Inventory shipped for repair or in support of repairs typically involves the following types of material: Manager-directed material, which item managers direct to be shipped to a contractor for repair, alteration, or modification. Government-furnished material, which contractors requisition in support of repairs, alterations, or modifications. Generally, this material is incorporated into or attached onto deliverable end items (final products such as aircraft) or consumed or expended in performing the contract. For fiscal year 2000, Air Force logistics records for all inventory control points showed the following number, value, and type of material had been shipped to contractors (see table 1). Table 2 shows a breakdown of all shipments to contractors in fiscal year 2000 by the security type, number of items, and dollar value of shipments. Department of Defense (DOD) policy contains specific internal control procedures to help ensure that shipped inventory is accounted for. When an item is shipped, a shipping notification should be sent to the receiving contractors. 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 was less than 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. As a result of departures from required procedures or ineffective procedures, the Air Force’s shipped inventory is vulnerable to loss or theft. First, the Air Force has allowed repair contractors access to government- furnished material not needed to fulfill the repair contract. Second, inventory control points have not provided property administrators with the required government-furnished material status reports to use in verifying contractor records of government-furnished material received. Third, contractors have not adequately recorded receipt of items and reported receipt to inventory control points. Fourth, contractors have not routinely reported discrepant shipments to the designated shipping activity. Fifth, Air Force procedures for following up on shipments that contractors have not confirmed as received are ineffective. Sixth, the Air Force has not provided adequate oversight of shipments to contractors. DOD requires inventory control points to establish one or more internal control systems (i.e., management control activities) to restrict contractor access to government-furnished material. Among other things intended, the control systems are to screen all repair contractor requisitions for validation and approval and to restrict contractor access to government- furnished material to the specific items and quantities listed in the repair contract. However, the inventory control points’ systems generally screen and restrict access to government-furnished material by a federal stock class or stock group rather than by stock number and quantity. Also, the contracts we reviewed generally did not specify, as required, both the items and the quantities of material that the inventory control points had agreed to furnish to contractors. As long as contractors requisition items within an authorized federal stock class or stock group, government- furnished material is automatically provided whether or not it is needed to fulfill the repair contract. In a July 1997 memorandum, the Air Force Materiel Command reiterated the requirement that the inventory control points screen all repair contractor requisitions by stock number and quantity for validation and approval, and it developed procedures for an automated method of loading stock numbers and quantities into the control systems. Air Force officials indicate that the major obstacle now is that the procedures for the automated method of loading stock numbers do not work as designed. For this reason, the Air Force Materiel Command waived the requirement for screening by stock number and quantity and allowed inventory control points to continue to screen contractor requisitions for government- furnished material at the federal stock class or stock group level. The following example illustrates the weakness in the current screening process. A contract we reviewed listed 14 specific, stock-numbered parts—from seven different stock classes—that were required to repair the end item (an electronic countermeasures system for the B-52H aircraft). However, because the inventory control point’s system screened and restricted the contractor’s access to government-furnished material by federal stock class, the contractor could requisition any item from the seven different stock classes in which the 14 parts are grouped. The seven stock classes contain over 502,900 other stock-numbered parts that are not needed to repair the end item. The contractor could requisition any of these parts, in any quantity, and the improper requisition could pass through the inventory control point’s screening system and be approved. We did not determine whether contractors had obtained unauthorized material as a result of their access to material by federal stock class or group. However, these control weaknesses are the same as those identified in earlier reports as having allowed contractors to obtain unneeded and unauthorized material. For example, in a 1998 report on the adequacy of government oversight over government-furnished material to a contractor, the Air Force Audit Agency reported 2,978 of the 5,569 validated requisitions were not needed to accomplish the contract. The unneeded requisitions included 1,090 stock numbers valued at $17.4 million. Similarly, a 1995 DOD inspector general report on management access to the DOD supply