Objective
We determined whether sufficient, accurate, and appropriate documentation existed to support costs for Army Working Capital Fund (AWCF) inventory valuation.
We statistically sampled 970 of 296,839 inventory transactions, valued at $870.2 million, which were based on historical costs recorded in the Logistics Modernization Program system during the second quarter FY 2016.
Finding
Assistant Secretary of the Army (Financial Management and Comptroller) (ASA[FM&C]) personnel did not provide sufficient, accurate, and appropriate documentation to support the costs recorded for 818 of 970 statistically sampled AWCF inventory transactions. We project that the ASA(FM&C) cannot support at least 291,408 AWCF inventory transactions, valued at $690.8 million of the $870.2 million in AWCF inventory items acquired in the second quarter FY 2016. This occurred because the ASA(FM&C) ineffectively performed discovery and corrective action phase activities of the financial environment related to AWCF inventory business processes.1 Specifically, the ASA(FM&C) did not:
- develop detailed standard operating procedures, flowcharts, and narratives describing the AWCF inventory business processes;
- identify the key positions that needed to be contacted to identify, maintain, and provide key supporting documentation for the transactions associated with AWCF inventory processes; and
- develop corrective action plans to remediate known documentation deficiencies.
In addition, the U.S. Army Materiel Command did not design the Logistics Modernization Program system with the functionality to identify receiving and invoice documents stored in another system. Finally, ASA(FM&C) personnel could not identify the amounts it previously credited to customers for inventory items returned for credit or repair.
As a result, the Army is not ready for an AWCF financial statement audit and will likely not be audit ready by the mandatory deadline on September 30, 2017. The Army’s inability to provide supporting documentation for AWCF inventory transactions is one reason it receives an annual disclaimer of opinion. Consequently, the Army is unable to support the $10.6 billion value of its Inventory, Available and Purchased for Resale, reported on the AWCF balance sheet as of September 30, 2016, as reflected in the Army’s disclaimer of opinion.2
Recommendations
We recommend that the ASA(FM&C):
- establish detailed standard operating procedures, flowcharts, and narratives for each inventory business process (1.a);
- identify key supporting documentation for each inventory process (1.b);
- develop a “perfect package” of supporting documentation for transactions associated with AWCF inventory processes (1.c);3
- identify and document key positions for each business process (1.d);
- ensure memorandums of understanding with service providers clearly identify who would maintain the documentation, where the documentation would be stored, protocols for requesting and providing documentation, and documentation retention policies (1.e);
- develop corrective action plans and milestones to correct the problems (1.f); and
- develop a process to maintain credit values given for returns for credit and unserviceable credit transactions (1.g).
In addition, the ASA(FM&C), in coordination with U.S. Army Materiel Command, should incorporate data fields within the Logistics Modernization Program system to identify the goods receipt and invoice documents in the Invoicing, Receipt, Acceptance, and Property Transfer system.
Management Comments and Our Response
The Deputy Assistant Secretary of the Army (Financial Operations), responding for the ASA(FM&C), partially agreed with our finding and agreed with our recommendations.
The Deputy Assistant Secretary of the Army (Financial Operations) stated that the Army implemented Recommendations 1.d and 1.e and has begun to implement Recommendations 1.a, 1.b, 1.c, 1.f, and 1.g. However, the Deputy Assistant Secretary of the Army (Financial Operations) did not describe the actions taken to implement Recommendations 1.d and 1.e or elaborate on how or when Recommendations 1.a, 1.b, 1.c, 1.f, and 1.g would be implemented. Therefore, these recommendations are unresolved and remain open. We request that the ASA(FM&C) provide the details on how and when the recommendations would be implemented by September 25, 2017. We will close the recommendations once we receive and verify that the ASA(FM&C) has implemented the recommendations.
The Deputy Assistant Secretary of the Army (Financial Operations) agreed to incorporate data fields within the Logistics Modernization Program system to identify the goods receipt and invoice documents, stating that a system change request was implemented in the Logistics Modernization Program on May 22, 2017. Therefore, the recommendation is resolved but remains open. We will close the recommendation once we receive evidence of system implementation and verify that the ASA(FM&C) and U.S. Army Materiel Command have the ability to trace the receiving reports and invoice documents from the Logistics Modernization Program system to the Invoicing, Receipt, Acceptance, and Property Transfer system.
1 During the discovery phase, the reporting entity defines and documents its business processes and financial environment; identifies the key supporting documentation needed for its business processes and financial environment; identifies and classifies any deficiencies with its supporting documentation; and defines its strategy for achieving audit readiness. The corrective action phase is the second phase and is designed to correct deficiencies identified during the discovery phase.
2 Report No. DODIG-2017-009, “Independent Auditor’s Report on the Army Working Capital FY 2016 and FY 2015 Basic Financial Statements,” November 9, 2016.
3 “Perfect packages” include all requested journal vouchers and supporting documentation necessary to support a transaction
This report is a result of Project No. D2016-D000FI-0145.000.