Responsibility for controlling and accounting for materiel shipped to repair contractors is shared between the Army and its contractors. Army inventory control points within the Army Materiel Command manage the movement of assets from the Army supply system to commercially operated repair facilities. The Army’s three major inventory control points for secondary repair items are the U.S. Army Aviation and Missile Command, the U.S. Army Tank-automotive and Armaments Command, and the U.S. Army Communications-Electronics Command. Repair contractors are generally required to establish and maintain a property control system for the control, use, maintenance, repair, protection, and preservation of government property in their possession. Inventory control points, as part of their materiel management functions, maintain the Army’s data systems that support inventory and financial management, requirements determination, maintenance planning, and procurement. These inventory management systems retain the accountable records for inventory transactions, including shipment and receipt records. The U.S. Army Aviation and Missile Command and the U.S. Army Tank- automotive and Armaments Command use the Commodity Command Standard System as their inventory management system. This system will eventually be replaced with the Logistics Modernization Program, which will integrate inventory functions performed by legacy inventory management systems. The U.S. Army Communications-Electronics Command uses the Logistics Modernization Program. The inventory shipment data we obtained from the U.S. Army Aviation and Missile Command and U.S. Army Tank-automotive and Armaments Command included shipments of secondary repair items and government- furnished materiel sent to contractor facilities located in the continental United States during fiscal year 2004. Many shipments contained multiple items. According to these records, the inventory control points together authorized shipments of more than 25,000 secondary repair items worth approximately $852 million to repair contractors. The records show they also authorized shipments of more than 44,000 government-furnished materiel items valued at approximately $118 million. The survey population we used to draw our sample included all shipments of secondary repair items for which we could not identify matching receipt records for corresponding inventory shipment records, all shipments of government- furnished materiel, and all shipments of classified government-furnished materiel and secondary repair items. Table 1 shows the population of shipments from which we drew our samples. DOD has established policies for maintaining accountability for assets shipped to repair contractors. Under these policies, for example, contractors are responsible for posting receipts in their property control records and notifying the appropriate inventory control point once they have received shipped assets. The inventory control point establishes a “due-in” record when a shipment is issued to track inventory that will eventually return to the Army supply system. Once notified of receipt by the contractors, the inventory control point processes receipt of a transaction in its inventory management system to reflect the contractors’ receipt of the shipment. If the inventory control point is not notified of receipt within 45 days of shipment, it is required to follow up with the intended recipient to determine shipment status. Without a confirmation of receipt, the status of a shipment is uncertain. In addition, DOD policy states that the military services may establish requirements for their inventory control points to provide advance notification of scheduled shipments to repair contractors. DOD also requires inventory control points to submit quarterly reports to DCMA identifying quantities and types of government-furnished materiel provided to repair contractors. DCMA assesses the accuracy of repair contractor records and accounts for government property furnished to contractors. The quarterly reports are intended to help contract officers verify that repair contractors have maintained accountability for all government-furnished materiel shipped to their facilities without relying strictly on contractor inventory records. The Army has established a system for formally reporting errors in shipments. Under DOD and Army regulations, recipients of repair materiel are required to investigate and report shipment discrepancies, such as incorrect quantities and types of items and items sent to the wrong location. If the discrepancy results from shipper error, the recipient submits a supply discrepancy report to the appropriate inventory control point. Inventory control point officials review and validate these reports and provide recipients with instructions for resolving the discrepancy. For example, the customer may be instructed to return misdirected items to the Army supply system or to retain items for future repair work. In addition to these policies, the Army is obligated to establish and maintain effective internal control systems. The Federal Managers’ Financial Integrity Act of 1982 requires GAO to issue standards for internal control in the federal government. According to these standards, internal controls are an integral component of an organization’s management that provide reasonable assurance that assets are being safeguarded and other objectives are being met. Internal controls should be designed to provide reasonable assurance regarding prevention or prompt detection of unauthorized acquisition, use, or disposition of an agency’s assets. Effective and efficient internal control activities help ensure that an agency’s control objectives are accomplished. Control activities