oversight

Financial Management: Briefing on the Federal Aviation Administration's Inventory Accountability

Published by the Government Accountability Office on 1999-03-03.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States

GAO   General Accounting Office
      Washington, D.C. 20548

      Accounting and Information
      Management Division

      B-28 1176

      March 3,1999

      The Honorable John R. Kasich
      Chairman, Committee on the Budget
      House of Representatives

      Subject:       Financial Management: Briefing on the Federal Aviation Administration’s
                     Inventory Accountability


      Dear Mr. Chairman:

      This letter responds to your request that we determine (1) whether the Federal Aviation
      Administration’s (FAA) systems can accurately account for and control inventory quantities
      and (2) how FAA identifies and manages excess inventory quantities. This letter summarizes
      the information provided during a February 16, 1999, briefing to your staff on these two
      areas. The briefing slides are enclosed.

      FAA’s inventory consists primarily of items centrally warehoused at the Mike Monroney
      Aeronautical Center (Logistics Center) in Oklahoma City, Oklahoma, and at field spare sites
      at over 34,000 locations throughout the United States. Many of these field spare sites are at
      remote locations.

      Based on our analysis of Logistics Center inventory test counts of a statistical sample of
      inventory, we concluded that the Logistics Center’s recorded inventory quantities were
      generally reasonable as of September 30, 1998. In addition, based on our review of Logistics
      Center inventory system controls, we concluded that the inventory system provides a
      reasonable basis for tracking and controlling inventory.

      We concluded from analyzing the Department of Transportation (DOT) OIG’s field spares
      inventory workpapers that the accuracy of field spares inventory quantities, and the ability of
      the system to track and control field spares is uncertain. The OIG found numerous errors in
      inventory recordkeepin g, and procedures and controls were not fully implemented. FAA is in
      the process of implementing new procedures for managing field spares inventory. FAA is
      also planning a complete field spares inventory count for fiscal year 1999.

      We found that FAA has established processes for identifying and managing excess inventory.
      The Logistics Center processes are in place; however, processes in the field were not fully
      implemented as of September 30, 1998.




                                   GAO/AIMD-99-98R       Briefing on FAA Inventory Accountability
B-281176




In January 1999, we designated FAA financial management as a high-risk area. Since 1990,
we have periodically reported on government operations identified as high risk because of
their greater vulnerabilities to waste, fraud, abuse, and mismanagement. Our high-risk status
reports are now provided at the start of each new Congress and the latest, High-Risk Series:
An Undate (January 1999, GAO/IN-99-l),         was recently issued. Over time, as high-risk
operations have been corrected, we have removed those improved areas from the list. Also,
as other risks have emerged, we have added new ones to keep the Congress current on
financial weaknesses needing more management attention. The FAA’s high-risk designation
means we will be giving sustained attention to monitoring its efforts to achieve financial
accountability.

We conducted our work from August 1998 through January 1999 in accordance with
generally accepted government auditing standards. We requested comments on our draft
briefing slides from the FAA and DOT Office of Inspector General. We received some
clarifying comments that we incorporated into our slides as appropriate.

We are sending copies of this letter to the Ranking Minority Member of your Committee, the
Secretary of Transportation, the DOT Chief Financial Officer, the FAA Administrator, the
Director of the Office of Management and Budget, and other interested parties. Copies will
also be made available to others upon request.

If you have any questions about this letter or the earlier briefing, please contact me at (202)
512-9508 or John Fretwell, Assistant Director, at (202) 512-9382.

Sincerely yours,



Linda M. Calbom
Director, Resources, Community,
  and Economic Development, Accounting
  and Financial Management Issues


Enclosure




(913850)



Page 2                         GAO/AIMD-99-98R        Briefing on FAA Inventory Accountability
a0   Accounting and Information
     Management Division

     FEDERAL AVIATION ADMINISTRATION

     inventory Accountability Review
     Status Briefing for the House Budget Committee

     February 16, 1999
GAD Contents

       l   Objectives
       l   Background
   l       Logistics Center Review
   l       Field Spares Review
   l       Excess Inventory Review
   l       Actions Being Taken by FAA
    GJQ* Objectives

        l   Determine whether FAA’s systems can
            accurately account for and control
            inventory quantities
        l   Determine how FAA identifies and
            manages excess inventory quantities




