oversight

Defense Inventory: Property Being Shipped to Disposal Is Not Properly Controlled

Published by the Government Accountability Office on 1999-07-01.

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

                  United States General Accounting Office

GAO               Report to the Chairman, Committee on
                  Armed Services, House of
                  Representatives


July 1999
                  DEFENSE
                  INVENTORY

                  Property Being
                  Shipped to Disposal Is
                  Not Properly
                  Controlled




GAO/NSIAD-99-84
United States General Accounting Office                                                                National Security and
Washington, D.C. 20548                                                                          International Affairs Division



                                    B-281629                                                                                         Letter

                                    July 1, 1999

                                    The Honorable Floyd D. Spence
                                    Chairman, Committee on Armed Services
                                    House of Representatives

                                    Dear Mr. Chairman:

                                    As requested, we reviewed the Department of Defense’s (DOD)
                                    management procedures for controlling excess weapon system parts,
                                    components, equipment, and other inventory items that are being shipped
                                    to disposal.1 You asked that we determine if this property is vulnerable to
                                    waste, abuse, or loss. During fiscal year 1998, the military services shipped
                                    millions of items to disposal with a reported acquisition value totaling over
                                    $20 billion. This report discusses (1) types and amounts of excess property
                                    that is reported as not received2 when shipped to disposal and (2)
                                    weaknesses in management controls over excess property that is being
                                    shipped to disposal that makes it vulnerable to waste, abuse, or loss. This
                                    report focuses on property that DOD considers sensitive or pilferable.
                                    Sensitive property is comprised of military parts and equipment that have
                                    capabilities and technologies involving weapons, national security, or
                                    military advantages. Pilferable property has no military capability or
                                    technology implications but is especially subject to theft because it can be
                                    readily resold or converted to personal use.

                                    This is the third in a series of reports responding to your request. We
                                    previously reported on DOD’s needless destruction of certain usable
                                    aircraft parts and on inappropriate sales of parts with military technology
                                    and flight safety risks.3 Our previous reports are summarized in appendix I.
                                    This report is also part of our continuing effort to address defense




                                    1
                                     DOD refers to property being shipped from one DOD activity to another as in-transit property.
                                    2
                                     DOD refers to shipped property that was not recorded as received as unaccounted for property.
                                    3
                                     Defense Inventory: Management of Surplus Usable Aircraft Parts Can Be Improved (GAO/NSIAD-98-7,
                                    Oct. 2, 1997) and Defense Inventory: Action Needed to Avoid Inappropriate Sales of Surplus Parts
                                    (GAO/NSIAD-98-182, Aug. 3, 1998).




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                   inventory management as a high-risk area4 because of vulnerabilities to
                   waste, fraud, abuse, and mismanagement. The scope and methodology of
                   our work are described in appendix II.



Results in Brief   DOD has had problems accounting for excess property that is being
                   shipped to disposal and has developed comprehensive procedures to track
                   the property. However, the procedures are not working effectively, leaving
                   property vulnerable to loss or theft. In 1998, the Defense Logistics Support
                   Command reported accountability over property being shipped to disposal
                   as a material weakness because there was little enforcement or use of
                   appropriate control procedures. DOD reports that during fiscal year 1998,
                   property valued at about $2.7 billion was shipped to disposal but was not
                   recorded as received by disposal offices. Our analysis of DOD’s data for the
                   12-month period ending March 31, 1998, shows that over one-half of the
                   dollar value of property that was reported as not received involved items
                   that require special handling such as communications equipment, aircraft
                   components, and gun parts.

                   DOD does not consider all property reported as not received as lost or
                   stolen. DOD officials stated that in many instances the property in question
                   is received and disposed of properly but is incorrectly reported as not
                   received because the systems used to track the property are not reliable.
                   However, DOD does not know the status of property being shipped to
                   disposal because of the questionable accuracy of data and lack of
                   adherence to control procedures. The reports used to manage and track
                   this property are not accurate because of computer system programming
                   and data input errors. For example, we identified 30 shipments that were
                   correctly entered into a service’s information system but, due to a
                   programming or data transmission problem, were not entered into the DOD
                   In-transit Accountability System. Consequently, the reports incorrectly
                   identified some property as not received, did not recognize large numbers
                   of disposal transactions reported by the services, and contained duplicate
                   information. Also, control procedures are not being followed because


                   4
                    In 1990, we began a special effort to review and report on the federal program areas we identified as
                   high risk because of vulnerabilities to waste, fraud, abuse, and mismanagement. This effort, which was
                   supported by the Senate Committee on Government Affairs and the House Committee on Government
                   Reform, brought a much needed focus on problems that were costing the government billions of
                   dollars. We identified DOD’s inventory management as a high-risk area at that time because levels of
                   unneeded inventory were too high and systems for determining inventory requirements were
                   inadequate.




