Report 04-AOC-02

IMPROVEMENTS ARE NEEDED IN CONTROLS
OVER HOUSE SUPPLIES INVENTORY

I. INTRODUCTION

Summary of Results

The Architect of the Capitol (AOC) needs to improve the management of the House supplies inventory maintained by the Superintendent of the House Office Buildings (Superintendent). The information contained in the current inventory system was not accurate; the quantity of items in the records did not match the number of items on the shelves; and items on hand were often not included in the system records. There were no uniform written policies and procedures to manage supplies inventory, and each shop managed its inventory differently. Prior to the start of our audit, the shop supervisors did not have access to the existing inventory management system and had to rely on outdated printed reports. Employees, for the most part, had access to all of the storerooms, checkout procedures were not effective, and the doors at remote storerooms were not self locking.

The combined effect of supporting a system to which shop supervisors had little access, and a lack of policies and procedures, was inaccurate and untimely data and a system that couldn’t be used to manage supplies efficiently and effectively. This, in conjunction with weak physical and accounting controls, resulted in a lack of accountability, increased risk of unauthorized use of supplies and materials, work delays due to unexpected shortages of critical items, surplus items, and unnecessary purchases of items already on hand.

The AOC realized that it needed to improve the situation and had already taken several improvement actions and begun the procurement of a new inventory management system before our audit began. Early in our audit, we learned that the shop supervisors, the key users of the new system, had not been consulted or involved in determining the requirements for the new system. We alerted the AOC of this fact and they informed us that such involvement was planned.

We have recommended the AOC consider and take action on several issues; most importantly, developing written policies and procedures. As these policies and procedures are developed, it will be important to have the active involvement of the shop supervisors who will be critical to effective system implementation and the continued maintenance of system information.

Background

Under the direction of the AOC, the Superintendent is responsible for the day-to-day care of the House buildings that include the Cannon, Longworth, Rayburn, and Ford House Office Buildings and the House Page Dormitory. To accomplish this task, the Superintendent has carpentry, electrical, plumbing, elevator, industrial equipment, masonry, painting, refrigeration and air conditioning, and sheet metal shops. Each of these shops maintains an inventory of supplies and tools classified as “consumable inventory” for maintenance, repair, and small projects within the House Office Buildings. The Superintendent also has a Supply Storeroom that processes, receives, and distributes all orders for supply items for the shops, and uses the inventory control sheets received from the various shops to update the “perpetual” inventory records in the Computer Application Specialists, Inc. system, known as CAS. In addition, the Supply Storeroom also maintains an inventory of certain items that are available for use by more than one shop. As of April 9, 2003, the value of the House supplies inventory recorded in the CAS system was $2,413,901. However, this does not include all items since our physical inventory revealed that many items in the shops are not recorded in the system.

Although the supplies inventory is the responsibility of the Superintendent, the AOC identified the need to replace the supplies inventory system and initiated a project to replace CAS. The AOC is purchasing a commercial-off-the-shelf system that will meet identified needs. The request for proposal was submitted to potential vendors on June 23, 2003. The contract was issued on September 26, 2003, and the system is projected to be fully implemented by February 2005.

Objective, Scope, And Methodology

The objective of this audit was to evaluate the economy, efficiency, and effectiveness of the Superintendent’s supplies inventory management. Specifically, we focused on 1) inventory utilization to include acquisition, turnover, and obsolescence, and 2) management controls over physical access and accountability.

The scope of this review of the supplies inventory management process for each of the Superintendent’s shops was to determine if the inventories were efficiently managed and controls were in place to prevent waste, misuse, or theft. The review included current inventory policies, procedures, and controls over stock as of April 2003. This audit was conducted in accordance with Government Auditing Standards as implemented in the Office of Inspector General Policies and Procedures Manual.

To conduct the audit, we reviewed policies covering the supplies inventory management, interviewed the 10 shop supervisors who use consumable supplies and materials, and are under the jurisdiction of the Superintendent, and discussed issues with personnel in the Accounting and Financial Systems Divisions. In addition, we used Audit Control Language (ACL) to analyze transactions in the CAS system database that covered the period January 1, 2001 through April 9, 2003.

