Financial Management:

Better Controls Essential to Improve the Reliability of DOD's Depot Inventory Records

AIMD-99-132: Published: Jun 28, 1999. Publicly Released: Jun 28, 1999.

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Pursuant to a legislative requirement, GAO provided information on the reliability of the Department of Defense's (DOD) depot inventory records, focusing on: (1) DOD's procedures for verifying the accuracy of its perpetual inventory records; and (2) the internal controls over the Defense Logistics Agency's (DLA) physical inventory process to determine whether they provide a reliable, accurate measure of the perpetual inventory records.

GAO noted that: (1) inventory record accuracy based on statistical sample inventory results is a key measure used by DOD managers and auditors to monitor the reliability of DOD's perpetual inventory records; (2) DLA established record accuracy goals for fiscal years (FY) 1997 and 1998 of 92 and 95 percent, respectively; (3) at the 14 distributions depots GAO visited, reported accuracy rates for FY 1998 counts were below this goal with only 2 depots reporting inventory rates above 90 percent; (4) at all the depots GAO visited, counters could access the inventory system to determine the expected number of inventory items on hand before undertaking the process of verifying inventory quantities at various locations; (5) DLA instructions stated that it was unacceptable for the counters to use the inventory system quantity in advance of completing this task; (6) GAO observed counters accessing the system to determine the quantity on hand before and during the sample counts; (7) one item variance totalling $1.3 million would have gone undetected if GAO had not requested that the items be physically counted rather than just recording the quantity in the system; (8) DOD policies and procedures regarding physical inventories did not specify the need for adequate segregation of duties when performing counts; (9) most of the depots GAO reviewed used the same warehouse personnel that were primarily responsible for storing, rewarehousing, and issuing the items being counted instead of using independent parties; (10) without that independence, physical counts may be adjusted inappropriately and discrepancies not reported; (11) the distribution depots lacked written detailed procedures for performing inventory counts; (12) research of inventory discrepancies was not adequate to permit managers to design and implement effective corrective actions; (13) researchers did not always completely or properly research causes for the variances and document their results; (14) the codes most often cited to describe the errors did not identify underlying causes, thus hampering managers' ability to discern major reasons for inventory errors; (15) some locations did not compile the research results to identify trends on major reasons for errors; (16) the depots did not always complete research in a timely manner to permit the prompt investigation of unexplained losses; (17) depots were not always notifying security offices of unresolved property losses promptly; and (18) DLA's recently revised inventory sampling process was a step forward in its efforts to measure inventory accuracy, but further improvements can be made.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: On January 8, 2001, the Defense Logistics Agency implemented a system software change at all distribution depots to restrict personnel from accessing the on-hand balance when conducting counts using radio frequency devices. In May 2003, DOD issued a revised DOD regulation 4140.1-R that changed the language regarding segregation of duties. It states that inventory duties must be divided among the work force so that no single individual can adversely affect the accuracy and integrity of the inventory. In August 1999, the Defense Logistics Agency published and disseminated a DSS Inventory Users Manual. Finally, DLA issued guidance to have all indicators of depot performance, including inventory balance integrity, considered during annual evaluations, and included critical elements for validating compliance with physical inventory policy and procedures in the responsibilities of Depot Accountable Officers and Inventory Supervisors.

    Recommendation: The Under Secretary of Defense (Acquisition and Technology), the Under Secretary of Defense (Comptroller), and the Director, DLA, should ensure that the inventory counters do not have access to inventory records during the counts and are sufficiently independent so that the integrity of the counts are not jeopardized. To address this will require: (1) changing the inventory system to better restrict access to on-hand quantities before and during the counts; (2) revising Military Standard Transaction Reporting and Accounting Procedures to emphasize that segregation of duties is an essential control element of the inventory count process; (3) developing written procedures and providing training on how counts are to be organized and performed; and (4) monitoring the physical inventories to ensure that procedures are properly and consistently followed.