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             service and disposal office personnel either are not fully aware of the
             procedures or do not always understand them. For example, service and
             disposal office personnel did not always know how to research and
             investigate discrepancies between what was shipped to disposal and what
             was received. We reviewed 191 sample shipments of sensitive military
             property reported as not received. No investigations had been made for any
             of these shipments. After further review, we were able to satisfactorily
             determine the status of 114 of these shipments (60 percent). We found that
             disposal offices received the shipments but, due to a backlog of property
             waiting to be processed, had not recorded the receipts. However, we were
             unable to trace the actual disposition of the remaining 77 shipments
             (40 percent). These included sensitive items such as a wiring assembly
             used for encrypted electronic communications, optical magnifying devices
             for 25-millimeter guns, and assorted components for the Bradley fighting
             vehicle and other weapon systems.

             We are recommending among other things that the Secretary of Defense
             take actions to correct information system errors and provide training on
             control procedures. These actions should be incorporated into a
             congressionally required plan to improve controls over items shipped
             between DOD activities.



Background   The Federal Property and Administrative Services Act of 1949, as amended,
             places responsibility for the disposition of government real and personal
             property with the General Services Administration. That agency delegated
             disposal of DOD personal property to the Secretary of Defense, who in turn
             delegated it to the Defense Logistics Agency (DLA). The Office of the
             Deputy Under Secretary of Defense (Logistics) provides overall guidance
             for disposing of property. The military services are responsible for
             determining if certain property they hold exceeds their needs. Once they do
             so, the Defense Reutilization and Marketing Service (DRMS), a component
             of DLA, carries out disposal functions. Excess property is generally sent to
             1 of 113 disposal offices5 for redistribution within DOD or transfer to other
             federal agencies. Property that is not redistributed or transferred is
             designated as surplus and can be donated to eligible entities such as state
             and local governments among many others. The property that remains after
             this process may be sold to the general public. Disposal offices are not


             5
              DRMS operates 85 domestic disposal offices and 28 international disposal offices.




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                             authorized to handle weapons, classified material, drugs, firearms,
                             ammunitions, and explosives. The military services dispose of these items.

                             DOD provides guidance for establishing an internal control system to
                             safeguard property that is being shipped. The key management information
                             system supporting these controls is the In-transit Accountability System.
                             Maintaining control and accountability over excess property being shipped
                             is important for two key reasons. First, the property includes sensitive
                             military parts and equipment that need to be safeguarded. Second, the
                             property is valuable and may include pilferable items, such as photographic
                             equipment and supplies, hand tools, shop equipment, and clothing. During
                             fiscal year 1998, the military services shipped to disposal millions of items
                             with a total reported acquisition value exceeding $20 billion.6


Inadequate Accountability    DOD’s problems with accountability over property being shipped to
Is a Long-standing Problem   disposal date back to the 1970s. In response, DOD over time developed
                             comprehensive procedures to control that property. However, audits
                             continued to find that these procedures were not effective. For example,
                             we reported in 1991 that some procedures for such shipments had been
                             discontinued.7 At the time, DOD agreed that control procedures were
                             ineffective but stated that it planned actions to improve controls.

                             In its annual Federal Managers’ Financial Integrity Act report for fiscal year
                             1995, DRMS identified accountability over property shipped to disposal as
                             a material weakness.8 In 1996, DRMS reported that use of the In-transit
                             Accountability System would provide control over the shipment of excess
                             property and that accountability was no longer a material weakness.

                             6
                              Excess property may be valued at salvage prices (3.4 percent of latest acquisition cost for fiscal year
                             1998). However, the standard price (i.e., latest acquisition cost and a surcharge covering the costs to
                             operate the supply system) is used throughout DOD in its logistics systems. Therefore, throughout the
                             remainder of this report, the standard price is the value associated with inventory being shipped to
                             disposal.
                             7
                              Property Disposal: Controls Needed to Preclude DOD Release of Unsafe Surplus M151 Jeeps
                             (GAO/NSIAD-91-10, Jan. 2, 1991).
                             8
                              The Federal Managers’ Financial Integrity Act of 1982 requires that executive agencies establish and
                             maintain systems of internal controls that conform to standards established by the Comptroller General
                             of the United States. The act also requires that agencies evaluate these controls periodically and report
                             to the President and Congress annually on their status. These controls must provide reasonable
                             assurance (i.e., a satisfactory level of confidence, given considerations of costs, benefits, and risks) that
                             resources are accounted for. When the head of the agency decides that the internal controls do not
                             comply with established standards, the agency's annual report must identify weaknesses and describe
                             how and when they will be corrected.




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                       However, in 1998, the Defense Logistics Support Command reported
                       accountability over the shipment of excess property as a material
                       weakness because there had been little enforcement or use of the In-transit
                       Accountability System.



Amounts and Types of   DOD reports of shipped property for fiscal years 1997 and 1998 indicate
                       unacceptably large amounts of property identified as not received at
Excess Property        disposal offices. For fiscal year 1997, DOD reported that the services
Reported as Not        shipped excess property valued at about $19.9 billion to disposal.
                       According to the report, property worth about $2.2 billion (11 percent) was
Received               not recorded as received by disposal offices. For fiscal year 1998, DOD
                       reported that the services shipped excess property valued at about $20.5
                       billion to disposal and that property worth about $2.7 billion (13 percent)
                       was not recorded as received by disposal offices (see table 1).



