July 12, 2016 —
We determined whether the Department of the Army properly records Army Working Capital Fund (AWCF) Inventory, Available and Purchased for Resale, at moving average cost (MAC1) within the Logistics Modernization Program (LMP2) system.
Despite the LMP system having the functionality to compute MAC, U.S. Army Materiel Command (AMC) did not properly record 83 of 128 nonâ€‘statistically sampled items from 18 of 557 plants3 in a manner that reasonably approximated historical cost. This occurred because AMC did not implement controls to ensure Lifeâ€‘Cycle Management Commands properly recorded AWCF inventory at MAC. AMC officials were focused on managing inventory quantities, rather than valuing the inventory at MAC. Specifically, AMC did not properly control the use of certain types of inventory movements within LMP,4 and did not train Army personnel adequately on MAC valuation and inventory movement types. In addition, AMC did not establish controls to identify and correct improper MAC values, prevent improper data from updating within LMP during end-of-day reconciliations, or properly establish data for Nonâ€‘Army Managed Items (NAMI) unitâ€‘ofâ€‘measure elements in LMP. Finally, the Army did not develop a comprehensive strategy for implementing MAC as the methodology for valuing its inventory in LMP.
As a result, the Army materially misstated its inventory on the FY 2015 AWCF Financial Statements and is at increased risk of not meeting the FY 2017 audit readiness milestone. Inaccurate MAC values have resulted in AWCF Industrial Operations switching to standard pricing as the basis for billing their customers, which may result in higher billing rates.
We recommend that the Commander, AMC, establish policies and procedures focused on managing inventory valuation at MAC; implement procedures to properly transfer inventory between valuation and movement types; and implement continuous training of Army personnel involved with inventory movements that affect MAC values. Among other recommendations, the Commander, AMC, should also review and correct MAC values for all Inventory, Available and Purchased for Resale; restrict access for the LMP end-ofâ€‘day reconciliation process to personnel with proper authority and training; and establish NAMI unitâ€‘ofâ€‘measure elements properly in LMP. We recommend that the Assistant Secretary of the Army (Financial Management and Comptroller), in collaboration with AMC, develop a comprehensive strategic plan for implementing MAC as the AWCF Inventory, Available and Purchased for Resale, valuation methodology.
Management Comments and Our Response
The Commander, AMC, and Assistant Secretary of the Army (Financial Management and Comptroller) did not respond to our request for comments on the recommendations in the draft of this report. We request that the Commander, AMC, and Assistant Secretary of the Army (Financial Management and Comptroller) provide comments on the final report.
1 MAC is a method for valuing inventory.
2 LMP is an enterprise resource planning system used to record Army logistical and financial transactions.
3 See Appendix A for sampling methodology.
4 Inventory movements within LMP indicated how the inventory reached its current location and condition.