3
w   Background--FY 1997 Financial
    Statement Audit Results
     l   OIG unable to issue an opinion due in
         part to significant deficiencies in
         accounting for inventory and related
         property
     l   OIG concluded that there were
         significant inconsistencies in
         inventory counting procedures and
         unexplained variances in inventory
         amounts.
a*     Background--Recorded                        Inventory
       Amounts at September 30, 1998
                                               Dollars
     Locations                              (Millions)        Percent

     Logistics Center                            $543           59.7

     Field spare sites                            338           37.2

     Aviation sites                                 28            31.

     Total                                       $909          100.0


       Note: The total amount presented represents balances before
             valuation reductions at year end for items to be repaired
             and for excess inventory.
w   Background--Inventory             Overview
    Acquisition Activities

                        Acquisition


        Svstems
      Devhopment                       Field Sites Spares
      Contractors   ,




                                             Center
GA!!* Background-Inventory Overview
      Exchange & Repair (E&R) Spares Activity
                                  Storage
                                 Locations

                                             Transfers



                                             Transfers




   Logistics             Field               Transfers
    Center               Site




                                             Transfers
m*            Background--Field Spares in FAA
              Regions and Centers




                                                                      Technical Cenler
                  W’
                  Pacific
                         estern
                              I       r---l
                  Region
                  §L38 mil.   1   I               I
                                  I
                                                  I
PO                                            I

                                                        l       9 regions    and 2 centers

                                                        . Over 800 siles

                                                        . Over 34,000 slorage
                                                          locallons

                                                            l   185,000 units

                                                      ‘1 totaling           $338 million




Source: FAA
GAD Logistics Center Review--
    Scope and Methodology
      l   Reviewed centralized warehouse
          inventory at Mike Monroney
          Aeronautical Center in Oklahoma
          City, Oklahoma
      0 Test counted statistical sample of
        i,nventory
      l Analyzed results

      l Projected errors

      l Assessed systems controls over

        quantities
     MO Logistics Center Review-
        Inventory Accountability

                     Test Count Results
                                         Units     Dollars
                                  (Thousands)    (Millions)

              Total tested            2J26.7     $145.72
              Overstatements             40.0       $1.58
              Understatements               .4      $1.62
              Differences-gross          40.4       $3.20
              Gross percentage
                 difference              1.9%        2.2%




10
     GAO Logistics Center Review-
         Inventory Accountability

               Examples of More Significant
               Dollar Differences

     Exception            Record    Actual     Quantity       Dollar difference
     item                quantity    count   difference           (Thousands)

      Rotary joint             72       66           (6)                 ($269)

      Digital data set         16       17                1                  55

     VHF receiver            746      834                                   269




11
     w   Logistics Center Review-
         Inventory Accountability
         l       Reasons for Test Count Differences
             l    7%   - Commingling similar items
             l   9%    - Timing of processing
                         documents
             l   22% - Prior erroneous adjustments
             l   62% - Unknown




12
     w   Logistics Center Review-
         Inventory Accountability

         Test Count Conclusions

          l    Dollar effect of projected quantity
               differences not significant to FAA’s
               financial statements
          l    Some differences warrant follow-up
              l high dollar/low quantity

              l unknown reasons




13
     MO   Logistics Center Review-
          inventory Accountability
          Supplemental Tests of Limited Items

           l   Unknown reasons category
               eliminated

           l   Reasons for differences were similar
               to original test counts




14
     GAO Logistics Center Review-
         Inventory Systems Controls

          Major Systems Capabilities

           l    Master inventory inquiry record
           l    Transaction history record
               l Receipts

               l Issues

               0 Adjustments
           l    Excess inventory records



15
     MI   Logistics Center Review-
          Inventory Systems Controls
          Assessment Results

          Controls over quantities generally
          appear to be effective; however, minor
          control weaknesses were identified
           l counting items received

           l receiving documentation

           . delays in recording receipts
           l data entry




16
     MI   Logistics Center Review-
          Inventory Systems Controls
          Conclusions

           l   Test counts and control assessment
               indicate that recorded inventory
               quantities are generally reasonable
               as of September 30, 1998

           l   Inventory system provides a
               reasonable basis for tracking and
               controlling inventory

