Imports and Exports: A Risky BusinessAn Issue for Executive Management

Presentation for:

CAUBO Conference

June 2007

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Presenters

Phyllis ClarkVice-President (Finance & Administration) & Chief Financial Officer University of Alberta

Barry TraversTax PartnerKPMG Edmonton

Jody BrookwellAssociate Director, Supply Management ServicesUniversity of Alberta

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Overview

• Non-financial risks to our Institutions

• U of A management of these risks

• External perspective on the assessment of risk

• U of A action plan to address risk as it relates to imports and exports.

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Internal Control

Business of Risk

Other Risks

Faculty / UnitBusiness Risk

FinancialStatements

RiskERM

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Risk Management

• “Other” Non-Financial risks• Embedded in U’s businesses• Risks to:

– Reputation– Research projects– Programmes

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Risk Management

• Environmental influencers of other Risk

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Sponsored Research Funding($ Millions)

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LegislationAccess to the Future Act

Administration of Estates ActAgricultural and Recreational Land Ownership Act

Alberta Bill of RightsAlberta Capital Finance Authority Act

Alberta Corporate Tax ActAlberta Energy & Utilities Board ActAlberta Health Care Insurance Act

Alberta Heritage Foundation for Medical Research ActAlberta Heritage Foundation for Science & Engineering Act

Alberta Heritage Scholarship ActAlberta Science & Research Authority Act

Animal Keepers ActAnimal Protection ActCancer Programs Act

Charitable Fundraising ActConstitution Act

Dangerous Goods Transportation & Handling ActEmployment Standards Code

Environmental Protection & Enhancement ActExpropriation Act

Financial Administration ActFiscal Responsibility Act

Freedom of Information & Protection of Privacy ActGaming & Liquor ActHealth Disciplines ActHealth Information ActHealth Professions Act

Human Rights, Citizenship & Multiculturalism ActHuman Tissue Gift Act

Income Trusts Liability Act

Insurance ActInternational Trade & Investment Agreements Implementation Act

Labour Relations Code Land Titles Act

Legal Profession ActLibraries Act

Livestock & Livestock Products ActMedical Profession Act

Mental Health ActMines & Minerals Act

Motor Vehicle Accident Claims ActOccupational Health and Safety Act

Occupational Therapy Profession ActPeace Officer ActPension Fund Act

Personal Information Protection ActPharmaceutical Profession Act

Police ActPost Secondary Learning Act

Professional & Occupational Associations Registration ActPublic Health Act

Public Sector Pension Plan ActPublic Utilities Board ActRadiation Protection Act

Safety Codes Act Smoke Free Places Act

Student Financial Assistance ActTraffic Safety Act

Trespass to Premises ActWater Act

Wildlife ActWorkers’ Compensation Act

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Why the Import Review?

• Pre-emptive

• Business/ process risk/ medium level risk

• Import/Export

• Biggest Surprises

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VP Level Challenges

• Recognizing the risk

• Selling the risk

- Getting organization onside

• People and processes

- Shortage of talent

• Keep it going

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Assessment of Risk – External Perspective

• The Sarbanes Oxley Act of 2002

• Management required to make representations on the effectiveness of internal controls over financial reporting

• Audit Committees now bear the overall responsibility of monitoring the completeness and accuracy of disclosures.

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Assessment of Risk – External Perspective

• Attestation requirement shifts more responsibility and liability to management and the Audit Committee.

• External auditors have some limited involvement to discharge their obligations under GAAP.

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Changed Environment

…External Auditors are NOT required to perform ANY

procedures to assess the accuracy, reliability or completeness of non-financial information.

…so how does Management gather the information required in order to make the representations on the effectiveness of internal controls as these relate to indirect tax commitments of a PSB.

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Tax/Indirect Tax Attestation• Tax – particularly Indirect Tax – is embedded in many aspects of

the organizations financial data.• In the C-SOx environment, Management is accountable for:

Documentation of specific tax risks inherent in the organization;

Significant classes of transactions;Account balances;Financial statement disclosures; andSignificant non-routine and non-systematic transactions.

• Management is responsible for identification of tax risk that could be a significant factor influencing management’s estimates.

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Where do the Issues of Risk Reside ?The areas of risk generally can be found in the followingcategories:

• Technical or factual inaccuracies in terms of application of tax;

• Miscoding of expenditures, or Incorrect recognition of tax liability in regard to classes of transactions;

• Late submission of returns, elections, or payment of taxes;

• Communication received by/with Finance • Board of Directors or Management involvement with

significant tax strategies.

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Imports/Exports Areas of Risk

The following are the key specific risk areas related to

Customs Compliance:

Imports Exports

• Valuation• Tariff Treatment• End-Use Provisions• Reporting Requirements• OGD Requirements

• High Value Goods• Export Controls• Area Controls• Subsequent Re-Import• High risk of non-reporting

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Overview of Findings

The findings of the import/export review of a University

tends to uncover the following: • Heavy reliance on broker with perception that –

“everything must be OK!”• Decentralized environment causes widespread risk

potential.• Fundamental lack of internal processes to complete a

“self-review” of key documents.

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Overview of Findings

• Documentary deficiencies in most risk areas which would produce penalties and duty.

• Significant reputational risk for certain funding programs under OGD requirements.

• Risk of slower movement of goods across the border.• Need for training to increase knowledge level of

requirements to staff asked to administer processes.

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U of A Experience

Engaged KPMG to complete a Customs Verification Audit

of import transactions.• Objective

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U of A Experience

Audit Findings:

Errors in all four risk categories

Non-compliance to OGD requirements

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U of A Experience

Final Report recommendationsCorrect errors & pay duties/taxes owing $$$Review internal processesImprove communication & training

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Other Government Departments OGD permits or certifications are required for certain

imported goods:

• Canadian Food Agency (CFIA)• Health Canada• Industry Canada• Transportation Canada• Department of Justice Canada• Atomic Energy Control Board• International Trade Canada

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U of A Example

Import transaction – Human Pathogen

Declared Value - $ 598.68 Canadian

Cost to Import - $ 60.00

Risk to Institution – “Priceless”

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U of A Action Plan

• Structure a Customs Division and develop expertise in-house.

• Build on relationship with Customs Broker.

• Update internal Import and Export procedures.

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U of A Action Plan

• Involve procurement - review distributed purchasing systems

• Develop a Communication and Training Strategy.

• Develop plan for ongoing internal compliance reviews.

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Next Steps

• Review of Export transactions

• Ongoing compliance reviews – Imports and Exports

• Take advantage of future CBSA programs

• Communication and Training – Keep it Going!

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Summary

• Big reputational risks; many external Departments

• Sleeper

• Pre-emptive – short term pain for long term gain

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Your Questions?