Review of Pricing of Silver Sold Under the Foreign Military Sales Program

AFMD-82-34: Published: May 3, 1982. Publicly Released: May 3, 1982.

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GAO was asked to review the Department of Defense's (DOD) pricing of items containing precious metals sold to foreign customers in the foreign military sales program.

The precious metal most often found in sales items is silver. The problem in pricing items for sale arises when DOD provides silver to contractors as Government-furnished material. The DOD inventory of silver results from a program in which silver is recovered from scrapped items. The cost to recover the silver is far less than its replacement cost, which is the cost that should be used in computing a standard price for the silver. For the transactions reviewed, there were undercharges of over $2 million because only the recovery cost was being used in price computations. The Army discovered its pricing errors just prior to the GAO audit and the Navy and Air Force were unaware that they were underpricing Government-furnished silver contained in items sold to foreign countries. The deficiencies found may be occurring throughout DOD because procedures for pricing items are standard within each service, and each uses similiar accounting and financial management systems. DOD must act to correct the problems for future sales and must make a reasonable effort to recover past undercharges. GAO and military internal audits have issued over 40 reports on DOD failure to bill for all required costs of foreign military sales. DOD corrective action has usually been slow, narrowly confined, and inconsistently implemented. DOD officials have advised GAO that the number of personnel assigned to administer the sales program is constrained by a personnel ceiling. GAO believes that the personnel assigned to administering the foreign military sales program should be exempt from the ceilings.

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 establish policies and procedures to identify items with Government-furnished silver sold to foreign countries.

    Agency Affected: Department of Defense

  2. 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 the market value of silver be used in pricing such items.

    Agency Affected: Department of Defense

  3. 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 responsible organizations to make a reasonable effort to recover undercharges on foreign sales resulting from nonrecovery of the replacement cost or market value of silver.

    Agency Affected: Department of Defense

  4. Status: Closed - Not Implemented

    Comments: DOD disagreed with GAO in exempting just foreign military sales personnel from personnel ceilings. It stated that the exemption would reduce overall flexibility in the distribution of resources and could imply that exempted programs were of more importance than other programs.

    Recommendation: The Secretary of Defense should seek authority from Congress and the Office of Management and Budget to exempt foreign military sales administrative positions from personnel ceilings. In seeking the exemption, the Secretary should provide data on validated administrative staffing needs, the cost of which would be reimbursed by foreign governments.

    Agency Affected: Department of Defense

 

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