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.