system concluded that granting contractors access to government-furnished material in the DOD supply system by federal stock class continued to be a material internal control weakness that placed DOD material at undue risk. To independently verify that contractors have accounted for all government-furnished material received, DOD policy requires inventory control points to provide to property administrators at the Defense Contract Management Agency quarterly status reports showing all shipments of Air Force material to contractors. Inventory control point officials responsible for distributing the reports to property administrators told us that the reports have not been sent. We found that existing Air Force procedures governing distribution of the quarterly status reports do not assign responsibility for distributing these reports to officials at inventory control points and are outdated (e.g., the systems for generating the reports no longer exist). Air Force officials acknowledge that the procedures are not current and stated that they are in the process of updating them. Proper distribution of government-furnished material status reports has been a long-standing issue. For example, a 1995 Department of Defense inspector general audit report on management access to the DOD supply system stated that the Air Force should take the distribution of its status report more seriously, ensuring that the report is issued each quarter. The audit report asserts that property administrators are the last line of defense in protecting material resources and, as such, they need an independent record of the government-furnished material shipped to contractors. The Air Force’s quarterly status report provides such a record; without it, property administrators must rely entirely on contractors’ records. Department of Defense and Air Force policies contain specific procedures governing the notifications that contractors should send to their inventory control points when they receive shipped inventory. The policies state that, upon receipt of an item, a receiving contractor must enter the shipment into its inventory records and notify the inventory control point of material receipt. To accomplish notification of receipt, the Air Force requires contractors to enter receipts into a reporting system at the appropriate inventory control point. The notification of receipt is an internal control designed to account for all shipped assets. During fiscal year 2000, the Air Force shipped thousands of items with a reported value at about $2.6 billion to contractors. As part of our review, we sought to determine whether items reportedly shipped to repair contractors had in fact been received and entered into both the contractors’ records and the inventory control points’ reporting systems. Our review indicated that contractors are not following policies governing receipt notification. Of the $2.6 billion of inventory shipped to contractors in fiscal year 2000, we judgmentally selected and reviewed 9,003 items valued at $814.2 million. We found that contractors had not always properly posted material receipts for these items into their records or into the inventory control points’ reporting systems. Specifically, 48 percent of these items had been received and properly posted by contractors to the inventory control points’ reporting systems; 19 percent of the shipped items had been received but were either improperly posted or not posted by contractors to their records and/or the inventory control points’ reporting systems; and 33 percent of items reportedly had not been received by contractors or lacked sufficient documentation to prove that they had been accounted for by the contractors. The items unaccounted for included those that warrant a high degree of protection and control because of their high value and/or their security classification, such as circuit card assemblies and navigation set control units. This lack of documentation is in itself an internal control weakness. For example, the federal acquisition regulation requires that contractors’ property control records provide a complete, current, and auditable record of all transactions involving government property. Table 3 presents more detailed information on the items in our review. No dominant cause for these failures to properly account for shipment receipts emerged in our discussions with contractor officials. However, in our interviews with contractor personnel, they identified a number of factors: inadequate training/instruction on how to use and enter information into the reporting system, lack of awareness of reporting procedures, data transmission problems (e.g., transactions entered by the contractors did not show up in the reporting system), data input errors made while attempting to enter information into the data deleted from the reporting system because of data storage constraints. In addition, two contracts in our review did not contain a reporting requirement. Because of these reporting problems, the inventory control points’ reporting systems contained inaccurate information on large numbers of shipment receipt notifications, thus reducing the value of the information as a means of accurately and adequately accounting for all shipped assets. Inventory control point personnel indicated that they are often forced to work around the reporting systems, and they expend considerable time and effort to collect, maintain, and analyze receipt information that should be readily available to them