We also conducted a sample physical inventory in each of the shops using a two-directional methodology. Using ACL to select a random sample from a population of 8,097 inventory supply items, we selected a sample of 150 items from the automated inventory system database to compare the system quantities with the quantities on the shelves. We also selected an additional 25 items that had the highest unit cost to ensure high dollar items were in our sample and judgmentally selected 63 items from the shelves in the various shops and traced them back to the automated inventory system to compare the quantities on hand. In addition, we reviewed the purchasing process and observed obsolete material in the shops. Although we attempted to evaluate inventory utilization which included acquisition, turnover, and obsolescence, the condition of the inventory management system was inadequate to enable such analyses.

In the absence of formal policies and procedures issued by the AOC, we used the GAO Executive Guide, Best Practices in Achieving Consistent, Accurate Physical Counts of Inventory and Related Property, dated March 2002, as guidance for this review.

Internal Controls

During this review, we evaluated the physical and accounting internal controls over the supplies inventory. Specifically, we reviewed a sample of supply items to determine if accounting records were accurate, access to the supplies was limited, supply items were safe, and issue controls were in place. The controls that needed improvement are discussed in the “Results Of Review” section of this report.

Prior Audit Coverage

There have been no prior audits of the Superintendent’s management of the supplies inventory. However, during this audit we issued a letter to the AOC on March 21, 2003, which stated that the AOC had not involved end users throughout the development of the new inventory management system. AOC management replied that additional input from the end users would be obtained before the statement of work was finalized. In addition, the AOC provided documentation that listed the end users who were involved before the statement of work was issued.

II. RESULTS OF REVIEW

Although the Superintendent is responsible for effectively managing the House supplies inventory, the AOC needs to improve the physical and accounting controls over the House supplies inventory. In particular, basic written policies or procedures to manage supplies inventory need to be developed. Since there were no written policies and procedures, supervisors could not be held accountable, and each shop managed its inventory differently. Improvements in physical and accounting controls would reduce the risk of unauthorized use of supplies and materials, decrease work delays due to unexpected shortages of critical items, and eliminate unnecessary purchases of items already on hand.

The AOC has taken several actions to improve management of the supplies inventory. For example, the AOC is in the process of implementing a new inventory management system, and the accounting department has drafted procedures that cover periodic physical inventory requirements. Shop supervisors were working to better organize their supplies inventories in drawers, bins, and shelves. Further, actions were taken in June 2001 when the AOC initiated an asset management effort to dispose of obsolete and surplus property and material inventories. This effort was completed in October 2002. In addition, a bench stock program has been established for certain items (like screws, nuts, and bolts) that are replenished on a regular basis by a contractor.[1] Finally, although the CAS inventory system has its limitations, during the new system implementation period, the House shop supervisors were given access to the CAS system which improved their ability to manage their individual shop supplies inventory. Prior to this review, shop supervisors depended on outdated hard copy reports to manage their inventory. With the implementation of the replacement system, scheduled to be operational in February 2005, shop supervisors will have more current data to better manage their supplies inventory.

Although the AOC is moving in the right direction, they continue to have problems with excess supplies on-hand, duplicate purchases of supplies, and credit card purchases to avoid work stoppages. The AOC needs to implement written policies and procedures capitalizing on active involvement of the shop supervisors to continue to improve inventory management and ensure that they will utilize the capabilities of the new replacement system.

Physical Controls

Written policies and procedures have not been established for managing, storing, and issuing supplies inventory resulting in the shops’ inconsistencies in how they manage their supplies, and reducing the quality and effectiveness of physical controls. During our review, we noted the following areas where physical controls need to be improved:

Supplies were unorganized and the shelves and bins were not labeled.
Shop employees had access to all supply storage locations.
Issue controls were weak. For example, when supplies were issued for work orders or projects, they were recorded on an issue control sheet and forwarded to the Supply Storeroom to be input into the CAS system. However, supplies used were not consistently recorded on the issue control sheets, and with one exception, none of the shops maintained an audit trail to identify the work order or project for which the supplies were used.
Doors at remote storage location did not lock automatically when closed.
According to information in the database, physical inventories of the supplies and materials were not conducted on a regular basis. When physical inventories were taken, there were no consequences for excessive shortages or overages, and no allowable variances had been established.[2] Basically, no one was held accountable for inventories, and the shop supervisors’ job performance was not tied to the accuracy of physical inventories.

In the absence of formal written inventory control policies and procedures, AOC personnel indicated that they rely on the Capitol Police presence as the main deterrent to the theft of supplies. However, it would be very difficult for Capitol Police officers to discern authorized from unauthorized activity by AOC employees. Therefore, better physical controls should be put in place, regular inventories of supplies must be conducted, and accountability for shortages must be established.

