Millions in Losses Continue on Defense Stock Fund Sales to Foreign Customers

AFMD-81-62: Published: Sep 10, 1981. Publicly Released: Oct 2, 1981.

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In response to a congressional request, GAO reviewed the Department of Defense's (DOD) actions on previous GAO recommendations for improving the accounting and financial management of the foreign military sales program. The review focused on the actions taken by DOD to revise and implement the policies, procedures, and accounting systems used to price sales of stock fund items to foreign customers. Specifically, the review discussed whether prices billed to foreign customers for stock fund items were adequate to replace the items in DOD inventories and thus avoid DOD subsidization of the foreign military sales program.

DOD has continued to largely subsidize the foreign military sales program by not charging foreign governments the estimated replacement cost of equipment and spare parts sold from inventory through DOD stock funds. According to the Arms Export Control Act, estimates of the cost to replace items should be used when making sales to foreign countries if the items sold are to be replaced in the DOD inventory. To implement the act, DOD policy provided for charging standard stock fund prices, which were to include an inflation factor adequate to recover the replacement costs of items sold. GAO estimated that, because of weaknesses in pricing policies and practices, millions of dollars were not recovered from foreign governments during fiscal year 1980. Inherent in the DOD pricing policy and practices were three main weaknesses: (1) inflation factors used to estimate replacement cost were unrealistically low; (2) inflation factors were not compounded when the items were purchased more than 1 year prior to their sale; and (3) the Air Force and Navy normally updated sales prices only once a year.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of Defense should direct the quality control unit recently established at the Security Assistance and Accounting Center to make sure that DOD components adequately and uniformly implement revised estimating procedures.

    Agency Affected: Department of Defense

  2. Status: Closed - Not Implemented

    Comments: DOD has increased the replacement factors to an extent that the recommendation is no longer necessary.

    Recommendation: The Secretary of Defense should require that a more adequate method of estimating replacement cost be used, including updating foreign sales prices more frequently.

    Agency Affected: Department of Defense

  3. Status: Closed - Not Implemented

    Comments: DOD has increased the replacement factors to an extent that the recommendation is no longer valid.

    Recommendation: The Secretary of Defense should require that a more adequate method of estimating replacement cost be used, including compounding inflation factors when computing estimated replacement cost for those items purchased more than 1 year prior to their sale.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of Defense should require that a more adequate method of estimating replacement cost be used, including adopting a more realistic inflation index.

    Agency Affected: Department of Defense

  5. Status: Closed - Not Implemented

    Comments: DOD has increased replacement factors for stock fund sales. DOD did not agree to recover past undercharges. Therefore, the recommendation is no longer valid.

    Recommendation: The Secretary of Defense should direct the military services to make a reasonable attempt to recover from foreign governments the undercharges in sales from the stock fund resulting from the failure to charge a reasonable cost as required by law.

    Agency Affected: Department of Defense

 

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