Internal Audits: The Cornerstone of Compliance - A.N. Deringer
Internal audits are the cornerstone of your compliance program. Monitoring your performance, and that of your Customs broker, is the only way to determine if the policies and procedures you've put in place are effective.
You may be asking yourself: How often do we do this? How do we do this? Who has time for this? Good questions! Let's address them one by one:
How Often Do We Do This?
- Weekly Automated Commercial Environment (ACE) Reviews
- Quarterly Post-Entry Reviews
How Do We Do This?
I recommend running your ACE report on a weekly basis to review ongoing activity at a high level. You are looking for:
- Unfamiliar HTS numbers
- New suppliers
- New countries of origin
You're looking for changes in sourcing patterns—new suppliers, products, or origins that have not been run by you for input prior to import. If/when you see something unusual, pull the entry(ies) and audit these transactions in detail. These unknowns have already created risk in your supply chain; now is the time to mitigate that risk.
Quarterly Post-Entry Reviews are the crux of your internal audit program. Establish a sample set of entries for a four-way-match exercise, a process that ensures the entered value/product matches the commercial invoice, purchase order, payment, and receiving records. Any discrepancies among these factors must be understood and explainable. How big is the sample? How do you choose which entries? Your business model and landscape determines your sample. My general approach is a mix of random and judgmental sampling. I make sure to pull entries across a good range of suppliers, products, and origins. If I've had a problem with a certain supplier, specific documentation, classifications, etc., I pull samples of these transactions every quarter until I'm satisfied the issue has been resolved.
Once the sample is established, it's time to use your Post-Entry Review spreadsheet, which contains key elements of the commercial invoice, Entry Summary (7501), accounts payable records of billing invoices and payments for each entry, and receiving records. Your goal is to ensure the classifications, values, and quantities declared to US Customs and Border Protection (CBP) match what you actually received in your inventory and paid your suppliers. Any discrepancies are assessed in terms of materiality to determine if post-summary corrections are in order and/or training/penalties to suppliers or others are required. You also need to determine if the errors are one-offs or systemic, which may require further auditing of specific transactions. Performing these audits quarterly ensures no issue gets out of control.
Who Has Time For This?
These audits take time, and it is time well-spent. It is also a regulatory requirement to demonstrate reasonable care and, therefore, not optional. If you simply don't have resources to devote to this effort, I suggest you contact your Customs broker to assist you. Hiring a quality Customs broker may be the most cost effective way to execute these audits.
Internal audits may seem daunting, but they are an integral part of your Customs compliance program. Developing this discipline will help you uncover risks in your supply chain, and, quite often, surface opportunities hidden in the patterns of your import activities to improve overall supply chain performance.