Recently, I have noticed an increased interest in questioning the validity of conducting statistical sampling inventories. Many people do not understand the concepts or the value of statistical sampling and that may be driving these perceptions.
This post includes some excerpts from a paper that I wrote some years ago. It establishes the relationship from the CFO Act of 1990 down to DoD guidance on the conduct of statistical sampling inventories.
The Chief Financial Officer’s (CFO) Act of 1990 (Public Law 101-576) Established Statutory Reporting Requirements Regarding Inventory and Assets under the Authority of the Agency’s CFO
The CFO Act of 1990 provides the statutory requirements that:
- Establishes the authority of an agency’s CFO including “directing, managing, and providing policy guidance and oversight of agency financial management personnel, activities, and operations.”
- Requires the implementation of sound financial management practices under the CFO including “the implementation of agency asset management systems, including systems for cash management, credit management, debt collection, and property and inventory management and control.”
- Requires the CFO to submit “an annual report to the agency head and the Director of the Office of Management and Budget.”
The Federal Financial Management Improvement Act (FFMIA) of 1996 (Public Law 104-208) Established Specific Statutory Audit Requirements
- The FFMIA establishes the periodicity of auditing requirements to annual by stating that “no later than October 1, 1997, and October 1, of each year thereafter, the Comptroller General of the United States shall report to the appropriate committees of the Congress.”
- Section 805, subparagraph (b), in essence gives the Office of Federal Financial Management the authority to put any agency on report (i.e. DoD) by requiring “a listing of agencies whose financial management systems do not comply substantially with the requirements of Section 3(a) the Federal Financial Management Improvement Act of 1996, and a summary statement of the efforts underway to remedy the noncompliance.”
DoD Financial Management Regulations (FMR) implement Public Law 104-208 (FFMIA of 1996) and 101-576 (CFO Act of 1990)
- The DoD FMR, Chapter 4, paragraph 040305, establishes a clear relationship between inventory records and the general ledger by stating “activities must reconcile line item accountability records to balances recorded in the general ledger inventory accounts at least quarterly.”
- Additionally, the DoD FMR, Chapter 4, paragraph 040306, specifies physical count as the process used for reconciling inventories and general ledger: “Activities must take physical counts of inventories in accordance with the procedures prescribed in DoD 4140.1 R, “DoD Materiel Management Regulation.” Activities must adjust the general ledger for differences between the general ledger balances and the physical count.”
The DoD 4140.1-R Establishes Policies for Physical Counting and Gives Priority to Sampling Methodologies
- The DoD 4140.1-R, paragraph C5.7.5.1.4, directs DoD components to “devote resources and select items for physical inventory” as a means to comply with DoD FMR. Paragraph C5.7.5.1.4.1 of DoD 4140.1-R gives number one priority to “annual random statistical samples that shall support the determination of logistics record accuracy and financial record accuracy.”
The DoD 4000.25-M Vol 2 Establishes Procedures for the Conduct of Statistical Sampling Inventories
- Paragraph C6.2.1.1 of DoD 4000.25-M reiterates that physical reconciliation is the material accountability method: “Ensure accurate property accountability records for the physical inventory are maintained in support of customer requirements and readiness by performing physical inventories and location surveys/reconciliations.”
- Paragraph C6.2.2.1 recognizes the impracticality and inefficiency of conducting complete inventories: “The dynamic nature of the physical inventory control function and the cost of counting and reconciling records require that the approach be more selective than the 100 percent wall-to-wall total item count concept.”
- Paragraph C6.2.10 of this instruction reiterates the policy in DoD 4140.1-R which gives top priority to sampling methodologies. Subparagraph C6.2.10.1 states “a stratified, hierarchical inventory sample shall be accomplished at least once annually for the purpose of validating the accuracy of the accountable record.”
References
- Chief Financial Officers (CFO) Act of 1990, (Public Law 101-76)
- Federal Financial Management Improvement Act (FFMIA) of 1996, (Public Law 104-208)
- Federal Managers Financial Integrity Act of 1982 (FMFIA) (Public Law. 97-255)
- Government Management Reform Act of 1994 (GMRA) (Public Law. 103-356)
- DLM 4000.25-2-M, “Military Standard Transaction Reporting and Accountability Procedures (MILSTRAP)”
- DoD 4140.1-R, “Material Management Regulation”
- DoD 7000.14-R, Department of Defense (DoD) Financial Management Regulation (FMR), Volume 4, Chapter 4, “Inventory and Related Property” (May 2009)