerous usable items in original manufacturer packaging, including 35  boxes of bandages, 31 boxes of gauze sponges and surgical sponges, 12  boxes of latex gloves, and 2 boxes of tracheostomy care sets.  We paid a  total of $167, including buyer’s premium, tax, and transportation cost, for  these items, which had a reported total acquisition cost of $3,290.   However, these items had become damaged due to rain and a leaky roof at  the Norfolk, Virginia, liquidation sales location.
The majority of property damage that we observed at liquidation contractor  sales locations is primarily the result of DRMS management decisions to  send excess DLA supply depot property to two national liquidation sales  locations without assuring that its contractor had sufficient human capital  resources and warehouse capacity to process, properly store, and sell the  volume of property received.  For example, excess DOD property sent to  the Huntsville, Alabama, liquidation sales location was stored outside  unprotected from weather, including sun, wind, rain, and hurricanes during  the summer and fall of 2004.  The liquidation contractor’s failure to record  these items in sales inventory at the time they were received, when  combined with lost and illegible property labels due to weather damage,  resulted in a significant loss of accountability for many of these items.
section_title: Outdated, Nonintegrated Systems Impair Economy and Efficiency
paragraphs: Inefficient, nonintegrated excess inventory and supply management  systems lack controls necessary to prevent waste and inefficiency in the  reutilization program.  For example, because the DRMS Automated  Inventory System (DAISY) and DLA’s Standard Automated Materiel  Management System (SAMMS) are outdated and nonintegrated, they do not  share information necessary to (1) identify and alert DLA item managers of  excess property that is available to fill supply orders and (2) prevent  purchases of new items when A-condition excess items are available for  reutilization.  We have continued to report that long-standing weaknesses  with DLA’s inventory systems related to outdated, nonintegrated legacy  systems and processes result in DOD and military units not knowing how  many items they have and where these items are located.  DLA has  acknowledged serious deficiencies in its automated inventory management  systems. Although DLA has an effort under way to replace SAMMS with the  Business Systems Modernization (BSM) and DRMS has a Reutilization  Modernization Program (RMP) under way to upgrade DAISY, so far these  have been separate, uncoordinated efforts and they do not adequately  address identified process deficiencies.  While the systems improvement  efforts are intended to integrate supply and excess inventory systems to  support the reutilization program, they are not focused on resolving long- standing problems related to unreliable condition code data and  incomplete data on NSNs.  The accuracy of these two data elements is  critical to the ability to identify like items that are available for reutilization  at the time purchases are made.
section_title: Concluding Comments
paragraphs: To effectively address problems with reutilization program waste and  inefficiency, DRMS and DLA will need to exercise strong leadership and  accountability to improve the reliability of excess property data; establish  effective oversight and physical inventory control; and develop effective  integrated systems and processes for identifying and reutilizing excess  property.  In addition, the military services will need to provide accurate  information on excess property turn-in documentation, particularly data on  condition codes, and item descriptions, including NSNs that are key to  identifying items for reutilization.  Improved management of DOD’s excess  property and a strong reutilization program would help save taxpayers  hundreds of millions of dollars annually.
Mr. Chairman and Members of the Subcommittee, this concludes my  prepared statement.  We would be pleased to answer any questions that  you may have.
section_title: Contacts and Acknowledgments
paragraphs: For more information regarding this testimony, please contact Gregory D.  Kutz at (202) 512-9505, or kutzg@gao.gov or Keith A. Rhodes at (202) 512- 6412, or rhodesk@gao.gov. Individuals making key contributions to this  testimony included Mario Artesiano, Stephen P. Donahue, Gayle L. Fischer,  Jason Kelly, Richard C. Newbold, Ramon Rodriguez, and John Ryan.   Numerous other individuals contributed to our audit and investigation and  are listed in our companion report.  Technical expertise was provided by  Sushil K. Sharma, PhD, DrPH.
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