                       Table 1: Value of Property Reported by DOD as Not Received (fiscal year 1998)

                       Dollars in millions
                                                         Total sent to     Amount not         Percent not
                       DOD component                         disposal        received           received
                       Air Force                              $6,151.3          $209.9                  3.4
                       Army                                    6,250.4         1,675.5                 26.8
                       Navya                                   5,242.5           676.2                 12.9
                       Other DOD                               2,867.6           104.5                  3.6
                       Total                                 $20,511.8        $2,666.1                 13.0
                       a
                       Includes Marine Corps.
                       Source: DOD In-transit Accountability System.


                       We analyzed In-transit Accountability System data for the 12-month period
                       ending March 31, 1998. About $1.8 billion of the property shipped to
                       disposal by the services was not recorded as received. Table 2 shows the
                       categories, number of items, and dollar value of property reported as not
                       received.




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                         Table 2: Categories of Property Reported by DOD as Not Received (12 months
                         ending Mar. 31, 1998)

                         Dollars in millions
                         Category                      Number of shipments         Number of items            Value
                         Sensitive military items                         16,656            283,171          $339.0
                         Pilferable items                                141,197          3,068,674           692.5
                         Nonsensitive items                              175,453         26,009,763           746.1
                         Total                                           333,306         29,361,608         $1,777.6
                         Source: DOD In-transit Accountability System.


                         Over one-half of the dollar value of the shipments in table 2 involved
                         pilferable items and sensitive military items comprised of technologies,
                         capabilities, and weapons that should not be made available to the public.
                         Our review focused on excess sensitive and pilferable items. Nonsensitive
                         items were excluded from our review because DRMS has an initiative
                         related to disposing of excess nonsensitive property that is designed to
                         reduce the number of unmatched transactions in the In-transit
                         Accountability System. DRMS and service officials told us that In-transit
                         Accountability System reports of property not received do not
                         automatically equate to lost or stolen property. They said that in many
                         instances, the property was incorrectly identified as not received by the
                         In-transit Accountability System. However, DOD’s management controls do
                         not provide sufficient confidence that property is actually received.



Management Control       DOD does not know the status of property being shipped to disposal
                         because of the questionable accuracy of data and lack of adherence to
Weaknesses Leave         control procedures. The reports used to manage and track this property are
Property Vulnerable to   not accurate because of computer system programming and data input
                         errors. Using judgmentally selected samples of items, we identified
Loss or Undetected       weaknesses in the In-transit Accountability System relating to
Theft                    (1) inaccuracies in the In-transit Accountability System data and (2) failure
                         to determine what happened to items that were shipped but not reported as
                         received. These conditions leave property vulnerable to loss or undetected
                         theft. The problems were caused primarily by programming and data input
                         errors and personnel not following or being familiar with required
                         procedures.




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Shipment Control            Military procedures require that excess property that is sensitive,
Procedures                  pilferable, or more than $800 in value be controlled from the time it leaves a
                            military unit's shipping activity until it arrives at a disposal office.
                            Implementing the controls is a shared responsibility. The military units are
                            supposed to provide information to the In-transit Accountability System
                            when the property is shipped. The disposal office provides information to
                            the In-transit Accountability System when the property is received. The
                            system then compares information on the property received from the
                            disposal office with information received from the military unit. If there is a
                            discrepancy, the military unit is notified. The unit is supposed to research
                            the discrepancy, coordinate with the disposal office, document its research,
                            and provide information on the results to the In-transit Accountability
                            System (see app. III for more detail).

                            Procedures also require disposal offices, upon receiving property, to
                            provide information to the In-transit Accountability System on the type,
                            quantity, and date of receipt. To reduce the cost, handling, and
                            administrative time needed to process property through the disposal
                            system, the services or disposal offices can accumulate nonsensitive
                            property under $800 in value together as a batch lot. Batch-lotted property
                            is not reported to the In-transit Accountability System and, therefore,
                            cannot be accounted for under the shipment control procedures. The
                            procedures, however, do not allow property considered pilferable,
                            sensitive, or over $800 in value to be placed in batch lots. Shipments of
                            such property must be reported to the In-transit Accountability System. All
                            property in the shipments we reviewed were considered sensitive or
                            pilferable.


Inaccurate Reporting Data   DRMS’ and services’ automated systems used to track excess property
Input and System Problems   shipped to disposal had programming and data input problems that caused
                            the In-transit Accountability System reports to contain inaccurate
                            information. Because of these problems, accountability reports did not
                            recognize large numbers of disposal transactions reported by the services
                            and contained duplicate or inaccurate information. Also, the Navy's
                            information system was not programmed to forward discrepancy notices to
                            shipping activities for review. This situation reduces the value of reports
                            generated as a management tool, thus increasing the vulnerability to
                            undetected property loss.

