Financial ManagementBetter Controls Essential to Improve the Reliability of DOD's Depot Inventory Records Gao ID: AIMD-99-132 June 28, 1999
Accurate inventory records help the Defense Department (DOD) avoid buying unnecessary items. Moreover, Congress relies on DOD's reported inventory levels to verify inventory reductions and to determine budget requests. The Defense Logistics Agency's (DLA) inventory accuracy rates, however, do not provide reliable information for assessing the accuracy of inventory records. To provide a meaningful measure for managerial decisions and financial reporting purposes, DLA's procedures for counting and reconciling variances must be improved. Investigations of possible theft were not being done because of major delays in researching count variances and in notifying security offices of significant and unresolved discrepancies between counts and the inventory records. Better internal controls over the count process, including revised policies and written detailed procedures, would help ensure that the distribution depots properly perform counts and reconcile variances to produce valid count results. Additional procedures and emphasis on strict adherence to current policies and regulations would help ensure meaningful inventory research results and the prompt identification and investigation of possible fraud and theft. Moreover, a DLA inventory sampling methodology that better recognizes the importance of item dollar values and other differences between items would provide more meaningful inventory accuracy measures and serve as the basis for appropriate management action.
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
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: Team: Phone: