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How to survive a customs audit: importers can not only survive a customs audit, they can also benefit from the experience. Two international trade veterans tell how.

For most importers, the phrase "customs audit" evokes a negative image. They tend to think of audits as labor- and data-intensive efforts that inevitably lead to findings that they are guilty of negligence, liable for additional duties, or worse.

That's why it may seem counterintuitive to say that importers could actually benefit from undergoing such an audit, called a "Focused Assessment." But if they can break through the complex web of laws, regulations, and policies administered by U.S. Customs and Border Protection (CBP), importers might find that a Focused Assessment and the related Importer Self Assessment (ISA) program can give them better insight into how they can manage their supply chains.


To understand the complexity surrounding customs audits, one has to understand the changes brought about by the Customs Modernization Act of 1993. The Mod Act fundamentally altered the relationship between importers and the U.S. Customs Service (now CBP). That legislation shifted the legal responsibility for declaring the correct value, classification, and applicable rate of duty for entered merchandise from Customs to the importer.

The Mod Act also associated the concept of "informed compliance" with that change in responsibility. Informed compliance is based on the premise that CBP must clearly and completely inform importers of their legal obligations so that they will be able to comply with the law.

In order for informed compliance to work, it's essential that the importing community and CBP share responsibility. Just as CBP is responsible for informed compliance, importers are responsible for using "reasonable care" in carrying out customs-related activities. These include such fundamentals as supplying enough accurate information for CBP to determine the correct classification of merchandise; implementing internal measures that will assure accurate documentation; and providing sufficient pricing and financial information to permit proper valuation of merchandise.

When the foundation of customs compliance changed, so did CBP's approach to auditing compliance levels. Since the Mod Act was enacted, the audit process has evolved from a traditional, data-intensive exercise to a "compliance assessment" that focused on the compliance rates for import entries, and then to the current stage of Focused Assessments.

CBP reviewed the history of the audit program and determined that internal controls--in other words, effective business processes designed to ensure regulatory compliance--are good predictors of actual compliance levels. Focused Assessments therefore begin with an evaluation of the strengths and weaknesses of importers' internal systems to determine how likely they are to be noncompliant in areas posing a "material" risk. (By "material," CBP means substantive noncompliance--for example, failure to report assists or the inability to document qualifications for a trade-preference program--as opposed to minor errors that would have little impact.)

Think of it this way. Remember the old saw that says legislation, like sausage, should not be seen in the making? CBP is less interested in the sausage than it is in the process by which it is made.


CBP specifies five basic elements of internal controls that must be in place for an importer's regulatory-compliance program to meet the agency's standards. (Detailed information about those requirements is available at These five components are rooted in accepted accounting principles. They include:

1. A control environment that is strongly established within the importer's culture and supported by senior executives;

2. Effective assessment of risk for noncompliance by the importer and its associated business units throughout their operations and in all departments;

3. Written policies and procedures that describe and mandate effective control activities;

4. Procedures that ensure the capture and communication of relevant information across the entire organization; and

5. Regular monitoring to ensure continued performance of the regulatory compliance system.

According to Peter Battaglioli, a customs audit specialist with the law firm Katten Muchin Rosenman LLP, CBP views the absence of any of those five components as "an accident waiting to happen."

In the most basic sense, therefore, Focused Assessments are designed to evaluate the existence and effectiveness of those five components of internal controls.

According to William Mohalley, CBP's Director of Regulatory Audit in Boston, the agency's Focused Assessment program allows CBP to develop an opinion regarding the level of risk posed by a particular company's import practices. It consists of three basic components:

1. Pre-Assessment Survey (PAS)

2. Assessment Compliance Testing (ACT), if necessary

3. Follow up, if necessary

During a Pre-Assessment Survey, the auditors identify any import-related activities that may present a risk of noncompliance with the laws that CBP is responsible for enforcing. They then review the importer's internal control systems to determine whether they are adequate to control that risk. If the PAS does not identify any unacceptable risks, the audit work can be completed at that point. If the PAS does identify unacceptable risks, the importer must then proceed with one of two options.

The first option is to take corrective action, including (if applicable) calculating the amount of revenue lost to the government as a result of the importer's errors. If the company agrees to this option, the auditors will establish a deadline for completion and schedule a follow-up visit.

If the importer does not agree to that option, the auditors will then proceed with Assessment Compliance Testing (ACT). This involves transaction testing to verify the extent of the problems identified in the Pre-Assessment Survey and/or to calculate the loss of revenue to the government.

When testing has been completed and the full extent of the problems has been quantified, CBP will ask the importer to take corrective action on problems it deems to have material impact on regulatory compliance levels. The agency also will advise the company of the amount of additional duties to be paid, if applicable. In such cases, the focused assessment will conclude with a follow-up audit.


This brings us to the question of" how to prepare for and "survive" the audit. It's a bit like facing final exams in college without having read the assigned books, and there's limited utility to cramming.

Importers that have been selected for a Focused Assessment audit are first notified by telephone. CBP will schedule an initial conference to be held at least 45 days later.

Upon receiving notice that they will be the subject of an audit, importers should learn what kinds of records the auditors will be reviewing by reading the detailed information about Focused Assessments on CBP's website. (There's a lot to read--the relevant PDF file is 3,473KB!)