    Agency Affected: Department of Defense: Defense Logistics Agency

  2. Status: Closed - Implemented

    Comments: On January 8, 2001, the Defense Logistics Agency implemented a system software change at all distribution depots to restrict personnel from accessing the on-hand balance when conducting counts using radio frequency devices. In May 2003, DOD issued a revised DOD regulation 4140.1-R that changed the language regarding segregation of duties. It states that inventory duties must be divided among the work force so that no single individual can adversely affect the accuracy and integrity of the inventory. In August 1999, the Defense Logistics Agency published and disseminated a DSS Inventory Users Manual. Finally, DLA issued guidance to have all indicators of depot performance, including inventory balance integrity, considered during annual evaluations, and included critical elements for validating compliance with physical inventory policy and procedures in the responsibilities of Depot Accountable Officers and Inventory Supervisors.

    Recommendation: The Under Secretary of Defense (Acquisition and Technology), the Under Secretary of Defense (Comptroller), and the Director, DLA, should ensure that the inventory counters do not have access to inventory records during the counts and are sufficiently independent so that the integrity of the counts are not jeopardized. To address this will require: (1) changing the inventory system to better restrict access to on-hand quantities before and during the counts; (2) revising Military Standard Transaction Reporting and Accounting Procedures to emphasize that segregation of duties is an essential control element of the inventory count process; (3) developing written procedures and providing training on how counts are to be organized and performed; and (4) monitoring the physical inventories to ensure that procedures are properly and consistently followed.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

  3. Status: Closed - Implemented

    Comments: On January 8, 2001, the Defense Logistics Agency implemented a system software change at all distribution depots to restrict personnel from accessing the on-hand balance when conducting counts using radio frequency devices. In May 2003, DOD issued a revised DOD regulation 4140.1-R that changed the language regarding segregation of duties. It states that inventory duties must be divided among the work force so that no single individual can adversely affect the accuracy and integrity of the inventory. In August 1999, the Defense Logistics Agency published and disseminated a DSS Inventory Users Manual. Finally, DLA issued guidance to have all indicators of depot performance, including inventory balance integrity, considered during annual evaluations, and included critical elements for validating compliance with physical inventory policy and procedures in the responsibilities of Depot Accountable Officers and Inventory Supervisors.

    Recommendation: The Under Secretary of Defense (Acquisition and Technology), the Under Secretary of Defense (Comptroller), and the Director, DLA, should ensure that the inventory counters do not have access to inventory records during the counts and are sufficiently independent so that the integrity of the counts are not jeopardized. To address this will require: (1) changing the inventory system to better restrict access to on-hand quantities before and during the counts; (2) revising Military Standard Transaction Reporting and Accounting Procedures to emphasize that segregation of duties is an essential control element of the inventory count process; (3) developing written procedures and providing training on how counts are to be organized and performed; and (4) monitoring the physical inventories to ensure that procedures are properly and consistently followed.

    Agency Affected: Department of Defense: Office of the Under Secretary of Defense for Acquisition, Technology and Logistics

  4. Status: Closed - Implemented

    Comments: The Defense Logistics Agency included causative research procedures in the DSS Inventory Users Manual and disseminated it to the distribution depots in August 1999. The Agency provided training on research to the distribution depot sites and also provided hardcopy step by step procedures to all depots. During fiscal year 2000, the Agency redefined its error codes and provided additional guidance to the depots on applying those codes. The Agency assigned oversight responsibility to the Defense Distribution Center, which will perform oversight by monitoring causative research, analyzing trends, and conducting unannounced on-site reviews to evaluate corrective actions and identify training needs.

    Recommendation: The Under Secretary of Defense (Acquisition and Technology), the Under Secretary of Defense (Comptroller), and the Director, DLA, should improve the accuracy of research and enhance the reliability basis of corrective actions by: (1) revising the appropriate policies and procedures to provide detailed instructions on conducting research (including review of transactions that affect the accountable balance, e.g. receipt, issues, and adjustments); appropriately using error codes; documenting research actions; and accumulating research results; and (2) training personnel responsible for research; (3) reviewing and eliminating error codes that do not identify underlying causes of inventory record variances; and (4) specifying how oversight will be carried out.

    Agency Affected: Department of Defense: Defense Logistics Agency

  5. Status: Closed - Implemented

    Comments: The Defense Logistics Agency included causative research procedures in the DSS Inventory Users Manual and disseminated it to the distribution depots in August 1999. The Agency provided training on research to the distribution depot sites and also provided hardcopy step by step procedures to all depots. During fiscal year 2000, the Agency redefined its error codes and provided additional guidance to the depots on applying those codes. The Agency assigned oversight responsibility to the Defense Distribution Center, which will perform oversight by monitoring causative research, analyzing trends, and conducting unannounced on-site reviews to evaluate corrective actions and identify training needs.

    Recommendation: The Under Secretary of Defense (Acquisition and Technology), the Under Secretary of Defense (Comptroller), and the Director, DLA, should improve the accuracy of research and enhance the reliability basis of corrective actions by: (1) revising the appropriate policies and procedures to provide detailed instructions on conducting research (including review of transactions that affect the accountable balance, e.g. receipt, issues, and adjustments); appropriately using error codes; documenting research actions; and accumulating research results; and (2) training personnel responsible for research; (3) reviewing and eliminating error codes that do not identify underlying causes of inventory record variances; and (4) specifying how oversight will be carried out.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

  6. Status: Closed - Implemented

    Comments: The Defense Logistics Agency included causative research procedures in the DSS Inventory Users Manual and disseminated it to the distribution depots in August 1999. The Agency provided training on research to the distribution depot sites and also provided hardcopy step by step procedures to all depots. During fiscal year 2000, the Agency redefined its error codes and provided additional guidance to the depots on applying those codes. The Agency assigned oversight responsibility to the Defense Distribution Center, which will perform oversight by monitoring causative research, analyzing trends, and conducting unannounced on-site reviews to evaluate corrective actions and identify training needs.

    Recommendation: The Under Secretary of Defense (Acquisition and Technology), the Under Secretary of Defense (Comptroller), and the Director, DLA, should improve the accuracy of research and enhance the reliability basis of corrective actions by: (1) revising the appropriate policies and procedures to provide detailed instructions on conducting research (including review of transactions that affect the accountable balance, e.g. receipt, issues, and adjustments); appropriately using error codes; documenting research actions; and accumulating research results; and (2) training personnel responsible for research; (3) reviewing and eliminating error codes that do not identify underlying causes of inventory record variances; and (4) specifying how oversight will be carried out.

    Agency Affected: Department of Defense: Office of the Under Secretary of Defense for Acquisition, Technology and Logistics

  7. Status: Closed - Implemented

    Comments: The Defense Logistics Agency's Depot Distribution Center is monitoring the depots causative research using automated system tools. DLA issued an instruction in October 2000, with procedures to ensure that unresolved inventory adjustments are immediately forwarded to security for appropriate action. According to DOD, even though the guidance has not yet been finalized, the depots are using the draft guidance and are fully aware of the requirement for timely notification to security. DLA has revised managers' and other individuals' performance standards to include critical elements on the timely completion of research and reporting to security. Guidelines emphasizing the importance of performance standards are published semi-annually by the Depot Distribution Center.

    Recommendation: The Under Secretary of Defense (Acquisition and Technology), the Under Secretary of Defense (Comptroller), and the Director, DLA, should ensure that possible theft is properly investigated by: (1) monitoring compliance with existing policies and procedures so that research is properly and promptly completed; (2) notifying security offices of significant losses and gains promptly; and (3) establishing appropriate management actions for noncompliance with the policy.

    Agency Affected: Department of Defense: Defense Logistics Agency

  8. Status: Closed - Implemented

    Comments: The Defense Logistics Agency's Depot Distribution Center is monitoring the depots causative research using automated system tools. DLA issued an instruction in October 2000 with procedures to ensure that unresolved inventory adjustments are immediately forwarded to security for appropriate action. According to DOD, even though the guidance has not yet been finalized, the depots are using the draft guidance and are fully aware of the requirement for timely notification to security. DLA has revised managers' and other individuals' performance standards to include critical elements on the timely completion of research and reporting to security. Guidelines emphasizing the importance of performance standards are published semi-annually by the Depot Distribution Center.

    Recommendation: The Under Secretary of Defense (Acquisition and Technology), the Under Secretary of Defense (Comptroller), and the Director, DLA, should ensure that possible theft is properly investigated by: (1) monitoring compliance with existing policies and procedures so that research is properly and promptly completed; (2) notifying security offices of significant losses and gains promptly; and (3) establishing appropriate management actions for noncompliance with the policy.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

  9. Status: Closed - Implemented

    Comments: The Defense Logistics Agency's Depot Distribution Center is monitoring the depots causative research using automated system tools. DLA issued an instruction in October 2000 with procedures to ensure that unresolved inventory adjustments are immediately forwarded to security for appropriate action. According to DOD, even though the guidance has not yet been finalized, the depots are using the draft guidance and are fully aware of the requirement for timely notification to security. DLA has revised managers' and other individuals' performance standards to include critical elements on the timely completion of research and reporting to security. Guidelines emphasizing the importance of performance standards are published semi-annually by the Depot Distribution Center.

