The Naval Inventory Control Point authorizes movement of its inventory from the Defense Logistic Agency, Navy-managed shipping and receiving activities, and Navy repair contractors. With prior approval from Naval Inventory Control Point item managers, Navy repair contractors can also use material located at their facilities. DOD procedures and Federal Acquisition Regulation procedures generally require that repair contractors establish and maintain an internal property control system for the control, use, maintenance, repair, protection, and preservation of government property in their possession. The Navy currently has 359 repair contractors using its Web-based inventory management system, known as the DOD Commercial Asset Visibility System. This system provides the Navy with asset reporting coverage for more than 95 percent of its commercial repair business. For fiscal year 2002, the most recent and complete data available at the time of our review, the Naval Inventory Control Point reported that 4,229 government-furnished material shipments (representing 4,301 items valued at approximately $115 million) had been shipped to its repair contractors. Table 1 shows the derivation of the sample size of our survey, including the number and value of shipments for which we received survey responses. DOD requires the Navy to use a number of procedures to monitor items shipped to and received by repair contractors. First, the recipient of the material is responsible for notifying the Naval Inventory Control Point once an item has been received. If the Naval Inventory Control Point has not been provided a receipt within 45 days of shipment, it is required to follow up with the intended recipient. The rationale behind these requirements is that until receipt is confirmed, the exact status of the shipment is uncertain and therefore vulnerable to fraud, waste, or abuse. The Naval Inventory Control Point is also required by DOD and Navy procedures to submit quarterly reports to the Defense Contract Management Agency identifying all government-furnished material that has been provided to a contractor. These reports allow the Defense Contract Management Agency to independently verify that Navy repair contractors have accounted for all government-furnished material shipped to them. As a result, the Defense Contract Management Agency does not have to rely strictly on records provided by Navy repair contractors. In addition to these DOD and Navy procedures, the Navy, as a representative of the federal government, is also obligated to establish and maintain effective internal control systems. The Federal Managers’ Financial Integrity Act of 1982 requires the General Accounting Office to issue standards for internal control in government. According to these standards, internal control is defined as an integral component of an organization’s management that provides reasonable assurance that the following objectives are being achieved: (1) effectiveness and efficiency of operations, (2) reliability of financial reporting, and (3) compliance with applicable laws and regulations. A subset of these objectives is the safeguarding of assets. Internal control should be designed to provide reasonable assurance regarding prevention of 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. The control activities are the policies, procedures, techniques, and mechanisms that enforce management’s directives, such as the process of adhering to DOD requirements for receipt of government-furnished material and issuance of quarterly government-furnished material status reports. DOD annually ships inventory valued at billions of dollars to various locations around the world. For years, DOD has had difficulty tracking this inventory from origin to destination. The accountability problem with shipped inventory is part of a more global issue. Since at least 1990, we have considered DOD’s inventory management to be a high-risk area because DOD’s inventory management procedures are ineffective. The lack of adequate controls over shipped inventory and the resulting vulnerability to undetected loss or theft have been major areas of concern. In March 1999, we reported that significant weaknesses existed at all levels of the Navy’s shipped inventory management structure, leading to potential theft or undetected losses of items and demonstrating inefficient and ineffective logistics management practices. We concluded that these weaknesses and the problems they created were primarily a result of the Navy not following its own procedures regarding controls over shipped inventory. In following up with the Navy, we found that the Navy had implemented many of our recommendations that have improved the accountability over its shipped inventory. According to Naval Inventory Control Point officials, at least 75 percent of their shipped inventory discrepancies have been resolved. Also, according to a June 2003 DOD Office of the Inspector General report, the Navy had taken actions to improve its procedures and controls to account for items repaired at commercial repair facilities. However, the DOD Office of the Inspector General found that additional improvements were needed to improve the monitoring and oversight of shipped inventory. The Naval Inventory Control Point and its repair contractors are not following DOD inventory management control procedures governing the accountability for and visibility of government-furnished material shipped to its repair contractors. As a result, this inventory is vulnerable to loss or theft. First, the Naval Inventory Control Point is not following a DOD procedure that requires repair contractors to acknowledge receipt of government-furnished