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

GAO provided a supplement to its report on Department of Defense (DOD) actions on previous GAO recommendations, evaluating the reasons for DOD allegations that two previous GAO reports on the pricing of foreign military sales inventory items were based on an erroneous application of the Arms Export Control Act and that unvalidated data were used to support their conclusions.

To implement the act, DOD policy provides for charging standard stock fund prices which are 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. DOD alleged that: (1) GAO misinterpreted the act by including in its random sample of sales transactions a large number of items not subject to the replacement pricing requirements of the act; and (2) GAO methodology for determining the replacement costs of many of the sample transactions was in error, because inflation factors were used which were not determined to be valid. Although DOD disagreed with the way GAO determined whether the United States was being reimbursed for its costs, it revised its pricing policy shortly after the first of the two GAO reports was issued. Regardless of which section of the act DOD chooses to rely on, its pricing policies for supply support arrangements should be consistent with the objective of cost reimbursement. The inflation factors used by GAO, which were developed by the Air Force over a period of years, had been proven to be adequate by a test GAO made in following up its audit.