Navigating Tariff Audits: A Guide for Internal Audit Professionals

The Evolving Tariff Landscape and Its Impact on Businesses

The global tariff landscape is in constant flux, presenting significant financial and operational challenges for many organizations. High-profile examples, such as Ford Motor Company's substantial tariff costs and FedEx's struggles with "erratic" tariff policies, underscore the widespread impact. Internal audit professionals, many of whom previously had limited experience with tariff-related audits, are now finding this area a critical focus. The dynamic nature of regulations, coupled with the potential for substantial financial penalties and supply chain disruptions, necessitates a proactive and informed approach from internal audit teams.

Key Tariff-Related Risks and Resources for Internal Auditors

Internal audit teams must understand the multifaceted risks associated with tariffs. These include the volatility of tariff regulations, which can change rapidly and impact compliance efforts; supply chain concerns, where tariffs can compress margins and necessitate strategic sourcing decisions; customs noncompliance, leading to penalties and shipment delays; and the misapplication of complex trade agreements like USMCA rules of origin. Incorrect tariff calculations and payments can also significantly distort financial reporting. To navigate these complexities, internal auditors can leverage various resources, including real-time updates from financial institutions, historical data from trade organizations, and risk insights from economic institutes, to build a comprehensive understanding of the tariff environment.

Defining Internal Audit's Role and Potential Audit Projects

Internal Audit's role in tariff management is not to become the primary expert but rather to provide assurance and advisory support while maintaining independence. This often involves partnering with departments like Finance, Trade Compliance, and Supply Chain, and sometimes engaging external specialists. Several potential audit projects can be undertaken:

• Cross-Functional Tariff Teams: A leading practice involves forming integrated teams (e.g., Supply Chain, Engineering, Finance, Legal, Internal Audit) to oversee tariff processes, ensuring compliance, cost reduction, and clear audit trails.
• Tariff Process Reviews: Auditing the effectiveness of tariff processes across different business locations, focusing on clear accountability, cross-functional communication, validation of payments and calculations, and timely identification of process owners.
• Decision Tree Drafting/Review: Assessing the development and adherence to decision trees that document sourcing decisions, USMCA qualification, and compliance risks, ensuring the business follows established guidelines for product sourcing and classification.
• Data Governance Audit Support: Advising on master data governance projects, particularly regarding correct classification in systems like SAP, to mitigate errors stemming from incorrect data setup.
• Third-Party Vendor Audits: For organizations outsourcing tariff compliance, conducting audits of third-party vendors to ensure accurate coding, payment, and communication between internal and external systems.

By engaging proactively in these areas, internal audit can transition from a traditional compliance role to a trusted advisor, helping organizations manage emerging risks and drive value.