                            One type of discrepancy recorded by the In-transit Accountability System
                            involved property that was recorded as received at the disposal offices, but


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that was not recorded as having been shipped. This situation occurred
primarily because transactions processed by the services’ information
systems did not show up in the In-transit Accountability System. We
reviewed a selection of 33 shipments that the In-transit Accountability
System identified as received by the Oklahoma City disposal office but that
had no corresponding shipment record. Of these shipments, 30 had been
correctly entered into the Air Force’s information system but had not been
recorded in the In-transit Accountability System. DRMS personnel were
investigating whether the cause of the problem was programming or data
transmission.

Records showed that the other three shipments were manually processed
and not entered into either the military service’s information system or the
In-transit Accountability System. The shipments involved Army gun
barrels. The unit typed the shipping documents and did not enter the
shipments into an information system or report the transactions to the
In-transit Accountability System. Procedures require units that do not have
computer connections to the In-transit Accountability System to either
arrange for shipments to be processed by a unit with those capabilities or
to mail a copy of the shipment documents for input into the system. The
personnel lacked training and did not know they were supposed to provide
data to the information system. Officials at the four disposal offices we
visited stated that they routinely received and processed excess property
accompanied by handwritten or typed shipping documents.

The In-transit Accountability System also contained duplicate information.
For example, shipments to the Texarkana, Texas, disposal office had been
recorded twice. The system reported the shipments both as sent but not
received and as received but not sent. The system created two
discrepancies for the same shipment because service and disposal office
personnel entered different stock numbers for the same shipment.
According to disposal office officials, this discrepancy occurs frequently on
shipments for which the military services have not obtained national stock
numbers9 and to which they assigned local stock numbers. Since the
disposal office's system cannot recognize local stock numbers, personnel
there routinely enter a national stock number that closely resembles a
description of the item being shipped. But because local and national stock


9
 National stock number refers to a 13-digit stock number used by DOD and other agencies to identify
items of supply. It consists of a four-digit federal supply class that designates the general commodity
grouping of the item and a nine-digit item identification number that differentiates one supply item from
another.




Page 8                                                         GAO/NSIAD-99-84 Defense Inventory
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                                numbers are different, the system cannot match the shipment with the
                                receipt, and a double discrepancy occurs.

                                In addition, Navy information systems were not programmed to forward
                                discrepancy notices for review by shipping activities. Consequently, items
                                were not being researched. The In-transit Accountability System
                                electronically notifies the Naval Inventory Control Point system that a
                                shipment to a disposal office has not been received. The Navy system
                                searches for a corresponding shipment transaction and informs the
                                accountability system that the shipment has been made. Once this happens,
                                the discrepancy notice is cleared from the Navy's system. However,
                                regulations require verification of receipts and research of discrepancies.
                                The Navy is working to correct this system error.

Disposal Office Personnel Did   We also noted that In-transit Accountability System reports were
Not Correctly Record Receipts   inaccurate and control procedures were not always properly implemented
                                because receiving personnel at the disposal offices either were not familiar
                                with receipt recording procedures or did not follow them. Specifically, we
                                found the following problems:

                                • At the Texarkana disposal office we physically inspected 33 batch lots
                                  and found pilferable property in 5 of them. The items were a firearms
                                  part, hand tools, a typewriter, and a wrench set. At the Oklahoma City
                                  disposal office, 4 of the 54 batch lots we inspected included pilferable
                                  property. We also identified a likely case of theft involving excess
                                  pilferable property. In June 1998, the Air Force shipped a camera lens,
                                  valued at $424, to the Oklahoma City disposal office. Disposal office
                                  personnel did not enter receipt of the lens into the tracking system.
                                  Instead, the lens was placed together with office supplies in a batch lot.
                                  Our inspection of the batch lot showed that the camera lens was
                                  missing. After a comprehensive search, disposal office personnel
                                  concluded that the camera lens had been stolen.
                                • At the Philadelphia disposal office, a military sensitive item, a
                                  night-vision image intensifier, was among 26 batch lots we inspected.
                                  Disposal office personnel stated that they checked the demilitarization
                                  codes and acquisition dollar value of property before it is placed in
                                  batch lots. However, they did not know that the procedures also
                                  required a check for pilferable and sensitive property.

                                Based on our discussions with DRMS officials, DRMS sent a memorandum
                                to all disposal offices addressing our findings. The memorandum directs
                                the disposal offices to comply with requirements covering batch lots and



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                             requires managers to periodically review the requirements with disposal
                             office employees. In addition, the officials revised the DRMS’ operational
                             compliance guide to include a periodic self-assessment by disposal offices
                             to ensure that pilferable and sensitive property is not included in batch lots.
                             Following this action, we reviewed 106 batch lots at the San Diego disposal
                             office and found no discrepancies.