material that has been shipped to them from the Navy’s supply system. Consequently, the Naval Inventory Control Point is not following another DOD procedure that requires it to follow up with its repair contractors that have not confirmed receipt of shipped material. Additionally, the Naval Inventory Control Point is not following DOD and Navy procedures that require quarterly reports on the status of government-furnished material shipped to Navy repair contractors be provided to the Defense Contract Management Agency. Navy repair contractors are not routinely acknowledging receipt of government-furnished material that has been shipped to them from the Navy’s supply system. According to a DOD procedure, repair contractors must enter shipments into their inventory records and notify the inventory control point when material has been received. This material receipt acknowledgment is designed to maintain accountability for all shipped items, including government-furnished material that has been shipped to Navy repair contractors in usable condition from the Navy’s supply system. Additionally, the Navy must adhere to internal control standards outlined by the General Accounting Office, such as providing assurance that assets are safeguarded against unauthorized acquisition, use, or disposition. Navy repair contractors are not routinely adhering to the DOD procedure to acknowledge receipt of government-furnished material shipped to them because Naval Inventory Control Point officials are not requiring them to do so. By not requiring repair contractors to receipt, the Naval Inventory Control Point does not follow up with its repair contractors within 45 days—as required by DOD procedure—when these repair contractors fail to confirm receipt of government-furnished material shipped to them. Naval Inventory Control Point officials acknowledged that they only become aware that a contractor has not received an item if the contractor inquires about the shipment. Naval Inventory Control Point personnel provided several reasons why Navy repair contractors are not being required to notify the Naval Inventory Control Point of material receipt. They indicated that the Naval Inventory Control Point does not require its repair contractors to acknowledge receipt of government-furnished material because such material is provided with the expectation that it will immediately be consumed in the repair of other items. Naval Inventory Control Point officials also stated that submitting notification of receipt for this material might overstate the inventory levels in the DOD Commercial Asset Visibility System—the Navy’s inventory management system—because the system would show this material as on-hand at its repair contractors’ facilities when the material is actually earmarked for immediate use in the repair of another item. We have noted the Naval Inventory Control Point officials’ concerns about the potential for notification of receipt of government-furnished material to overstate inventory levels. However, one of the Navy repair contractors in our review currently uses the DOD Commercial Asset Visibility System to enter receipt of government-furnished material, without overstating the inventory levels maintained within the system. Specifically, the Navy repair contractor is using a standard module of the DOD Commercial Asset Visibility System to enter receipt of material received in usable condition from the Navy’s supply system. Upon entering a receipt of material in the system, the contractor then issues the item to itself for immediate use in the repair of another item. This process eliminates the possibility of adverse impacts to inventory levels. However, the Naval Inventory Control Point is not using this module of the DOD Commercial Asset Visibility System for the receipt of material received in usable condition. Additionally, in our previous Air Force report on shipments to repair contractors, we found that in contrast to the Navy, the Air Force requires repair contractors to issue a notification of receipt for material that they have received. For fiscal year 2002, the most recent and complete data available at the time of our review, the Naval Inventory Control Point reported that 4,229 government-furnished material shipments (representing 4,301 items valued at approximately $115 million) had been shipped to its repair contractors. We randomly selected and examined 308 government- furnished material shipments, representing 344 items that were shipped to Navy repair contractors. We surveyed 29 Navy repair contractors to determine if they had recorded receipts for these shipments in their property records. The repair contractors had recorded receipts for all classified shipments. However, they could not document the receipt of 4 unclassified shipments (representing 4 items). Because our sample was randomly selected, the results can be projected to the entire universe of government-furnished material managed by the Naval Inventory Control Point. We estimate that 50 unclassified items may be unaccounted for, with a value of about $729,000 in inventory of aircraft-related government- furnished material for fiscal year 2002. Lack of contractor notification has impeded the Naval Inventory Control Point’s visibility of government-furnished material. Without such notification, the Naval Inventory Control Point cannot be assured that its repair contractors have received all shipped material. Finally, because the Naval Inventory Control Point does not have data on unconfirmed government-furnished material shipments, it lacks the ability to independently know when corrective actions, such as resolving inventory discrepancies, are needed.