are the policies, procedures, techniques, and mechanisms that enforce management directives, such as the process of adhering to DOD requirements for receipting of shipped assets and generation of quarterly government-furnished status reports. Internal control weaknesses have impeded the Army’s accountability for assets shipped to repair contractors. Army inventory control points do not consistently record receipts for secondary repair items shipped to repair contractors. Furthermore, the Army does not verify receipt of government- furnished materiel. In addition, the Army does not provide shipment status reports to DCMA as required under DOD regulations. A lack of accurate accountability for shipments of secondary repair items and government- furnished materiel places these assets at risk of loss or theft, diminishes asset visibility and can distort on-hand inventory balances, leading to unnecessary procurement of items. Army inventory control points are not consistently recording receipts of shipments of secondary repair items in their inventory management systems. In our analysis of fiscal year 2004 shipment data obtained from two Army inventory control points, we could not reconcile shipment records with receipt records for 1,076 (42 percent) of the unclassified secondary repair item shipments, with a value of $481.7 million, or for 30 (37 percent) of the classified secondary repair item shipments, with a value of $8.1 million. In this analysis, we identified shipments that lacked a matching receipt record as well as those shipments for which there was a discrepancy between the number of items shipped and the number receipted. Table 2 displays the results of our analysis for shipments of unclassified secondary repair items. These data show that Army inventory control points, on the basis of receipt records maintained in its inventory management systems, cannot confirm that a substantial portion of inventory items shipped to repair contractors were in fact received. In the absence of accurate and complete receipt records, the Army lacks inventory transaction data needed for maintaining accurate accountability for an asset as it moves through the repair cycle. Furthermore, inaccurate or incomplete receipt records can lead to a distortion of on-hand inventory balances, thus placing the Army at risk of procuring more items than are needed to support the warfighter. The Army Audit Agency, in September 2004, noted that the Army lacked accurate receipt records for shipments both to contractors and to government- owned depot facilities, and that, as a result, on-hand inventory balances for some items were understated by about $40.8 million. Our survey results showed that repair contractors could confirm receipt of most, but not all, of the fiscal year 2004 shipments. On the basis of our analysis of the survey results and follow-up work with contractors and Army item managers, we estimated that about 15 percent of the unclassified secondary repair item shipments in our survey population could not be confirmed as being received. We estimated that these lost or unaccounted for shipments have a value of approximately $68 million. For example, our sample of secondary repair items included a shipment of 30 aircraft rotary wing components with a total value of $8.3 million. The Army’s inventory management system did not show a receipt for this shipment, and the contractor had no record of receiving the shipment. On the basis of our work, the status of this shipment remains uncertain. For classified items, the contractor confirmed receipt for 79 of the 80 secondary repair item shipments but could not confirm receipt for 1 shipment in our survey population with a value of about $17,000. In a subsequent analysis conducted by the Army to determine the status of this classified shipment, the Army discovered that it had erroneously provided us with a duplicate shipment record, causing this shipment to appear unaccounted for based on the original data that the Army had provided for this review. According to the Army, this was not a classified shipment sent to the contractor for repair, but rather a shipment record that pertained to a repaired asset coming from the contractor back into its inventory. The Army provided documentation to confirm the receipt of this asset back into its inventory. On the basis of this data, we deleted this record from our analysis. Thus, all shipments of classified secondary repair items were received by the contractors. Although required to obtain confirmation of receipt from repair contractors, Army inventory control points lack systematic procedures for obtaining and documenting receipt of shipments of secondary repair items and for following up within 45 days in cases where receipt was not confirmed by the contractors. Army regulations concerning receipt notification do not specify the method or form by which contractors are to notify the inventory control point when they receive shipments. Moreover, multiple individuals at the inventory control points may become involved in the receipting process. Item managers, who manage specific inventory items and authorize shipments of secondary repair items to contractor facilities, are generally responsible for ensuring repair contractors receive shipments. We found that various methods are used to confirm receipt. Some item managers rely on routine reports provided by the contractors or on data obtained from contractors’ inventory data systems. Other item managers confirm receipt by telephone calls to contractor officials. Once the receipt confirmation is obtained, the item manager may pass the receipt information to other inventory control point personnel, who then update the record in the inventory management system.