Failure to Follow            Our review of 191 judgmentally selected shipments showed that the
Procedures Results in Loss   services and disposal offices did not follow procedures for researching
                             discrepancies between what was reported as sent to disposal and what was
of Accountability
                             received. Service and disposal office personnel were not adequately trained
                             and did not always understand or were not fully aware of the procedures.
                             Consequently, service and disposal personnel did not know how to
                             research and investigate discrepancies. As with the reporting problems,
                             this situation made property vulnerable to loss. Procedures require that the
                             sending unit research such discrepancies. If the unit and the disposal office
                             cannot resolve the discrepancy, the unit is required to alert its security
                             office or criminal investigators.10 If a unit does not respond to a
                             discrepancy report after two notices, DRMS takes no further action but
                             leaves the discrepancy on its records for 2 years.

                             Although the property we selected for review had military capabilities,
                             technologies, or value that warranted protecting, the discrepancies were
                             not being researched and investigated. We researched available records
                             and found that 114 shipments had been properly disposed. In most cases,
                             we found that the disposal offices had received the shipments but did not
                             record the receipts in a timely manner. The In-transit Accountability
                             System automatically reports a discrepancy if property is not recorded as
                             received within 60 days after being shipped. Officials pointed to a backlog
                             of property waiting to be processed as the reason for the delays. However,
                             for the other 77 shipments, we were unable to determine what happened to
                             the property. Specifically:

                             • Records on 27 shipments of sensitive property sent by the Army to the
                               Texarkana, Texas, disposal office showed no evidence of receipt or


                             10
                                The criminal investigative agency in the Air Force is the Office of Special Investigations, in the Army it
                             is the Criminal Investigative Division, and in the Navy it is the Naval Criminal Investigative Service.
                             Other agencies that may become involved include the Defense Criminal Investigative Service; the DLA
                             Command Security Office; the U.S. Customs Service, Office of Special Investigations; and the Federal
                             Bureau of Investigation.




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                          disposition of the property. The missing property included optical
                          magnifying devices for 25-millimeter guns and assorted components for
                          the Bradley fighting vehicle and other weapon systems.
                        • Records on 48 shipments of sensitive property sent by the Air Force to
                          the Oklahoma City, Oklahoma, disposal office showed no evidence of
                          receipt or disposition. The missing property included aircraft lighting
                          panels that displayed name plates or tags identifying the panels as part
                          of a specific weapon system. Procedures require the name plates or tags
                          to be removed and destroyed.
                        • Records on two shipments of sensitive property sent by the Navy to the
                          San Diego, California, disposal office showed no evidence of receipt or
                          disposition. One missing item was a sensitive wiring assembly used for
                          encrypted electronic communications.


Results Act Goals and   The weaknesses in management controls over excess property shipped to
Related Reporting       disposal also undermine DOD’s ability to measure progress towards
                        achieving the selected goals set out in its fiscal year 2000 Performance
Requirements
                        Plan. The plan was prepared in response to the requirements of the
                        Government Performance and Results Act.11 The plan contains a
                        performance indicator for achieving 90-percent visibility over material by
                        fiscal year 2000 and 100-percent visibility by 2004. Visibility refers to
                        knowing on a real-time basis how many units of specific items are on hand,
                        where the items are located, and their condition. Officials stated that they
                        were evaluating ways to enforce their control procedures and to increase
                        management oversight of the accountability of excess property shipped to
                        disposal.

                        The officials stated that the accountability problem with property shipped
                        to disposal is part of a larger problem involving visibility over all shipped
                        property. DOD was required by the Strom Thurmond National Defense
                        Authorization Act for Fiscal Year 1999 to develop, by March 1, 1999, a
                        comprehensive plan to ensure visibility over shipped items.12 According to


                        11
                           The Results Act requires federal agencies (including DOD) to develop departmentwide strategic and
                        performance plans and reports. They must set strategic goals, measure performance, and report on the
                        degree to which goals were met. This is expected to provide Congress and other decisionmakers with
                        objective information on the relative effectiveness and efficiency of federal programs. Annual
                        performance plans are included as appendix J to the Secretary of Defense’s Annual Report to the
                        President and the Congress.
                        12
                           The Authorization Act requires that the Comptroller General review the plan and submit to Congress
                        any appropriate comments.




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                      DOD officials, the plan will be available later in 1999 and will address
                      improvements needed in accountability over excess inventory shipped to
                      disposal.



Conclusions           DOD management controls over excess property being shipped to disposal
                      are not working effectively, leaving the property vulnerable to loss or
                      undetected theft. DOD believes that property is not being lost and that
                      most record discrepancies are due to administrative errors. However, such
                      administrative problems are systemic and widespread. In addition, DOD
                      does not know the status of property being shipped to disposal because of
                      the questionable accuracy of data and lack of adherence to control
                      procedures. Further, control procedures over property shipped to disposal
                      are not being followed because service and disposal personnel either are
                      not fully aware of the procedures or do not always understand them.
                      Underlying causes of these conditions appear to be the heavy flow of
                      property to disposal, insufficient management attention, and a lack of
                      training. These conditions make it impossible to report accurate
                      performance measures results for inventory that is being shipped.