Accounting Controls

Until the new system is operational, the CAS system is still being utilized, even though it does not provide adequate accounting controls. During our review we noted the following areas where accounting controls need to be improved:

The item records in the automated inventory system are not complete. For example, many of the supplies on the shelves are not entered into the CAS system. During our review, we found that 18 items, or 28.6 percent of the 63 items we selected from the shelves to trace back to the CAS system, were not in the system. Also, one shop’s CAS system records showed zero balances for all items in our sample with a value of less than $500. The shop supervisor stated that he had removed all the items valued less than $500 from the system.
When supplies are ordered for a specific Superintendent project, they are immediately expensed when received, instead of being recorded in the system. Then, if there are excess items left over when the project is done, the supplies are still not entered into the CAS system. They are co-mingled with the main supply inventory when they are returned to the shops’ shelves and bins.
Items left over from completed Construction Management Division projects have caused shops to have excess items on hand, inaccurate inventory balances, and in some cases, unrecorded items on hand held for possible future use.
A complete audit trail of supply inventory transactions had not been maintained. Currently, only one shop records what supplies and materials are used on specific jobs, work orders, or projects. Also, when shop supervisors realize that the system quantity does not agree with the quantity on hand, adjustments to the CAS system are recorded as “usage” of supplies to bring the system quantity in agreement with the physical count. This distorts the usage rate and makes it impossible to calculate management information such as inventory turnover rates or identify lost, missing, or damaged items.
Items that are transferred to AOC shops in other jurisdictions are “off the record”. If the Senate, Library of Congress, or Capitol have an emergency, and are in need of an item, then the House shops “loan” the item to the other shop. The borrowing shops pay back the House shop when their supplies are replenished.

All of the conditions listed above contribute to the inaccuracy of the CAS system, and undermine the Finance Office’s ability to determine the value of supplies and inventory on hand and the ability of AOC managers to use the CAS system information to make informed decisions. The new system will have appropriate functions to improve accounting controls; however, adequate policies and procedures need to be established to ensure that the new system’s capabilities are utilized.

Conclusion

Overall, managers are making attempts to manage their supplies inventories; however, improvement is needed to eliminate the underlying problems in order to support implementation of the new system. The inventory management control problems exist because the AOC has not established and issued policies to ensure that all AOC shops manage and store their supplies in a consistent manner, and that they keep diligent records so that management decisions can be based on this data. Improvements in these areas will reduce the risk of unauthorized use of supplies and materials within the House shops, decrease work delays due to unexpected shortages of critical items, and eliminate unnecessary purchases of items already on hand. In addition, such improvements could enable the AOC shops to decrease the size of their inventory, and therefore, free up storage space for other uses.

Recommendation

We recommend that the Architect of the Capitol (Superintendent of the House Office Buildings) establish written policies and procedures to strengthen physical and accounting controls over supplies inventories. As the AOC develops these controls they should consider the following issues:

Granting access to inventory to the least practicable number of authorized personnel so as not to compromise physical controls, and taking steps to ensure adequate separation of duties between custody and record keeping functions.
Ensuring that all inventory is organized, labeled, and bar coded.
Installing locks on doors at remote storage locations that lock automatically when each door is closed.
Recording transfers of items to another shop or jurisdiction.
Recording the usage of all items, identifying the specific work orders or projects where used, in order to provide a complete audit trail of the items from purchase to usage.
Recording all adjustments to inventory with the appropriate reason for the adjustments.
Requiring periodic item checks by shop supervisors to promote ongoing system accuracy, in addition to cycle counts by independent parties.
Establishing appropriate variances between the actual inventory count and the system records.
Requiring accountability for the inventory custodians and establishing appropriate performance measurements for inventory management.

Management Response

On March 18, 2004, the Superintendent of the House Office Buildings concurred with the finding and recommendation contained in this report. On January 8, 2004, the Architect of the Capitol issued AOC Order No. 32-1, “Policy for Inventory Management” which addresses the recommendation. Full implementation of the policy requirements are estimated to be completed by September 30, 2004.

Office of Inspector General Comments

The proposed actions taken by the Architect of the Capitol are substantially responsive to the issues identified. As the Superintendent of the House Office Buildings fully implements the requirements of “Policy for Inventory Management”, they should reconsider recording transfers of items between shops or other jurisdictions.

[1] A bench stock program includes low cost inventory parts/items designated as bench stock that are issued and tracked in bulk quantities rather than individually.

[2] The AOC’s Accounting Division considers a variance of 5% to be acceptable.