in these automated systems. Visibility over shipped material depends in part on accurate contractor reporting of material receipts; without adequate reporting, the Air Force cannot readily account for shipped material, making it vulnerable to theft or loss. Air Force policy also requires contractors to notify the shipping activity if a discrepancy exists between items shipped and items received. The purpose of discrepancy reporting is to determine the cause of discrepancies, effect corrective action, and prevent recurrence. Such reports also provide (1) support for adjustment of property and financial inventory accounting records, (2) information as a basis for claims against contractors, and (3) information for management evaluations. As table 3 shows, 1,829 of the items (valued at about $24.2 million) we reviewed had reportedly not been received, but only 8 of the items were reported as discrepancies and resolved. For the remaining 1,821 items, we found a number of problems in discrepancy reporting. Contractor personnel did not report the discrepancies. According to most contractor personnel, this situation occurred primarily because the shipping activity did not notify them of impending shipments, thus they did not expect the shipment and could not monitor its status. Others indicated that they simply never report any discrepancies. Contractor personnel reported the discrepancies, but they did not route the discrepancy reports to the appropriate shipping activity personnel who could investigate and resolve the discrepancies. Although we found that contractor personnel did not properly route shipping discrepancies to the appropriate shipping activity, they were under the impression that they had. Contractor personnel reported the discrepancies, but did not follow up when no response was received from the shipping activity. They did not follow up because they planned to reorder the material that they had not received. Contractor personnel reported the discrepancies, but when they later determined that the materials had been received, they did not cancel the discrepancy reports. This failure to comply with Air Force procedures undermines the Air Force’s ability to determine the cause of discrepancies, effect corrective action, and prevent recurrence. This situation can also result in loss of control over material, lost recovery rights, and material remaining in a questionable status for long periods of time. To ensure proper reporting and accounting of material receipts, DOD policy requires that inventory control points follow up with the contractor within 45 days from the date of shipment if they have not been notified that a shipment has arrived. 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. At present, Air Force procedures do not ensure adequate follow-up on unconfirmed receipts. According to Air Force officials, inventory control points send electronic inquiries to contractors to follow up on all shipments. However, the Air Force has not yet established a system by which (1) the inventory control points can reconcile material shipped to contractors with material received by contractors to determine unconfirmed receipts and (2) contractors can respond to the follow-up inquiries to confirm receipts or discrepancies. Consequently, inventory control points assume that all material shipped to contractors is received by them, and they close the record on the shipments without contractor confirmation of material receipt. The inventory control point does not become aware that material has not been received unless the contractor inquires about the shipment. The result is a situation in which unconfirmed receipts are officially considered delivered, an assumption that, in turn, places this material at risk of fraud, waste, abuse, and theft. The following example illustrates how the lack of adequate follow-up on unconfirmed receipts places this material at risk. In June 2000, the Defense Distribution Depot in Warner Robins, Georgia, reportedly issued and delivered 85 electron tubes to an Air Force repair contractor, but, according to contractor personnel, the shipment was never received and the contractor never reported the discrepancy to the inventory control point. In January 2002, we requested proof of issuance and delivery from the Warner Robins depot. The depot provided proof of issuance but could not confirm delivery. According to depot personnel, a delivery signature was not obtained from the contractor’s receiving personnel at the time of delivery. Nevertheless, the inventory control point closed the record on this $3.5 million shipment, assuming the electron tubes had been received. The electron tubes remain unaccounted for. To address its deficiencies relating to proper reporting and accounting of material receipts, the Air Force plans to transition to the Department of Defense Commercial Asset Visibility System (CAV II). This will require a 2-year scheduled transition starting in fiscal year 2003 and ending in fiscal year 2004. Another weakness preventing effective accountability over shipped inventory relates to the Air Force’s financial management system. The Chief Financial Officers Act of 1990 requires a plan for the integration of agency financial management systems. The Federal Financial Management Improvement Act of 1996 built upon the 1990 act and required agencies to maintain an integrated system (i.e., an integrated general ledger controlled system). With such a system, accounting records and logistics records (i.e., records from the supply and repair side of inventory control points) should be updated automatically when inventory items are purchased and received. Any differences between these two sets of records should be identified periodically and research conducted to alert management at the inventory control points to possible undetected loss or theft of shipped items. As part of the its latest efforts to reform its financial operations, the Department of Defense has stated that it will develop Defense-wide integrated systems. If effectively designed and implemented, these systems will be integral to ensuring effective accountability over the Air Force’s shipped inventories. To evaluate and improve supply operations and reporting performance, Air Force policy requires shipping activities to record, summarize, and report to Air Force headquarters the volume and dollar value of shipment discrepancies, and headquarters is required to analyze this data to identify the causes, sources, and magnitude of discrepancies so that corrective actions can be taken. This policy is consistent with federal government standards for internal controls that require ongoing oversight to assess the quality of performance over time and to ensure that findings of audits and other reviews are promptly resolved. Air Force headquarters acknowledges that it has not requested nor collected contractor shipment discrepancy data, and, as of February 2002, had not developed a definite plan of action or a target date for full implementation. The lack of program oversight may represent inadequate management emphasis. Even if the Air Force were collecting the contractor shipment discrepancy data, it would not be meaningful because, as shown earlier, contractors are not reporting discrepancies accurately. The lack of this information impedes the Air Force’s ability to evaluate and improve supply operations as well as its ability to determine which activities are responsible for lost or misplaced items. Inventory worth billions of dollars has been vulnerable to fraud, waste, and abuse because the Air Force either did not adhere to control procedures or did not establish effective procedures. Because of these control weaknesses, repair contractors have access to items and quantities of items not specified in their contracts, and the Defense Contract Management Agency does not have the quarterly reports on shipment status that it needs to independently verify that contractors have accounted for shipments of government-furnished material. In addition, contractor receipt posting and discrepancy reporting practices produce incomplete and inaccurate information, impairing the ability of the Air Force to monitor shipments. Even if contractor records on shipment receipts were accurate, the Air Force’s system cannot reconcile material shipped to contractors with material received by contractors, so the Air Force cannot readily identify shipments with unconfirmed receipts. Consequently, the Air Force cannot readily account for these shipments, which include classified, sensitive, and pilferable items. Finally, the Air Force has not exercised the required extent of program oversight by collecting data on contractor shipment discrepancies and using it to assess practices for safeguarding shipped inventory; as a result, it cannot identify the extent and cause of contractor shipment discrepancies or take corrective action. To improve the control of inventory being shipped, we recommend that the Secretary of Defense direct the Secretary of the Air Force to undertake the following: Improve processes for providing contractor access to government- furnished material by listing specific stock numbers and quantities of material in repair contracts (as they are modified or newly written) that the inventory control points have agreed to furnish to contractors; demonstrating that automated internal control systems for loading and screening stock numbers and quantities against contractor requisitions perform as designed; loading stock numbers and quantities that the inventory control points have agreed to furnish to contractors into the control systems manually until the automated systems have been shown to perform as designed; and requiring that waivers to loading stock numbers and quantities manually are adequately justified and documented based on cost- effective and/or mission-critical needs. Revise Air Force supply procedures to include explicit responsibility and accountability for generating quarterly reports of all shipments of Air Force material to distributing the reports to Defense Contract Management Agency property administrators. Determine, for the contractors in our review, what actions are needed to correct problems in posting material receipts. Determine, for the contractors in our review, what actions are needed to correct problems in reporting shipment discrepancies. Establish interim procedures to reconcile records of material shipped to contractors with records of material received by them, until the Air Force completes the transition to its Commercial Asset Visibility system in fiscal year 2004. Comply with existing procedures to request, collect, and analyze contractor shipment discrepancy data to reduce the vulnerability of shipped inventory to undetected loss, misplacement, or theft. In written comments on a draft of this report (see app. II), the Department of Defense concurred with six of the recommendations, non-concurred with one recommendation, and partially concurred with