Recommendations       We recommend that the Secretary of Defense include actions in the
                      statutorily-required plan for visibility over shipped inventory that would
                      address the following areas of concern:

                      • Lack of adherence to internal control procedures for safeguarding
                        excess property shipped to disposal to include researching and
                        investigating discrepancies between what was reported as sent to
                        disposal and what was received.
                      • Insufficiently trained personnel.
                      • Data accuracy problems contained in the In-transit Accountability
                        System reports.
                      • The need for performance measures, milestones, and timetables to help
                        monitor the progress being made to reduce the vulnerability of property
                        being shipped to disposal to undetected loss or misplacement.



Agency Comments and   In commenting on a draft of this report, DOD concurred with the report.
                      DOD stated that it has convened an Integrated Process Team to address
Our Evaluation        in-transit control visibility. The team will address our report
                      recommendation, including the responsibilities of the various types of



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organizations that generate excess personal property as well as the
responsibilities of the disposal activities. DOD’s comments are included in
appendix IV. DOD also provided detailed technical comments and we
revised the report to reflect them where appropriate.


We are sending copies of this report to the appropriate congressional
committees; the Honorable William Cohen, Secretary of Defense; the
Honorable Louis Caldera, Secretary of the Army; the Honorable Richard
Danzig, Secretary of the Navy; the Honorable F.W. Peters, Acting Secretary
of the Air Force; Lieutenant General Henry T. Glisson, Director, DLA; and
the Honorable Jacob Lew, Director, Office of Management and Budget.

Please contact me at (202) 512-8412 if you or your staff have any questions
concerning this report. Major contributors to this report are listed in
appendix V.

Sincerely yours,




David R. Warren, Director
Defense Management Issues




Page 13                                      GAO/NSIAD-99-84 Defense Inventory
Contents



Letter                                                                                             1


Appendix I                                                                                        16
Summary of Prior GAO
Reports

Appendix II                                                                                       19
Scope and
Methodology

Appendix III                                                                                      21
Control Procedures for
Excess Property
Shipped to Disposal

Appendix IV                                                                                       23
Comments From the
Department of Defense

Appendix V                                                                                        24
GAO Contacts and
Staff
Acknowledgments

Tables                   Table 1: Value of Property Reported by DOD as Not Received (fiscal
                           year 1998)                                                              5
                         Table 2: Categories of Property Reported by DOD as Not Received
                           (12 months ending Mar. 31, 1998)                                        6




                         Page 14                                    GAO/NSIAD-99-84 Defense Inventory
Contents




Abbreviations

DLA        Defense Logistics Agency
DOD        Department of Defense
DRMS       Defense Reutilization and Marketing Service



Page 15                                    GAO/NSIAD-99-84 Defense Inventory
Appendix I

Summary of Prior GAO Reports                                                                    AppIex
                                                                                                     ndi




             1. Defense Inventory: Management of Surplus Usable Aircraft Parts Can Be
             Improved (GAO/NSIAD-98-7, Oct. 2, 1997).

             We reviewed selected aspects of the Department of Defense's (DOD)
             disposal process, focusing on whether (1) during the disposal process DOD
             destroyed usable aircraft parts that did not have military technology and
             flight safety implications and (2) the military services recalled aircraft parts
             from the disposal process to preclude unnecessary purchases or repairs.

             We noted that management of the aircraft parts disposal process could be
             improved. DOD destroyed some usable aircraft parts and sold them as
             scrap. These parts were in new or repairable condition and did not have
             military technology or flight safety implications. The parts could possibly
             have been sold intact at higher than scrap prices. This situation occurred
             for several reasons. For example, disposal offices destroyed parts because
             the demilitarization codes the military services had assigned to the parts
             were inaccurate. The codes indicated the parts contained military
             technology when they did not. Our work showed that the Oklahoma City
             disposal office destroyed 62 of 71 sample items, even though they did not
             have technology implications, because the assigned codes required their
             destruction. Personnel responsible for assigning and reviewing the codes
             had not been sufficiently trained and guidance was not adequate. In
             addition, policies and practices designed to prevent the inadvertent or
             unauthorized release of parts with military technology and flight safety
             implications did not distinguish between parts with or without such
             implications. Parts without military technology and flight safety concerns
             were destroyed along with parts that had these characteristics.

             Our work also showed that DOD could have purchased or repaired fewer
             aircraft parts if it had recalled the needed parts from the disposal process.
             For example, the Army could have reduced current and planned purchases
             by about $200,000 by using Cobra helicopter parts scheduled for
             destruction. DOD regulations require the military services to know which
             parts they have placed in the disposal process. However, interface
             problems between service and disposal office computer systems precluded
             the services from knowing what parts were at the disposal offices. The
             military services had not instituted alternative ways to obtain this
             information on a routine basis.

             Problems with the disposal process were likely not unique to the three
             disposal yards we visited because DOD, military service, and Defense
             Logistics Agency policies and procedures generally apply to activities being



             Page 16                                         GAO/NSIAD-99-84 Defense Inventory
Appendix I
Summary of Prior GAO Reports




performed at all locations. Our past reviews and DOD internal studies
identified similar problems at these and other locations over the past 10
years or earlier.