    Recommendation: The Under Secretary of Defense (Acquisition and Technology), the Under Secretary of Defense (Comptroller), and the Director, DLA, should ensure that possible theft is properly investigated by: (1) monitoring compliance with existing policies and procedures so that research is properly and promptly completed; (2) notifying security offices of significant losses and gains promptly; and (3) establishing appropriate management actions for noncompliance with the policy.

    Agency Affected: Department of Defense: Office of the Under Secretary of Defense for Acquisition, Technology and Logistics

  10. Status: Closed - Implemented

    Comments: Even though DOD concurred with this recommendation, it has not been successful in developing a single sampling plan to satisfy both the logistics and financial communities requirements to measure inventory accuracy. Instead, DLA has developed separate sampling plans to address GAO's concerns. DLA's logistics sampling plan has incorporated dollar value and item characteristics, as suggested in GAO's recommendation, and is focused on line item accuracy. DLA's financial sampling plan is oriented towards measuring the accuracy of inventory valuation and places emphasis on large dollar value inventory. DOD has involved both IG statisticians and consultants to ensure validity of the sampling plans. While the IG, consultants, and GAO agree that separate plans are not as efficient, the plans together do address GAO's recommendation.

    Recommendation: The Under Secretary of Defense (Acquisition and Technology), the Under Secretary of Defense (Comptroller), and the Director, DLA, should enhance the sampling methodology to provide an inventory accuracy measure that better reflects the importance of the dollar value and sensitivity of items on hand at each distribution depot for accountability of assets and financial reporting.

    Agency Affected: Department of Defense: Defense Logistics Agency

  11. Status: Closed - Implemented

    Comments: Even though DOD concurred with this recommendation, it has not been successful in developing a single sampling plan to satisfy both the logistics and financial communities requirements to measure inventory accuracy. Instead, DLA has developed separate sampling plans to address GAO's concerns. DLA's logistics sampling plan has incorporated dollar value and item characteristics, as suggested in GAO's recommendation, and is focused on line item accuracy. DLA's financial sampling plan is oriented towards measuring the accuracy of inventory valuation and places emphasis on large dollar value inventory. DOD has involved both IG statisticians and consultants to ensure validity of the sampling plans. While the IG, consultants, and GAO agree that separate plans are not as efficient, the plans together do address GAO's recommendation.

    Recommendation: The Under Secretary of Defense (Acquisition and Technology), the Under Secretary of Defense (Comptroller), and the Director, DLA, should enhance the sampling methodology to provide an inventory accuracy measure that better reflects the importance of the dollar value and sensitivity of items on hand at each distribution depot for accountability of assets and financial reporting.

    Agency Affected: Department of Defense: Under Secretary of Defense (Comptroller)

  12. Status: Closed - Implemented

    Comments: Even though DOD concurred with this recommendation, it has not been successful in developing a single sampling plan to satisfy both the logistics and financial communities requirements to measure inventory accuracy. Instead, DLA has developed separate sampling plans to address GAO's concerns. DLA's logistics sampling plan has incorporated dollar value and item characteristics, as suggested in GAO's recommendation, and is focused on line item accuracy. DLA's financial sampling plan is oriented towards measuring the accuracy of inventory valuation and places emphasis on large dollar value inventory. DOD has involved both IG statisticians and consultants to ensure validity of the sampling plans. While the IG, consultants, and GAO agree that separate plans are not as efficient, the plans together do address GAO's recommendation.

    Recommendation: The Under Secretary of Defense (Acquisition and Technology), the Under Secretary of Defense (Comptroller), and the Director, DLA, should enhance the sampling methodology to provide an inventory accuracy measure that better reflects the importance of the dollar value and sensitivity of items on hand at each distribution depot for accountability of assets and financial reporting.

    Agency Affected: Department of Defense: Office of the Under Secretary of Defense for Acquisition, Technology and Logistics

 

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