three recommendations. DOD did not concur with our second recommendation—to improve processes for controlling contractor access to government-furnished material by developing automated internal control systems for loading stock numbers and quantities and screening them against contractor requisitions. DOD states that the Air Force Special Support Stock Control system already has the recommended capability in place. Although the Air Force Special Support Stock Control system may be capable of loading stock numbers and quantities and screening them against contractor requisitions, we found that in practice the system was not able to carry out this function as designed. A January 2002 software change implemented to address the issue did not resolve it, and Air Force officials acknowledged in April 2002 that this system was still not working properly. To correct the weakness in its current automated internal control systems, Air Force officials stated that in April 2002 the Air Force Materiel Command planned to revise its existing procedures for an automated method of loading stock numbers into the current control systems. We believe that the Air Force’s actions to correct its internal control systems deficiencies are a step in the right direction, and, if the revised procedures do work as designed, they will improve the process for controlling contractor access to government-furnished material. Based on DOD’s comments, we modified our recommendation to emphasize the need to demonstrate that automated internal control systems for loading and screening stock numbers and quantities against contractor requisitions perform as designed. DOD partially concurred with the recommendation to load stock numbers and quantities for items requisitioned by contractors into the control systems manually until the automated system is implemented. DOD again stated that the Air Force Materiel Command’s current control systems already provide the capability for loading and screening national stock numbers and quantities against contractor requisitions. However, DOD directed the Air Force to determine the feasibility of establishing an interim capability until all repair contracts are written in compliance with Air Force policies and procedures. We continue to believe our recommendation will be valid until the previously discussed automated internal control system for loading stock numbers and quantities and screening them against contractor requisitions is proven to work as designed. DOD partially concurred with the recommendation to require that waivers to loading stock numbers and quantities manually are adequately justified and documented based on cost-effective and/or mission-critical needs. DOD reiterated that the current Air Force control systems already provide the capabilities for loading stock numbers and quantities and screening them against contractor’s requisitions. DOD further states that it will direct Headquarters, Air Force Installations and Logistics, to ensure that future decisions affecting validation of contractor orders involving government-furnished materiel or equipment are based on cost- effectiveness and/or mission-critical needs and that requests are processed in accordance with DOD policies and procedures. We agree with DOD that any future waivers should be justified and documented. However, we continue to believe our recommendation will be valid until the waiver is rescinded, because the waiver allows for the inventory control point to continue to load and screen contractor requisitions at the federal stock class or stock group levels rather than loading contracts at the required national stock number level. Finally, DOD partially concurred with the recommendation to comply with existing procedures to request, collect, and analyze contractor shipment discrepancy data to reduce the vulnerability of shipped inventory to undetected loss, misplacement, or theft. DOD stated that in February 2001, Headquarters, Air Force Installations and Logistics, directed all Air Force major commands to collect and analyze these types of supply discrepancies for possible trends. DOD added that each major command was tasked to provide Air Force Installations and Logistics a semi-annual report of its findings (negative reports were not required). DOD recently directed Headquarters, Air Force Installations and Logistics, to re- emphasize this requirement to all major commands and to require that all major commands submit a report on their findings for the last 12 months. Moreover, a negative report will be required if no supply discrepancies were received. While we believe this is a step in the right direction, we also believe the DOD response to our recommendation does not address the contractor discrepancy reporting issues raised in this report. Although some Air Force major commands may actually be collecting and analyzing shipment discrepancies at their Air Force bases, we found that similar contractor shipment discrepancy data has not been requested nor collected. As we stated in this report, Air Force headquarters acknowledges that it has neither requested nor collected these contractor discrepancy report data for shipments, and, as of February 2002, had not developed a definite plan of action or a target date for full implementation. We continue to believe the conditions we reported on and our recommendation are still valid and should be addressed by DOD. Based on DOD’s comments, we have made it clear that the shipment discrepancy data referred to in this report and in the related recommendation was provided by the contractors. Appendix I contains the scope and methodology for this report. DOD’s written comments on this report are reprinted in their entirety in appendix II. 