2. Defense Inventory: Action Needed to Avoid Inappropriate Sales of
Surplus Parts (GAO/NSIAD-98-182, Aug. 3, 1998).

We reviewed DOD’s disposal process for surplus parts with both military
technology and flight safety risks, focusing on DOD’s efforts to (1) identify
and destroy parts with military technology and (2) implement a flight safety
program to prevent aircraft parts with potential flight safety risks from
being sold through the disposal process.

We noted that while DOD recognized the dangers associated with selling
surplus parts with military technology to the public and had taken certain
actions to address the problem, DOD’s disposal offices inadvertently sold
surplus parts with military technology intact. These sales occurred for
three reasons. First, the military services assigned the wrong
demilitarization codes to the parts. Because guidance was inadequate,
codes assigned to parts with military technology incorrectly indicated that
the parts did not contain the technology. DOD has been considering ways
to address this situation but has not yet reached a final decision. Second,
an initiative intended to correct inaccurately assigned demilitarization
codes did not ensure that data systems were updated with the corrected
codes. As a result, disposal offices continued to sell parts with military
technology intact after the codes for the parts were determined to be
inaccurately assigned. Personnel responsible for correcting the
inaccurately assigned codes did not always update their data systems with
the corrected codes. Third, the methods that the disposal offices used to
demilitarize some parts did not adequately destroy the military technology
contained in the parts. Guidance to disposal offices on how to destroy the
military technology inherent in some items was not adequate.

DOD and its components had not aggressively pursued implementation of
initiatives to prevent the sale of potentially dangerous flight safety critical
aircraft parts through the disposal system. DOD and the components had
not set timelines for implementing the flight safety program. Also, none of
the components had fully implemented all of the program initiatives, but
some have made greater progress than others. For example, at the time our
fieldwork was completed, the Army had identified over 4,500 aircraft parts
with flight safety implications, whereas the Navy had not identified any
aircraft parts with these implications. DOD planned to increase its



Page 17                                        GAO/NSIAD-99-84 Defense Inventory
Appendix I
Summary of Prior GAO Reports




interaction and involvement in the program, but the military services and
the Defense Logistics Agency continued to have problems accomplishing
flight safety program initiatives.




Page 18                                     GAO/NSIAD-99-84 Defense Inventory
Appendix II

Scope and Methodology                                                                       ApIpex
                                                                                                 ndi




              To determine DOD’s policies and practices to account for excess property
              that is shipped between the military services and disposal offices, we met
              with officials and performed work at the Office of the Deputy Under
              Secretary of Defense (Logistics), Washington, D.C.; Army, Navy, and Air
              Force Headquarters, Washington, D.C.; the Defense Logistics Agency, Fort
              Belvoir, Virginia; and the Defense Reutilization and Marketing Service,
              Battle Creek, Michigan. We also reviewed policies, procedures, disposal
              and transaction histories, and related records obtained from the Defense
              Supply Center, Philadelphia, Pennsylvania; the Naval Inventory Control
              Point, Philadelphia, Pennsylvania; the Oklahoma City Air Logistics Center,
              Tinker Air Force Base, Oklahoma; Defense Distribution Depots located in
              San Diego, California, Texarkana, Texas, Susquehanna, Pennsylvania, and
              Oklahoma City, Oklahoma; and the U.S. Army Reserve, Oklahoma City,
              Oklahoma. We also interviewed personnel and collected information from
              six disposal offices located in Oklahoma City, Oklahoma; Philadelphia and
              Mechanicsburg, Pennsylvania; San Diego and North Island, California; and
              Texarkana, Texas.

              To identify the reported types and amounts of excess DOD property
              shipped to disposal that are identified as not received, we obtained data
              from DOD’s In-transit Accountability System showing discrepancies
              between shipment and receipt data. We analyzed the data to identify
              shipments of pilferable, sensitive, and nonsensitive items that were
              reported by the In-transit Accountability System as not received.

              At the Defense Reutilization and Marketing Service, we obtained
              computerized records from the In-transit Accountability System showing
              property that was not received between February 1997 and March 1998,
              giving us the most current and complete shipping data available. Using the
              data, we judgmentally selected for review 191 shipments reported by DOD
              as not received at disposal to determine whether the material was missing
              and whether any discrepancies were researched. We selected these
              shipments based on the military sensitivity of the items in the shipments.
              We selected and reviewed 56 Air Force shipments of excess military
              sensitive items sent to the Oklahoma City disposal office, 84 shipments of
              excess Navy military sensitive items sent to the San Diego disposal office,
              and 51 shipments of excess Army military sensitive items sent to the
              Texarkana disposal office. We selected these locations because, according
              to DOD records, large quantities of excess military parts and equipment,
              including our sample items, were sent to these locations but were never
              recorded as received. We did not independently verify the overall accuracy
              of the In-transit Accountability System database from which we obtained



              Page 19                                      GAO/NSIAD-99-84 Defense Inventory
Appendix II
Scope and Methodology




data but used it as a starting point for selecting shipments which we then
tracked back to records and documents on individual transactions.

