The Role of Internal Audit in Managing Third-Party Compliance Amid Tariff Changes

Recent changes in tariff policies and an increased focus on third-party requirements have significantly increased the integral role that internal audit can play in helping supply chains navigate these additional challenges. Companies must proactively adapt to these changes to maintain their competitive edge, minimize risks, and ensure the efficiency and resilience of their supply chains. Internal audit functions are uniquely positioned to provide valuable insights and assurance in this evolving environment. This article explores the role of internal audit in defining a company’s third-party requirements and using them to address the impact of recent tariff policies.

Defining an Organization’s Third-Party Requirements

Compliance with evolving tariff regulations is essential to avoid penalties and legal issues. Internal auditors must verify that the company adheres to the latest tariff requirements and maintains accurate and timely documentation. As these regulations often have a ripple effect on the supply chain, it becomes crucial to ensure that suppliers are also compliant and aligned with the organization’s standards.

Supplier Vetting and Management

We expect updates to the International Professional Practices Framework (IPPF) third-party requirements later this summer, which will establish a baseline for assessing the design and implementation of third-party governance, risk management, and control processes. These requirements necessitate risk management processes for third parties be standardized and comprehensive to address key risks and ensure continuous monitoring of suppliers.

In the meantime, internal audit should assess the effectiveness of the company’s supplier management processes, including due diligence, contract management, and performance evaluations. The following includes specific actions for internal audit teams:

• Evaluating Supplier Due Diligence
  • Asses all supplier selection protocol, ensuring the process includes thorough due diligence, including compliance checks and financial assessments.
  • Ensure due diligence includes financial statements, compliance certifications, and background checks, and is maintained meticulously.
  • Assess risk mitigation practices for new and existing suppliers, including contract approval and execution.
• Assessing Contract Management
  • Review Contract Templates: Examine the company’s standard contract templates to ensure they include essential terms and conditions, such as scope of work, pricing, deliverables, and performance metrics.
  • Contract Approval and Execution: Assess the approval and execution process for supplier contracts. Verify that appropriate stakeholders review and approve contracts, and that executed contracts are appropriately stored and accessible.
  • Contract Monitoring: Evaluate how the company monitors and manages active contracts, including tracking contract renewals, amendments, and ensuring compliance with terms and conditions.
• Evaluating Supplier Performance Management
  • Performance Metrics and KPIs: Review the performance metrics and key performance indicators (KPIs) used to evaluate supplier performance. Ensure metrics are clearly defined, measurable, and aligned with business objectives.
  • Performance Evaluation Process: Assess the process for regular supplier performance evaluations. Verify that evaluations are based on objective criteria and that results are documented and communicated to suppliers.
  • Corrective Actions and Improvement Plans: Check whether the company has mechanisms to address performance issues. This includes documenting corrective actions, setting improvement plans, and monitoring progress

Impact of Recent Tariff Policies

Increased Costs and Financial Risks

Tariff policy changes can increase the costs of raw materials, components, and finished goods. These cost increases can squeeze profit margins and necessitate adjustments in pricing strategies. Internal audit can partner with senior leadership to assess the financial impact of tariff changes and verify that management has implemented effective measures to mitigate these risks.

Supply Chain Disruptions

Tariffs can disrupt established supply chains by making certain suppliers less competitive or by causing delays in the importation of goods. Internal audit should evaluate the organization’s supply chain resilience, identify potential bottlenecks, and ensure contingency plans are in place. Specifically, internal audit can follow a three-step process:

• Understand the Supply Chain Structure and Processes
  • Map the Supply Chain Structure: By identifying suppliers, manufacturers, logistics providers, and distribution channels, auditors can better understand the flow of materials across the supply chain and identify vulnerabilities.
  • Identifying Key Stakeholders: It’s essential to identify and engage with key stakeholders, including supply chain managers, procurement officers, and logistics personnel, to gain a comprehensive understanding of the processes and potential vulnerabilities.
• Stress Testing and Scenario Analysis
  • Stress Testing: Perform stress tests on the supply chain to evaluate how it performs under different adverse conditions, such as a sudden increase in demand, supplier failure, or transportation delays.
  • Scenario Planning: Use scenario planning to analyze the potential impact of various risk events on the supply chain. Develop and test different scenarios to understand their implications and identify weaknesses.
• Developing and Evaluating Contingency Plans
  • Contingency Planning: Review the organization’s existing contingency plans and ensure they are comprehensive and up to date. Contingency plans should include alternative suppliers, emergency response protocols, and communication strategies.
  • Plan Testing: Ensure that contingency plans are regularly tested and updated based on lessons learned from simulations and real-life incidents. This helps to ensure that plans are effective and can be executed quickly in the event of a disruption.

Continuous Monitoring and Reporting

As your company begins to understand the areas of the business impacted by the changing tariff policies, it is essential to monitor the external environment and the company’s response to changes on an ongoing basis. This includes evaluating financial risks, supply chain vulnerabilities, compliance risks, and reputational risks.

Your internal auditor should establish robust monitoring processes that track emerging risks and ensure compliance with new regulations. Regular reports detailing key risks and recommending corrective actions should be provided to senior management. These reports should highlight immediate concerns and offer long-term strategies for managing the impact of tariff changes on the supply chain.

Effective communication and collaboration between internal audit, management, and other key stakeholders are essential. Auditors should facilitate discussions and ensure a common understanding of tariff impacts and supply chain challenges. By fostering open dialogue, internal audit can help build a more proactive and coordinated approach to risk management.

Finally, internal audit can support the organization in building a resilient supply chain framework that can withstand tariff fluctuations. This may involve auditing supply chain partners for compliance, assessing the integrity of supplier relationships, and recommending diversification strategies to reduce dependency on high-risk regions. By enhancing the supply chain’s resilience, the organization can better navigate the challenges posed by new tariff regulations.

Conclusion

The evolving landscape of tariff policies and third-party requirements presents significant challenges and opportunities for companies and their supply chains. The role of internal audit is more critical than ever in an increasingly complex and dynamic global trade environment. By leveraging their expertise and adopting a proactive approach, internal auditors can help organizations survive and thrive amid the challenges posed by recent tariff policies and third-party requirements.

CBIZ works with middle market leaders subject to the new tariffs to understand the impact on their operations and explore mitigation strategies. We will continue to closely track executive actions regarding tariffs and will keep you informed in the coming weeks and months to provide additional insights.

If you have questions, please connect with us.