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 appropriate congressional committees; the Secretary of Defense; the Secretary of the Air Force; the Director, Office of Management and Budget; and the Director, Defense Logistics Agency. We will also make copies available to others upon request. Please contact me at (202) 512-8412, or Lawson Gist, Jr. (202) 512-4478, if you or your staff have any questions concerning this report. Other GAO staff acknowledgments are listed in appendix III. To assess the Air Force’s and its repair contractors’ adherence to procedures for controlling shipped inventory, we took the following steps: To identify criteria for controlling shipped inventory, we reviewed Department of Defense and Air Force policies and procedures, obtained other relevant documentation related to shipped inventory, and discussed inventory management procedures with officials at the following locations: Headquarters, Department of the Air Force, Washington, D.C.; the Air Force Materiel Command, Wright-Patterson Air Force Base, Ohio; the Oklahoma City Air Logistics Center, Tinker Air Force Base, Oklahoma; the Ogden Air Logistics Center, Hill Air Force Base, Utah; the Warner Robins Air Logistics Center, Robins Air Force Base, Georgia; the Defense Contract Management Agency, Alexandria, Virginia; and the Defense Logistics Management Standards Office, Fort Belvoir, Virginia. To identify the number, value, and types of shipped inventory, we obtained computerized supply-side records of all government-furnished material shipments and manager-directed material shipments between October 1999 and September 2000 from the Air Force Materiel Command at Wright- Patterson Air Force Base, Ohio. The records contained descriptive information about each shipment, including the document number, national stock number, and quantity shipped. We excluded broken items shipped from end-user activities to contractor repair facilities and repaired material returned from a contractor repair facility to a storage activity or end user because the Air Force Materiel Command could not readily identify and provide the descriptive information. To determine the security type of selected shipments in fiscal year 2000, we identified the national stock number for all shipments of government-furnished material and manager-directed material. We then matched the national stock number with security classification codes in the Department of Defense Federal Logistics Information System. To select contractors and items shipped to them, we used computerized shipment data obtained from the Air Force Materiel Command. To develop our methodology, we conducted a preliminary review using three judgmentally selected contractors; two contractors were chosen on the basis of their proximity to the inventory control points, and the third was selected because of the substantial volume of shipments between it and all of the inventory control points. For these initial contractors, we selected 214 government-furnished material items and 1,159 manager-directed material items, based on such factors as the national stock number of the items and the number of items and/or dollar value of the shipments. Subsequently, we judgmentally selected an additional nine repair contractors, three for each inventory control point, that had either the largest dollar value or the largest number of government-furnished and manager-directed items shipped to them. For these contractors, we then selected 188 government-furnished material items and 7,442 manager- directed material items based on the military sensitivity of the items in the shipments and the unit price and/or dollar value of the shipments. Because the number of selected contractors and shipments was limited and judgmentally selected, the results of our analysis cannot be projected to all Air Force repair contractors and shipments. To assess whether shipments had been received and entered into the inventory control points’ repair-side reporting system, we obtained from the inventory control points their computer-generated shipment receipt histories. The receipt histories contained descriptive information about each shipment, including the document number, national stock number, and quantity reported as received. We did not independently verify the overall accuracy of the databases for 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. Because our conclusions are based only on those shipments for which we tracked back to documents, use of this data is reasonable for our purposes. To determine whether contractors had accounted for our selected shipments, we then matched the Air Force Materiel Command supply-side records of shipments to inventory control points’ repair-side receipt histories. When we identified discrepancies, we followed up with the repair contractors and inventory control points by tracking items back to contractor inventory records and by holding discussions with officials at the following locations: BAE Flight Systems, Mojave, California; Boeing, San Antonio, Texas; Boeing Electronic Systems, Heath, Ohio; Heroux, Inc., Quebec, Canada; ITT Avionics, Clifton, New Jersey; Lockheed Martin, Marietta, Georgia; Lockheed Martin, San Antonio, Texas; Lockheed Martin Lantirn, Warner Robins, Georgia; Northrop