Progress Made by the Navy in Improving Physical Inventory Controls and the Magnitude, Causes and Impact of Physical Inventory Adjustments in the Army, Air Force and Defense Logistics Agency

GAO presented information related to monitoring the Navy's progress in improving physical inventory controls over supply in improving system inventories. Pursuant to a congressional request, it also investigated the causes and impact of physical inventory adjustments in other service branches and evaluated the adequacy of Department of Defense (DOD) policies and procedures to improve physical inventory controls and inventory record accuracy. In its review, GAO found that the Navy is improving physical inventory controls and inventory record accuracy and stated that the Navy's actions should result in long-term improvements. However, with respect to Army, Air Force, and Defense Logistic Agency inventory adjustments, GAO stated that the value of physical inventory adjustments reported to DOD understates the extent of inaccuracies by billions of dollars annually, which has an adverse impact on supply economies and readiness. Further, GAO found that these services' procedures and practices are generally not effective in identifying and correcting the causes of recurring major inventory record errors. GAO attributed these conditions to procedural weaknesses, a shortage of qualified personnel, and inadequate management emphasis and priority. GAO noted that the high rate of reversals of physical inventory adjustments and erroneous reconciliations of valid major physical inventory variances is indicative of poor physical inventory performance and serious inventory control problems. Although GAO believes that the present DOD action plan will result in significant improvements, GAO is opposed to changes to increase the timeframe for reversing physical inventory adjustments and the mandatory dollar criteria for items subject to pilferage.