Details from DHS' OIG Report on CBP FY 2009 Internal Controls (Part II - Drawback)
The Department of Homeland Security's Office of Inspector General has issued a report containing an independent audit conducted by KPMG LLP that addresses the strengths and weaknesses of U.S. Customs and Border Protection's fiscal year 2009 internal controls over financial reporting.
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This is Part II of a multi-part series of summaries of this report and provides an overview of the report's findings regarding CBP's FY 2009 material weaknesses1 in the area of drawback2. Drawback was also found to be a material weakness in FY 2008. See future issues of ITT for additional summaries.
Multiple Weaknesses Related to Drawback Internal Controls Identified
The auditors identified a number of weaknesses related to CBP's internal controls over drawback, noting that much of CBP's drawback process is manual, placing an added burden on limited resources. While CBP used a sampling approach to compare, verify, and match consumption entry and export documentation to drawback claims submitted by importers, system and procedural limitations decreased the effectiveness of this approach. The auditors concluded that the inherent risk of fraudulent claims or claims made in error was high, which increased the risk of erroneous payments.
Weakness Include Lack of Automated Controls, Invalid Statistics, Etc.
The auditors detailed these weaknesses as follows:
Lack of automated controls. The Automated Commercial System (ACS) lacked automated controls to detect and prevent excessive drawback claims and payments, necessitating inefficient manual processes that do not effectively compensate for the lack of automated controls. ACS did not have the capability to compare, verify, and track essential information on drawback claims to the related underlying consumption entries or export documentation upon which the drawback claim was based. In addition, ACS lacked controls to prevent the overpayment of drawback claims at the summary line level.
Unknown amount of overclaims.Drawback review policies did not require drawback specialists to review all or a statistically valid sample of prior drawback claims against the underlying consumption entries (UCE) to determine whether, in the aggregate, an excessive amount was claimed. CBP does not have absolute assurance that a selected import entry is not being over claimed by different drawback claims.
Invalid statistics.Drawback review policy and procedures allow drawback specialists, with supervisory approval, to judgmentally decrease the number of ACS selected UCEs randomly selected for review, thus decreasing the review's effectiveness. Further, CBP's sampling methodology for selecting UCEs is not considered to be statistically valid.
Insufficient document retention period.The period for document retention related to a drawback claim is only three years from the date of payment. However, there are several situations that could extend the life of the drawback claim well beyond three years.
Auditor Recommendations to CBP to Improve Controls Over Drawback
The auditors recommended that CBP take the following actions:
- Implement effective internal controls over drawback claims as part of any new system initiatives, including the ability to compare, verify, and track essential information on drawback claims to the related UCEs and export documentation for which the drawback claim is based, and identify duplicate or excessive drawback claims;
- Implement automated controls to prevent overpayment of a drawback claim; and
- Develop a system or process to eliminate the need for statistical sampling of UCE and prior related drawback claims. In addition, until this system or process is implemented, the auditors recommend that CBP explore other statistical approaches for selecting UCEs and prior related drawback claims under the current ACS environment.
1A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis.
2Drawback is a remittance, in whole or in part, of duties, taxes, or fees previously paid by an importer. CBP collected approximately $26.4 billion in import duties, taxes and fees in FY 2009 on merchandise arriving in the U.S. from foreign countries.
(See ITT's Online Archives or 03/11/10 news, 10031115, for Part I of BP's multi-part series of summaries on this report.
See ITT's Online Archives or 03/02/10 news, 10030215, for BP summary of CBP and TTB withdrawing their drawback proposed rules.)
DHS OIG report (OIG-10-51, dated February 2010) available at http://www.dhs.gov/xoig/assets/mgmtrpts/OIG_10-51_Feb10.pdf