- I + UNITED STATESGENERALA~CWNT WASHINGTON DC. 20 DEFENSE DIVISION d ’ 3 ’ B&M%!~ IllllllllllllllllllllllllIllllllllllllll LM095512 Dear Mr. Secretary: The General Accoynting Office has petiormed a limited~follow-up examination into the.ef.@@x&x~qegs and economy of the Air Force's physical inventory progmn fpr supplies and equipsnent stocked at Air Force air materiel areas* Our field work, which was completed in July 1971, was performed at the Oklahcum City, Sacramento, and San Antonio Air Materiel Areas; and the Air Force Logistics Command. In a prior report to the Congress entitled, "Improved Inventory Controls Needed for the Departments of the Amy, Navy, Air Force, and the Defense Supply Agency" (B-146828, dated November 14, lg67), we reported that inventory record6 throughout the Department of Derense were generally unreliable. We pointed out that the failure of supply personnel to properly research and reconcile physical inventory differ- ences and to make required adjustments to stock records were major recurring causes of inventory record errors. In Hay 1968, the Air Force Auditor General*s office reported that physical inventories taken at the Air Force's five air materiel areas did not improve the validity of i?WentOq reCOrd6 because of faulty physical inVent0I-y reconciliation and ad$&ment practices. Our fouiow=qpLQe~vi~di6closed ------ that the problem6 previously cited still exist. Inventory record inaccuracies are frequently not corrected by physical inventories because of the repeated fail- ure of supply personnel to accurately count stock and to make Fe- quired adjustments to inventory records. Details of our ftidings follow. FBYSICAL INVE#TORIESOFACTIVEINVES~hTaTE~ Air materiel areas are required to physically inventory all active investment items (high-dollar value items or reparable items with a large 6tOCk turnover) on a regularly Scheduled quarterly basis. During the quarter ending September jC9 1970, the three air materiel areas included in our review physically inventoried 4,598 items of this nature. 50TH ANNIVERSARY 1921- 1971 f ~-146828 Based on our analysis of a randomly selected statistical sample, we estimate that 3,219 of the items required inventory record adJust- ment. We found that 49 percent of the required adjustments were either not made or were made incorrectly due to iuaceurate physical counts or erroneous reconciliation of major stock differences. The inaccurate counts and erroneous reconciliations occurred because warehousemen and inventory managers did not comply w5th prescribed procedures. Warehousemen did not identify stock received and issued during the physical inventory cycle for items being inven- toried. Tnventory managers frequently made incorrect assumptions as to the causes of major stock differences In order to reconcile the differences and avoid ma,jor physical tiventory adjustments. These conditions are illustrated below. On August 7, 1970, au inventory record cut-off balance of 606 units of F'SN &2C-Kl~-5lBALS was established for physical inventory comparison purposes at the San Antonio Air Materfel Area. On August 14, 1970, a physioal count showed 1,148 uuits on hand. As a result, the inventory record balance for this item was increased by 542 units. Our research showed that 522 units were issued after the inventory cut-off date and prior to the count date. Therefore, the 522 units should have been added to the couut quantity. Also, 1,148 units received after the cut-off date were included In the physical couut and should, therefore, have been deducted from the couut quantity. Thus, the adjusted couut quantity should have been 522 units, and the inventory record balance should have been decreased by 84 units rather than increased by 542 units. In July 1970, a physical inventory of FSN 284o-g5+828~ at the Oklahma City Air Materiel Area revealed a stock shortage of 418 units valued at $64,372. The inventory manager's re- search of this shortage disclosed that the inventory record balance for this item was decreased by 1,134 units and subse- quently increased by 403 units on the same day in October 1969 as a result of a stock issue and stock denial, respectively. The inventory manager assumed that the stock denial of 403 units was erroneous and that 1,134 units were actually issued. As a result a shortage of 403 units was considered reconciled and a physical inventory loss adjustmen% of 15 units valued at @,a0 was made to the inventory record. Our research of shipment records showed that the inventory manager's assmp- tion was incorrect. We found that ouly 73l units were actually -2.. . l . B-146828 issued because the remaining quantity of 403 units could not be located in the warehouse. Therefore, we believe that a physical inventory loss adjustment of 418 units valued at $64,372 should have been made. On the basis of our tests, we estimate that the inventory records for 1,563 items, or 34 percent of the items inventoried, still contained stock shortages and averages, valued at about $8.8 million, subsequent to physical inventory and 5nventory record adjustment actions. WALL-TO-WALLPRYSIGALIIMCNTOmS This type of physical inventory involves a complete count of classified and pilferable tyRe items and other items comprising designated Federal supply classes. Wall-to-wall physical inven- tories accounted for 81 percent of all regularly scheduled phys- ical inventories taken in fiscal year 1970. We made a limited evaluation of a wall-to-wall physical inven- tory taken in May 1970 at the San Antonio Air Haterie Area. This physical inventory bvolved a count of 19,257 items (radio and television communication equipment, sound recording equipment, etc.) with recorded stock