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

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

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: John F. Simonette Team: General Accounting Office: Accounting and Financial Management Division Phone: (202) 275-1581