Aug. 28, 2018 —
This past May, Secretary of Defense James N. Mattis urged all Defense Department employees to do their part to make the DoD audit ready. The Army, Navy, Marine Corps and Air Force audits came online in 2018; the Defense Logistics Agency led the way in 2017.
In 2011, Congress charged the department with achieving auditability by 2017. DLA embraced and aggressively pursued that goal. Completing an audit became a priority; our strategic goal of “Always Accountable” reinforces our fundamental responsibility to the warfighter to be cost conscious, achieve and sustain a clean audit, and remain innovative.
Last year we completed our first audit, which resulted in a disclaimer from Ernst & Young, our independent auditor team. Although it was expected, the disclaimer confirmed that we did not have everything the auditors needed to give a “clean” opinion. The evidentiary matter, or records, were not sufficient to prove our statements.
DLA and Office of the Secretary of Defense leadership understood the challenges of a first-time “go” for DLA’s audit. It’s no small accounting challenge to inventory over $100 billion of inventory — more than $15 billion in DLA-purchased parts and materials and nearly $85 billion for the military services — held by 493 activities at 240 locations around the world.
Keeping a large inventory for a long time is not a commercial practice. Storage costs money in leased space, climate control and the labor required to keep track of items. Some inventory, like food, has a limited shelf life, and stored parts can become outdated when new systems or equipment come along. Furthermore, everything DLA holds in inventory is a cost to the government.
DLA’s inventory must be accurate to ensure DoD’s financial statements reflect the actual organizational expenses. It’s essential to obtain a “clean” audit opinion on the agency’s own financial statements. Because of this, it’s critical that we manage our inventory and costs carefully.
In the disclaimer, DLA’s independent public accountant found three major problems with the agency’s inventory program:
- Mismatch of the quantities in DLA’s inventory and financial systems.
- Commingling of inventory from different owners.
- Infrequent inventory counts.
What’s the significance of these problems for DLA and its customers?
Figures that don’t match make it hard for the agency to ensure it actually has the number of items on hand as indicated in its records. This requires DLA to spend more time verifying the value of those items, which adds cost. The agency is taking steps to ensure the figures in its inventory and financial systems match.
Commingling different owners’ inventory poses two risks. When inventory records show gains and losses, DLA can’t ensure they’re accurately accounted for in the true owner’s financial records. DLA policy directs who registers a gain or loss, but the end result can be over- or understating inventory records in an owner’s financial statements. This means the agency may have too much or too little of an item on hand.
DLA also needs to count the items in its inventory more frequently and more directly. The current process of counting items based on value once every two or five years isn’t good enough. Annual inventories must be performed to ensure accurate financial statements.
Addressing these weakness will drive changes needed in DLA’s inventory management strategy and help the agency achieve a clean audit opinion.
How the Military Services Can Help
DLA holds nearly $85 billion of the military services’ inventory, which requires agreement between financial statements. There are several things the services can do. They can ensure proper notification occurs for items destined for DLA facilities, mark the items clearly and include complete documentation.
Once the material is in DLA custody, the military service must make sure its financial records match DLA’s inventory records for the items the service owns. If there are quantity discrepancies, the service should research them, correct the figure in its systems and provide that updated number to DLA.
Since DLA doesn’t have access to the military services’ financial records, the Army, Navy, Air Force and Marine Corps are DLA’s vital partners in reconciling their financial statements to DLA’s inventory records. This also directly affects the agency’s ability to know if its inventory count is complete.
This will be a massive effort for the workforce. The enterprise is working to develop, improve and implement the agency’s inventory management strategy.
Because of the size, value and geographical locations of DLA’s facilities, a 100 percent inventory every year will be expensive and complex. It will require input from personnel from DLA Logistics Operations, DLA Information Operations, DLA Finance and DLA Acquisition, along with every DLA major subordinate command.
Getting counts done on time and accurately requires many people working together on scheduling, counting, researching and tracking.
Everyone has a role.