17
     GAQ Field Spares Review-
         Scope and Methodology

             l   Relied on OIG inventory test counts for
                 14 sites
             l   Gathered information from FAA officials
                 in Headquarters and Logistics Center
         l       Reviewed     OIG   inventory workpapers
         0 Analyzed results
         l       Assessed systems controls over
                 quantities

18
     GLQ!OField Spares Review-
          Inventory Accountability

                       Summary of OIG Tests
                                                    Value        Quantity
                                        Sites   (Millions)   (Thousands)

           Total field spares            834        $322              153
           Sites with completed
             physical inventory          354           63              34
             Sites tested                  14          14               7
             Sites with test count
              differences                   9            9              5
          Note: OIG judgmentally selected items to test at each
                site based on an April 1998 site listing


19
GA* Field Spares Review-
    Inventory Accountability

     Examples of OIG Test Count Differences
                             Quantity       Net          Net
                 Quantity    per OIG     quantity     Value of
                per record    count     difference   difference



     Site   A      27           6          (21)      ($67,183)

     Site   B      41          51          IO             3,992
     Site   C       4          13           9             4,686
     Site   D       0          65          65         105,747
c\O
     GAD Field Spares Review--
         Inventory Accountability
          Type of Difference
           l New parts not recorded

           l Recorded items not located

          Reasons for Differences
           a Inventory recordkeeping not a high

             priority
           a Count procedures not available or not

             disseminated
           0 Lack of training in taking physical
             inventory
           a Records not updated timely


22
     w   Field Spares Review-
         Inventory Systems Controls
         Major Systems Capabilities

          l   Inventory by location, quantity on
              hand, description of item, and system
              item supports
          l   Physical inventory history
          l   3-year demand history to determine
              excess



23
     G+Q* Field Spares Review-
          Inventory Systems Controls
          Assessment results

           . Systems and controls had not been
              fully implemented as of
              September 30, 1998
             l Controls not established over data

                input
             l Receipted inventory not always

                recorded


24
     MID Field Spares Review--
         Inventory Systems Controls
          Conclusion

          Field spares inventory accuracy and the
          ability of the system to track and control
          inventory is uncertain.




25
     GA* Excess Inventory Review-
         Scope and Methodology

          l   Reviewed FAA procedures for
              identifying and managing excess
              quantities
          l   Reviewed OIG workpapers on
              excess field spares
          l   Made limited observations of excess
              inventory at Logistics Center




26
     GAO Excess Inventory Review

         l       Logistics Center Excess Procedures
             l    Process is structured
             l    Process uses monthly on-hand arid
                  usage data
             l    System automatically identifies
                  potential excesses which item
                  managers research and resolve
         l       Excess amount of $26 million identified
                 by FAA as of September 30, 1998
27
     m*   Excess Inventory Review

            l     Examples of Logistics Center excess
                  items
                 l Cable--about    1 million
                    feet--$900,000
                l Outdated electronic sensing

                    devices--over 1,300~-$I .3 million
                l Circuit card assemblies--over

                    120~-$I 23,000
                l Obsolete printers--over    1,400~-
                    $2.9 million

28
     m*   Excess Inventory Review

           l    Field Spares Excess Procedures
               l Biennial review by location--over

                 3-year demand considered excess
               l Excess review done when systems

                decommissioned
          l    Procedures not fully implemented as
               of September 30, 1998
          l    Potential excesses identified by OK3
               and FAA personnel in FY 1998, but
               not quantified

29
     MI       Actions Being Taken by FAA to
              improve Inventory Management
          l       For Logistics Center FAA is developing
              l    a physical inventory integrity guide
              l    a long term excess inventory plan
              l    procedures to check excess stock
                   records before procuring new stock
              l    plans for a bar coding system




30
     m*       Actions Being Taken by FAA to
              Improve Inventory Management
          l   For Field Spares Inventory, FAA is
               implementing new procedures for
               managing field spares
               developing a perpetual inventory
               system
               developing a bar coding system
               planning a complete physical inventory
               for FY 1999

31
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