valued at $225 million. Our tests showed that required inventory record adjustments were not made or were made incorrectly for 16 of 20 randomly se- lected items due to inaccurate counts (similar to example on page 2) and erroneous reconciliations. For example, a physical count of one item disclosed a shortage of 129 units valued at $72,756. The inventory record for this item was not adjusted because a re- count supposedly reconciled or eliminated the shortage disclosed by the first count. However, we found that the recount revealed a shortage of 190 units valued at $lO7,160. Sm!l?ISTlCAL SAME'LIRGPRYSIC!AL INVENTORIES With the exception of those Item classifications mentioned in the above paragraphs, air materiel areas are required to evaluate the inventory record accuracy for all stocked items on a statis- tical sampling basis over a 2-year cycle. l For statistical sampling purposes, items are grouped into designated inventory lots. A physical count is made of a repre- sentative sample of items, normally 7'5, selected from each lot. ~-146828 If no more than four of the sample items are found to have major errors (recorded stock locations but no recorded stock quantities, or vice versa; and stock differences valued at $200 or over), all items in the lot are considered to have acceptable inventory record accuracy and no further action is required. If more than four items have major errors, a physical count is made for either a larger sample of items or for all items in the lot. In fiscal year 190, the three air materiel areas reviewed by us statistically evaluated the overall inventory record accuracy for 30 lots, consisting of about 411,000 items. The statistical sampling results reported to higher management levels indicated that all 30 lots had acceptable inventory record accuracy. However, oup limited tests indicate that the reported statistical sampling accuracy results . were of questionable validity. At the Sacramento and San Antonio Air Materiel Areas, we found that the sample selection process was biased by the exclusion of items with recorded stock locations but no recorded stock quantities. Also at the San Antonio Air Materiel Area, we found that documents evidencing recent stock receipts were falsely prepared for the pur- pose of reconciling major inventory overages for sample items. This was done to permit the reporting of acceptable sample inventory accuracy for the effected lot of items, thus avoiding the possible necessity of having to take a physical count of all items in the lot (approximately ll,OOO items). ADVERSEEFFECTSOF FACULTY PHYSICALINVENTORYPRACTICES In addition to performing hundreds of thousands of regularly scheduled physical inventories annually to maintain accurate inven- tory records for all stocked items, air materiel areas have also taken about 5s,OOO special or unscheduled physical inventories yearly at an estimated annual cost of $2.6 million. These special inventories were taken as emergency measures to resolve inventory errors not previously corrected by regular physical inventories. We believe that a substantial number of these special in- ventories were necessitated by inventory errors which were either caused by or should have been corrected by prior physical inven- tories. In this respect, we found a number of instances in which -4- B-1&828 items were repeatedly subjected over a short timespan to a mixture of scheduled and special physical inventories. These inventorfes were taken to correct errors, some of which were caused by the physical inventories themselves. For example, one item was in- ventor-fed 26 times (mixture of regular and special) in fiscal year 1970 l Some of these inventories were taken only a few days apart and resulted in offsetting gain and loss adjustments, indicating that the original adjustients were made in error. The occurrence of inaccurate physical counts, erroneous recon- ciliation of major inventory differences, and Invalid physical in- ventory adjustments were suffictently frequent, in our optiion, to impair the effectiveness and economy of the Air Force's physioal inventory program. We believe our findings show that prescribed physical inventory procedures are not well understood or followed by warehousemen and inventory managers. Also, existing physical inventory controls do not ensure cqliance with prescribed proce- dures. We believe that improvements in physical inventory controls will result in a significant increase in inventory record accuracy and a substantial reduction in the physical inventory workload. We are, therefore, reccenmend3ngthat supply personnel be provided with more frequent and comprehensive instruction on physics.1 inventory procedures and techniques. Also, we recommend that more rigid controls be instituted to enforce compliance with prescribed pro- cedures. Finally, we recommend that increased internal audit covemge be given to this area. These reccxumendations are subject to the provisions of Section 236 of the Legislative Reorganization Act of 1970. We will appreciate receiving copies of the statements you furnish the specified committees in accordance with these provisions. If you desire, we will be glad to discuss these matters in greater detail with you or your staff. Copies of this letter are being sent to the Secretary of Defense. Sinc.erely yours, i gR L ‘ Director % The Honorable The Secretary of the Air Force -5- a
Follow-Up Review of the Effectiveness and Economy of the Air Force's Physical Inventory Program for Supplies and Equipment Stocked at Air Force Air Materiel Areas
Published by the Government Accountability Office on 1971-09-28.
Below is a raw (and likely hideous) rendition of the original report. (PDF)