For each sample shipment, we researched shipment records, analyzed
inventory records, reviewed disposal office documentation and receipt
records, and held discussions with service and disposal office personnel at
the locations selected. We also examined 219 batch lots of property at the
disposal offices to determine whether the batch lots contained pilferable or
sensitive property.

To determine whether military units properly reported disposal
transactions, we reviewed an additional 33 transactions that were
identified by the In-transit Accountability System as received at the
Oklahoma City disposal office but were not identified as having a
corresponding shipment. We also selected these shipments on the basis of
the military sensitivity of the items in the shipments.

We reviewed the In-transit Accountability System reports for other issues
that negatively impacted DOD’s management controls. For example, to
determine whether duplicate transactions were included in the In-transit
Accountability System reports, we compared discrepancies involving
shipments of excess property to the Texarkana disposal office with
discrepancies involving receipts of excess property at the Texarkana
disposal office for fiscal year 1998.

We used the same computer programs, reports, records, and statistics that
DOD, the military services, the Defense Logistics Agency, and the Defense
Reutilization and Marketing Service use to control excess property that is
shipped between the military services and the disposal offices. We did not
independently determine the reliability of all these sources.

For historical perspective and illustrations of past problems, we reviewed
the results of prior DOD internal studies and DOD Inspector General
reports. We also used documentation and data obtained during prior work
on disposal operations.

We performed our review between July 1998 and March 1999 in accordance
with generally accepted government auditing standards.




Page 20                                      GAO/NSIAD-99-84 Defense Inventory
Appendix III

Control Procedures for Excess Property
Shipped to Disposal                                                                                                        AIpIex
                                                                                                                                ndi




                                               Inventory Control Point



                                                  (1) Release Order

               (2a) Shipping notice
                                                       Shipping Activity


                                                                                                 (8) First    (9) Second
                                       (2) DD Form1348-1A     (3) Signed 1348-1A                     follow-up follow-up



                                            (4) Defense Reutilization and     (10) Results of
               (2b) Shipping notice               Marketing Office                 research



                                                    (5) Receipt notice
                                      (6)                                                  (7)
                     Match                             Department of Defense                          Discrepancies
                   case closed                    In-transit Accountability System



                          Manual Process
                          Electronic Process


               (1) Inventory manager determines that an item is excess and prepares an
               inventory release order (A5J). The A5J is sent electronically to the
               shipping activity where the item is stored.

               (2) The shipping activity fills out a Shipping and Receiving Document
               (DD Form 1348-1A), which accompanies the item to the disposal office.

               (2a) The shipping activity notifies the Inventory Control Point that the item
               was shipped. This notification clears the inventory manager’s records of
               accountability for that item.

               (2b) The shipping notification is also sent to the DOD In-transit
               Accountability System, and a suspense file is established by document
               number, national stock number, and number of items shipped.

               (3) The disposal office inspects the shipment, signs the DD 1348-1A, and
               returns the form to the shipping activity. The shipping activity is required
               to keep this form for 2 years.




               Page 21                                                        GAO/NSIAD-99-84 Defense Inventory
Appendix III
Control Procedures for Excess Property
Shipped to Disposal




(4) The disposal office inspects and counts the number of items received
and enters the receipt information into its inventory system. The receipt
notice is sent electronically to the DOD In-transit Accountability System,
and a suspense file is established for the document number, national stock
number, and number of items received.

(5) The system compares document numbers, national stock numbers, and
quantities for each notification of shipment and each notification of
receipt.

(6) If an exact match of document number, national stock number, and
quantity occurs, the file is closed.

(7) A discrepancy occurs if there are quantity differences, no shipping
notification exists for a receipt notification, or no receipt notification exists
for a shipping notification.

(8) A first follow-up request (AFX) is sent to the shipping activity to
investigate the reason for the discrepancy and resolve it. A report of the
investigation is to be sent to the In-transit Accountability System within 10
working days.

(9) If no report of investigation is received within 20 days, a second
follow-up request (AFZ) is sent to the shipping activity to investigate the
reason for the discrepancy and resolve it. If no investigative report is
received, the file remains active for 1 year and is then moved to the history
file as unresolved. The history file is maintained for 2 years.




Page 22                                         GAO/NSIAD-99-84 Defense Inventory
Appendix IV

Comments From the Department of Defense                      ApV
                                                               Ienxdi




              Page 23        GAO/NSIAD-99-84 Defense Inventory
Appendix V

GAO Contacts and Staff Acknowledgments                                                           ApV
                                                                                                   enx
                                                                                                     di




GAO Contacts         Charles I. Patton, Jr., (202) 512-4412
                     Ronald L. Berteotti, (214) 777-5702



Acknowledgments      In addition to those named above, Roger L. Tomlinson, Jackie L. Kriethe,
                     Frederick T. Lyles, Jr., Thomas E. Baril, Jr., and Robert C. Sommer made
                     key contributions to this report.




(709363)     eL
              rtet   Page 24                                     GAO/NSIAD-99-84 Defense Inventory
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