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 www.cbp.gov.) 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. Continued ...

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