The Customs Focused Assessment—Part II: Internal Controls Consideration
3/20/2006
by John Goodrich | Format for Print

In the first part of this article we discussed what a Customs & Border Protection (CBP) Focused Assessment (FA) is and how your company might have been selected. In this article, we’ll take a closer look at the type of information CBP is trying to obtain.

What is CBP looking for within a Focused Assessment?

The purpose of an audit is to ensure your company has paid all duties, taxes and fees it owes and to ensure it is compliant with other non-revenue rules of importing. Briefly stated, CBP is checking to ensure your company has exercised reasonable care in classifying your products, valuing your shipments, and accurately tendering duties. They do this partly by reviewing your historical records.

Customs is also concerned about enforcing strategic trade initiatives. These initiatives generally have to do with the following issues:

1. Quantitative restrictions on shipments or quotas;
2. Increases in duty rates due to antidumping, countervailing or safeguard duties;
3. Reductions in duty resulting from trade agreements such as NAFTA or CAFTA; and
4. Prohibitions on imports of non-conforming products such as intellectual property right infractions, goods from embargoed countries, or goods not complying with regulatory standards of other agencies.

In researching these issues, CBP again concentrates on valuation and classification but also scrutinizes the country of origin and country of export of the shipment. Inaccurate reporting of this information could lead to revenue recovery for the government.

If our records are complete will we pass the audit?

Well, yes and no. Remember, CBP does not begin an audit by looking at historical records. They start by scrutinizing your company’s internal business controls to assess if they are robust enough to ensure compliance. Then they check the records. Of course if the records demonstrate compliance, the audit results should be favorable.

What does CBP mean by internal controls?

Customs reviews five components of your company’s internal controls:

1. The Control Environment.
2. Risk Assessment.
3. Internal Control Activities.
4. Information and Communication.
5. Monitoring.

Weakness in any of these components can be an indication the company will not be fully compliant. Lets take a look at each of these components of internal control from CBP’s perspective.

1. The Control Environment refers to the organizational culture and the tone set by management. CBP sees this as the foundation for effective internal controls. A good control environment places a priority on business controls and ethics. It values competence and makes a commitment to hire, train and retain qualified staff.
2. Risk Assessment looks to a company’s strategies for reviewing and responding to challenges within its import program and greater business environment. How does the company respond to change within its import program? Does the company address growth, new services or complex import programs proactively? How does the company respond to personnel turnover? Is the company overly dependent on its third party provider? Has the company changed its business behavior as a result of previous compliance issues?
3. Internal Control Activities are the tactical things a company does to ensure regulatory compliance. Has the company identified and documented specific control activities? Control activities can be proactive and preventive, or they could be reactive and investigative.
4. Information & Communication describes how a company shares information internally within the organization and externally with vendors and service providers. Customs is checking to see that communication is reliable and ongoing.
5. Monitoring is a macro, strategic process wherein a company reviews the control environment for effectiveness and makes changes if necessary. Internal or external resources could perform the monitoring process.

In part III of this article I will explore industry best practices for internal control.

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