By Jennifer Horvath, Associate Attorney
Changes to the U.S. Customs and Border Protection (Customs or CBP) Focused Assessment program are almost here. Customs announced earlier this year that it expects to implement the changes in early fiscal year 2015 (the 2015 fiscal year begins October 2014). Customs should announce the formalized updates prior to the actual implementation. However, even though no announcements have been made in this regard, certain updates may occur although they are not yet posted to CBP’s website.
A Focused Assessment (FA) is Customs’ name for a comprehensive audit of an importer’s Customs compliance program. FAs are performed by the Regulatory Audit division of Customs. Importers are selected for FAs based on their volume and value of entries, and any risk areas identified through a review of the company’s import data. FAs address key areas of risk in importing such as: classification, valuation, use of free trade agreements, use of special duty free provisions, and antidumping/countervailing duties. Currently, FAs follow a set procedure by proceeding from distinct phases in the process. First, auditors begin with a review of the company’s internal controls addressing their import program and analyzing an initial set of entries to obtain a better grasp of the importer’s controls and risks. Auditors then test areas of the company’s import program found to be at risk after a review of internal controls. If a significant risk is determined according to the currently strict guidelines, the auditors are required to proceed to transactional testing. Testing includes requesting sample entry documents related to a specific area, as well as reviewing company financial records and general ledger, and proofs of payment for specified entries. Upon finalizing the test results, if significant risk is found, the loss of revenue is calculated by either the importer or the Customs auditors (depending on the level of risk identified and the negotiations between the company and Customs). If no significant risk is found, an audit opinion is issued usually with no loss of revenue identified nor penalties issued. If risk is found, the importer would be required to complete Customs improvement plans (CIPs) for each risk area identified. The CIPs would be reviewed by Customs for accuracy and thoroughness in preventing a recurrence of the errors found in the testing. A link to CBP’s handbook on current FA procedures is found at: http://www.cbp.gov/sites/default/files/documents/FA%20Document.pdf.
Customs auditors currently have strict guidelines to follow in determining whether a company’s import activities pose an unacceptable risk, and therefore “fail” an audit. The anticipated changes to the FA program include allowing more flexibility for auditors to determine whether import activities pose an acceptable or unacceptable risk. The phases will essentially stay the same, but with some modifications to allow for a process that is more adaptable to the individual importer’s program. Below is an overview of the future changes announced by CBP:
- Sample size: CBP has stated it will have a range of size of sample entries selected for the initial review of entries. The initial entry set can be expanded to include a larger quantity of entries. Customs believes the larger sample size allows for greater accuracy in identifying issues or lack thereof.
- Updating risk assessment procedures used to follow current COSO framework standards (Committee of Sponsoring Organizations of the Treadway Commission), and current Government Accounting Standards.
- Instead of formulaic worksheets that led to rigid conclusions of either an unacceptable or acceptable risk, auditors will be given general guidelines for assessing internal controls and testing parameters. The general guidelines allow auditors to use their experience to be more flexible in assigning risk level, and to create more tailored audit programs to suit the circumstances of the importer and its environment.
- Auditors will be allowed to vary the focus of the audit depending on their expectation of the efficacy of the internal controls.
In addition to FAs, the CBP Regulatory Audit also issues Quick Response Audits (QRAs). QRAs are targeted audits, and analyze one risk area of the importer which has been selected after reviewing the import data for that company. In addition, Customs is also starting to issue what they informally term “small audits”. Such audits are similar to QRAs, but they include more risk areas which have been pre-identified. Our firm’s experience has been that these audit only addresses two risk areas.
As Customs has not yet published their intended formal implementation of the FA changes, it remains to be seen exactly what these will entail, but one thing is clear: the audit process overall is changing – requiring importers to be ready to show how their import compliance programs/controls meet the COSO- based standards, are effective, and are being followed. Without these key efforts, the audit process will surely be long and protracted.