It is particularly important to review and answer the questionnaires concerning internal control and electronic data processing, which can be found on CBP's website. Importers should trace or flowchart both automated and manual processes for all types of customs transactions. They should also ensure that they have a basic procedures manual in place before the Focused Assessment begins.

Another important preparatory step is to assess how all company departments affect import activities. For example, accounting decisions related to taxation may have a significant impact on customs valuation. Ideally, importers should identify any problems and take corrective action before the audit begins. The objective is to take action on their own terms, rather than ignore the issues and wind up negotiating the terms of a compliance-improvement program with CBP while the government holds all the proverbial cards in its hand.

There's no question that a Focused Assessment will require a great deal of time and effort on the part of the importer. Audits can take anywhere from a few weeks to several months. One of the first things the auditors and the importer do is to establish a mutually agreed-upon timeline for completion, with target dates for accomplishing the various tasks required for the audit. How much time will be necessary depends on the size of the company's import operations, how well it prepared for the assessment, and how well it fares in the PAS.

After the initial conference, CBP will provide the importer with a detailed questionnaire to complete. The questionnaire will require input not only from the company's compliance personnel but also from all of the functions that bear on the proper classification and valuation of imported goods. For example, accounting personnel may need to provide information about tax decisions that affect valuation; legal may need to provide information about the ownership of foreign subsidiaries. The CBP auditors will not remain on site but will stay in contact with the firm and request additional information as needed during the Focused Assessment.


At the beginning of this article, we suggested that importers could benefit from undergoing complex regulatory audits--an idea that at first glance may have seemed preposterous. Nevertheless, we think the Focused Assessment and ISA audit processes provide companies with the opportunity to manage their businesses more effectively.

That's because regulatory compliance is an integral part of a company's international supply chain, but few importers look at that function in such a broad context. A Focused Assessment, however, provides an opportunity to review import operations from the perspective of an integrated business process. It's also an opportunity to bring processes, people, and information together and to optimize the way they connect with each other.

Importers that have undergone Focused Assessment audits can also benefit by thinking of CBP as an integral part of their extended supply chains. The reason: It's said that a chain is only as strong as its weakest link, and in our view, the weakest link in an international supply chain often is the trip across the border and into the United States, where goods literally are in CBP's custody until they have been formally released.

Companies that operate effective and efficient supply chains know that each segment of those chains needs to be managed--even those over which they have no direct control. Yet few companies have considered what it takes to manage a relationship with federal regulatory agencies such as CBP. Yes, it can be risky to take an active posture toward the government, but the alternative is for importers to risk losing control of their goods to CBP for indeterminate periods.

Importers have not yet exploited the "shared responsibility" aspect of the Customs Modernization Act, believing that issuing regulations and explaining them on a website fulfills the government's obligation to inform the trade community of regulatory requirements.

We believe that consistently applying "reasonable care" to customs activities can help importers gain significant leverage when dealing with regulatory authorities. In other words, importers can expect a degree of reciprocity from CBP when they follow the agency's rules with particular care.

In short, thoughtful use of the Focused Assessment and ISA programs can provide importers with the opportunity to get ahead of the curve on compliance issues and, more importantly, to shape their relationships with CBP in a way that will bring greater control over the regulated portions of their supply chains.

Can You Avoid Focused Assessments?

Is it possible for an importer to fall outside the scope of the Focused Assessment program administered by U.S. Customs and Border Protection (CBP)? The answer is yes, there are two ways to avoid such audits, but one is more or less a matter of chance while the other requires a significant amount of effort and expense.

As a practical matter, the pool of companies that are subject to Focused Assessments is limited to the 9,000 importers that annually enter merchandise valued at $30 million dollars or more. Thus, smaller companies are unlikely to draw CBP's attention.

The other way is to join the Importer Self Assessment (ISA) program. ISA members are formally exempted from Focused Assessments, in part because they undergo a similar, very stringent audit as part of the ISA application process.

When enrolling in ISA, companies sign a memorandum of understanding with CBP affirming that they agree to comply with applicable laws and regulations, maintain a system of business records that demonstrates the accuracy of their customs transactions and creates an audit trail of financial records, maintain internal controls that encompass the five basic components of regulatory compliance, and perform periodic testing, among other requirements.

A significant benefit of ISA participation, according to ISA Director Joseph Rees, is an enhanced right to employ "prior disclosure"--the process by which a company that finds customs violations on its own and reports them to CBP may greatly reduce its penalty exposure. Yet relatively few importers have enrolled in ISA. Many apparently are reluctant to invite CBP to review their regulatory-compliance processes. Some importers also have expressed concern about the amount of time and resources required to complete an ISA application and audit. To attract more participants, CBP needs to convince importers that the benefits of ISA outweigh the risks and that the agency will not be the guest that came for a weekend but stayed for a month.


Joan Padduck, a former global logistics executive for major U.S. importers, including Reebok and Staples, and Philip Spayd, former Director of Northeast Field Operations for CBP, are principals in the consulting firm Global Trade Systems Inc.
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Author:Padduck, Joan; Spayd, Philip
Publication:Logistics Management (Highlands Ranch, Co.)
Date:Oct 1, 2005
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