Businesses maintain a range of financial controls to monitor purchasing, vendor disbursement and tax reporting among other financial activities. Importers should have the same level of financial controls in place to ensure proper reporting of valuation and unit quantities on customs entries.

The standard financial control for vendor payment is a three-point audit in which the accounting department compares the original purchase order (PO) with the vendor’s commercial invoice and, finally, with the received quantities. If all three points match, the company pays the vendor.

The three-point audit may be viewed graphically as follows:

As an importer you have a reasonable care obligation to ensure you have accurately declared value to Customs. A method of ensuring you have met your reasonable care requirements is to ensure the value declared on the customs entry matches the actual payment made to the vendor.

Some importers believe they are doing this sort of audit by reviewing the entry documents received from their broker. It is standard procedure to compare the commercial invoice provided by the customs broker with the entry and entry summary also provided by the broker.

Consider, however, the weaknesses of such a superficial audit:

1. The customs broker may receive a different version of the commercial invoice than that sent by the vendor to the importer for payment. It commonly happens that the broker receives a lower-value factory invoice instead of the vendor’s marked-up invoice.
2. The importer’s receiving department may discover a quantity or other product receiving discrepancy
3. The purchase order may show a different price than that declared by the vendor on the invoice.
4. Accounting may make an invoice adjustment to allow for receiving or purchase price variances.

Each of these price or quantity variations would likely not be discovered within a typical customs entry review.

Compliant companies go a step further and co-opt the three-point audit by adding an additional checkpoint: the entered value shown on the customs entry.

This revised four-point audit may be viewed graphically as follows:

You will note in this graphic the connection to the PO has been weakened visually by using dotted lines. From a Customs perspective there is no requirement for the PO to be absolutely in sync with entered value as long as the commercial invoice and actual payment match the entered values and quantities. Some companies choose not to invest time and effort in maintaining accurate POs. This might be an option for your company.

I am not, however, recommending leaving the PO out of the four-point audit process. One of the root causes of valuation and quantity discrepancies within customs entries comes from lack of discipline within the purchase order. Poorly recorded PO values and quantities result in inaccurate commercial shipments and documentation, which end up distorting the customs entry.

Experienced importers have found that holding the purchasing department accountable for issuing and maintaining accurate POs contributes to enhanced compliance in the area of valuation and quantity reporting.

Companies that implement four-point audits find the following:

1. Accounting adjusts the actual payment to allow for overages, shortages, damages and purchase-price variations. The resulting payment does not match the customs entry.
2. Standard accounting practice allows for nominal price variances between what was received, what the vendor invoice states, and what the company pays for. This logical practice assumes that the importer’s receiving department is imperfect and perhaps did not receive the shipment accurately. It also makes the practical assumption that spending time on reconciling minor piece count or value discrepancies is a waste of company resources.
   
   Unfortunately this practice results in the entry showing inaccurate valuation or unit quantity information. This practice is particularly troublesome when it is discovered that the importer received more product than it declared on the entry.
   
3. Intermediaries such as trading companies may be paid a higher price or commission that is, in fact, a dutiable charge that was left off of the customs entry.

While we can imagine a utopian business environment that would integrate the four-point audit into the accounting process and automate both, implementing a four-point audit need not be that difficult or complex.

Importers have found the following techniques helpful in implementing a four-point audit:

1. Allow the import compliance team to have browsing access to the accounts payable records and systems.
2. Develop a zero tolerance policy regarding purchase price or unit quantity variances for any import purchases.
3. Require the receiving, accounting and purchasing departments to notify the import compliance team of any price or quantity discrepancies.
4. Require purchasing to maintain an accurate record of the purchase order values and quantities and to amend the PO to record any approved changes.
5. Perform a post-entry audit that documents the auditor’s review of the accounts payable disbursement, the actual quantities received, and the purchase order.

As with any post-entry audit process, you are required to report any discrepancies you discover to Customs by correcting the customs entry.