Air Force Supply Management:

Analysis of Activity Group's Financial Reports, Prices, and Cash Management

AIMD/NSIAD-98-118: Published: Jun 8, 1998. Publicly Released: Jun 8, 1998.

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Pursuant to a congressional request, GAO reviewed the financial operations of the Department of Defense (DOD) Working Capital Fund, focusing on the: (1) accuracy and consistency of the Air Force supply management activity group's (SMAG) accounting and budgetary reports; (2) group's price-setting process; and (3) Air Force Working Capital Fund's cash management practices.

GAO noted that: (1) the Air Force has had difficulties producing reliable financial information on the supply management activity group's operations, setting prices for inventory the group sells to customers, and generating sufficient cash to help discontinue the Air Force Working Capital Fund's practice of advance billing its customers since 1993; (2) these weaknesses impair the Air Force's ability to: (a) ensure that customers can purchase inventory items when needed; and (b) achieve the goals of the working capital funds, which are to focus management attention on the full costs of carrying out operations and to manage those costs effectively; (3) at the core of many of the supply management activity group's financial management weaknesses is its inability to produce reliable information on its cost of goods sold and net operating results; (4) this financial information is critical since the activity group must set prices that reflect the expected costs of providing inventory items to customers; (5) if these data are inaccurate, the activity group's prices may not cover its full cost of operations or generate enough cash to pay its bills, which has been the case in recent years; (6) until the Air Force can: (a) develop accurate information on the supply management activity group's net operating results and cost of goods sold; (b) use this information to develop an effective price-setting process; and (c) acquire and use management tools for projecting cash outlays--its customers will remain susceptible to wide price fluctuations and a corresponding depletion of funds; (7) further, the Air Force Working Capital Fund will have to continue to advance bill customers so that it has enough cash to pay its bills; and (8) finally, senior managers and those responsible for providing oversight will continue to lack the information they need to make informed decisions on Air Force supply operations.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation. During the fiscal year 1998 budget review process, the Air Force reallocated fiscal year 1998 resources to customers to ensure that they could buy required inventory items during fiscal year 1998. For example, the Air Force provided $34 million to the Education and Training Command and $8.9 million to the Air Mobility Command so that these two Commands could purchase the inventory items they need.

    Recommendation: The Air Force needs to develop an effective process for determining the cost of goods sold. In addition, the Secretary of the Air Force should assess the impact of price changes to determine whether customers can acquire the goods they need in fiscal year 1998 and take funding reallocation actions, as appropriate, to meet the highest priority needs.

    Agency Affected: Department of Defense: Department of the Air Force

  2. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation. The Air Force reviewed its processes to identify weaknesses and actions to correct the problem. The Air Force is monitoring accounts receivable and cash balances monthly, and any anomalies are referred to the appropriate financial analyst for resolution.

    Recommendation: The Secretary of the Air Force should direct the Commander, Air Force Materiel Command, to monitor accounts receivable balances and cash outlay rates to identify anomalies and their causes so that corrective actions can be taken.

    Agency Affected: Department of Defense: Department of the Air Force

  3. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation and has taken steps to develop a cash forecasting model. The Air Force developed a methodology to forecast required cash levels and end-of-period cash positions. The model was implemented for the material support division of the Supply Management Activity Group on March 1, 2000. In addition, the Air Force implemented the model for the Depot Maintenance Activity Group and the Information Services Activity Group at the end of March 2001.

    Recommendation: The Secretary of the Air Force should direct the Commander, Air Force Materiel Command, to ensure that the development of the cash forecasting model includes the capabilities to forecast: (1) a required cash level; (2) end-of-period cash positions on a weekly, monthly, or annual basis; (3) disbursements to be made in future years based on when vendors are scheduled to deliver items to SMAG and the process charged by the vendors; and (4) receipts based on SMAG's sales.

    Agency Affected: Department of Defense: Department of the Air Force

  4. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation. The Air Force and the Defense Finance and Accounting Service worked together and, in July 1998, reconciled the net operating results in the 1307 report to the reported actual net operating results in the budget justification report that is used for budgeting.

    Recommendation: To help link information contained in the accounting report to budget formulation, the Secretary of the Air Force should direct a reconciliation of the net operating results in the 1307 accounting report to the reported actual net operating results in the budget justification report that is used for budgeting purposes.

    Agency Affected: Department of Defense: Department of the Air Force

  5. Status: Closed - Not Implemented

    Comments: DOD concurred with this recommendation. DOD recognizes that it needs to develop an implementation strategy that will help improve the accounting and reporting for the cost-of-goods sold figure. However, DOD has not made progress in developing such a strategy because this is a complex issue that involves: (1) developing accounting policy that affects the cost-of-goods sold figure and inventory figure; and (2) modifying existing systems or developing new systems to account for the cost-of-goods sold figure.

    Recommendation: To ensure that DOD acts to correct SMAG's financial reporting problems and develop an accurate cost-of-goods sold figure, the Secretary of Defense should develop a detailed implementation plan to ensure that the actions identified by DOD in September 1997 to correct the financial reporting problems are carried out promptly. The plan should: (1) identify specific actions that need to be taken including the modification of existing systems or development of new systems; (2) establish milestones; (3) clearly delineate responsibilities for performing the tasks in the plan; and (4) ensure compliance with accounting standards on accounting for inventory and related property.

    Agency Affected: Department of Defense

  6. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation. The Air Force has taken three actions to improve the accuracy of the prices that the supply group charges its customers. First, the Air Force is stabilizing the supply group's price setting methodology (that is, they are not changing the methodology for setting prices) in order to enable the Air Force to develop more consistent historical trend data on customers' funding needs. Second, Air Force Materiel Command requested assistance from the Air Force Audit Agency to ensure that the fiscal year 2000 and fiscal year 2001 prices for individual inventory items would result in a composite price change that was consistent with the approved composite price increase. Third, for the fiscal year 2001 prices, the supply group is determining the impact of actual price changes on individual customers prior to the start of the fiscal year so that the information can be used by Air Force headquarters to reallocate funds among the activity group's Air Force customers, if necessary.

    Recommendation: The Air Force needs to develop an effective process for determining the cost of goods sold. In addition, the Secretary of the Air Force should direct the Commander, Air Force Materiel Command, to develop and implement procedures to ensure that the prices that are established for individual inventory items are consistent with the composite prices developed and approved by the Office of the Under Secretary of Defense (Comptroller) during the budget process.

    Agency Affected: Department of Defense: Department of the Air Force

 

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