Grumman, Baltimore, Maryland; Northrop Grumman, Warner Robins, Georgia; PEMCO Aeroplex, Birmingham, Alabama; Teledyne Electronic Technologies, Warner Robins, Georgia; and the Defense Distribution Depots (located in Warner Robins, Georgia, and Oklahoma City, Oklahoma). To determine what happened to selected items that had reportedly not been received by contractors, our Office of Special Investigations followed up with commercial carriers by obtaining proof of delivery information and by holding discussions with officials at the following locations: ABF Freight Systems, Inc., Fort Smith, Arkansas; Associated Global Systems, Inc., New Hyde Park, New York; CorTrans Logistics, LLC, Wooddale, Illinois; Emery Worldwide, Ontario, California; Federal Express Corporation, Somerset, New Jersey; and United Parcel Service, Washington, D.C. To learn whether issues associated with unaccounted-for shipments were adequately resolved, we reviewed Department of Defense, Air Force, and Air Force Materiel Command implementing guidance. Such information provided the basis for conclusions regarding the adherence to procedures for controlling shipped inventory. To determine whether the Air Force had emphasized shipped inventory as part of its assessment of internal controls, we reviewed assessments from the Department of the Air Force, the Oklahoma City Air Logistics Center, the Ogden Air Logistics Center, and the Warner Robins Air Logistics Center for fiscal years 1999 and 2000. Our work was performed from May 2001 through April 2002 in accordance with generally accepted government auditing standards. We conducted our other investigative work during March 2002 and April 2002 in accordance with investigative standards established by the President’s Council on Integrity and Efficiency. Key contributors to this report include Sandra F. Bell, George Surosky, Susan Woodward, Jay Willer, David Fisher, Norman M. Burrell, and John Ryan. Performance and Accountability Series: Major Management Challenges and Program Risks—Department of Defense. GAO-01-244. Washington, D.C.: January 2001. High-Risk Series: An Update. GAO-01-263. Washington, D.C.: January 2001. Defense Inventory: Plan to Improve Management of Shipped Inventory Should Be Strengthened. GAO/NSIAD-00-39. Washington, D.C.: February 22, 2000. Department of the Navy: Breakdown of In-Transit Inventory Process Leaves It Vulnerable to Fraud. GAO/OSI/NSIAD-00-61. Washington, D.C.: February 2, 2000. Defense Inventory: Property Being Shipped to Disposal Is Not Properly Controlled. GAO/NSIAD-99-84. Washington, D.C.: July 1, 1999. DOD Financial Management: More Reliable Information Key to Assuring Accountability and Managing Defense Operations More Efficiently. GAO/T-AIMD/NSIAD-99-145. Washington, D.C.: April 14, 1999. Defense Inventory: DOD Could Improve Total Asset Visibility Initiative With Results Act Framework. GAO/NSIAD-99-40. Washington, D.C.: April 12, 1999. Defense Inventory: Navy Procedures for Controlling In-Transit Items Are Not Being Followed. GAO/NSIAD-99-61. Washington, D.C.: March 31, 1999. Performance and Accountability Series: Major Management Challenges and Program Risks—Department of Defense. GAO/OCG-99-4. Washington, D.C.: January 1999. High-Risk Series: An Update. GAO/HR-99-1. Washington, D.C.: January 1999. Department of Defense: Financial Audits Highlight Continuing Challenges to Correct Serious Financial Management Problems. GAO/T- AIMD/NSIAD-98-158. Washington, D.C.: April 16, 1998. Department of Defense: In-Transit Inventory. GAO/NSIAD-98-80R. Washington, D.C.: February 27, 1998. Inventory Management: Vulnerability of Sensitive Defense Material to Theft. GAO/NSIAD-97-175. Washington, D.C.: September 19, 1997. Defense Inventory Management: Problems, Progress, and Additional Actions Needed. GAO/T-NSIAD-97-109. Washington, D.C.: March 20, 1997. High-Risk Series: Defense Inventory Management. GAO/HR-97-5. Washington, D.C.: February 1997. High-Risk Series: Defense Financial Management. GAO/HR-97-3. Washington, D.C.: February 1997.

Summary: GAO has considered Department of Defense (DOD) inventory management to be a high-risk area since 1990 because inventory management systems and procedures are ineffective. This report evaluates the Air Force's inventory control procedures for material shipped to contractors for repair or for use in repair. The Air Force and contractor personnel have not complied with DOD and Air Force inventory control procedures designed to safeguard material shipped to contractors, placing items worth billions of dollars at risk of fraud, waste, and abuse. The Air Force's three inventory control points have not restricted repair contractors' access to the specific items and quantities of government-furnished material needed to accomplish the contract. Quarterly reports on the status of shipped material have not been sent to property administration officials at the Defense Contract Management Agency. Contractors receiving shipped material have not (1) properly entered the receipt of shipments into their records and into the inventory control points' reporting systems or (2) routinely reported shipment discrepancies. Air Force procedures for following up on shipments that contractors have not confirmed as received are ineffective, leaving the status of the shipments uncertain. The Air Force has not provided adequate program oversight because it does not request and analyze data on contractor shipment discrepancies to identify their extent and cause so that corrective action may be taken.