If the anti-dumping investigation also involves cost of production, the verification is even more time consuming and difficult. The Commerce Department usually sends an accountant (either an employee of the Commerce Department or an outside consultant from an accounting firm under contract to the Commerce Department) to conduct the cost. verification. The accountant concentrates on several general issues:

- Have all of the costs of producing the merchandise been included in the response? Many of the requests made at a cost verification, such as an examination of the engineering drawings for a product and a factory tour, are intended to discover whether all of the costs have been included. If the Commerce Department finds some component listed on the engineering drawing that has not been included in the cost, it expects an explanation.

- Have the costs been properly allocated to the individual products or models under investigation? - The Commerce Department must ensure that costs have not been allocated to other products that are not under investigation, as this would understate the costs of the products that are under investigation. The Commerce Department is especially careful when examining factory overhead expenses, which are relatively easy to reallocate to products not under investigation.

- Have all of the appropriate costs been included in the period of investigation? - The Commerce Department must also ensure that costs have not been allocated outside the period of investigation. For example, it usually examines whether an appropriate allocation of research and development costs has been included, even if those costs were incurred prior to the period of investigation. Unfortunately, the Commerce Department's policy with regard to R&D costs has not been consistent. This problem is discussed further in chapter 3.

- Have the costs been properly allocated among the various categories used by the Commerce Department? - The Commerce Department knows that companies try to shift costs among the various categories to lower the total costs. For example, shifting overhead expenses into general and administrative expenses can reduce the total cost, and thus reduce the dumping margins. The Commerce Department tries to prevent such shifts. (G&A is usually expressed as a percentage of cost of manufacture, including overhead; switching an expense from overhead to G&A will often create only a very small increase in the G&A percentage while reducing per-unit cost of manufacture significantly. In addition, in constructed value cases when G&A is less than the statutory minimum 10%, adding to G&A up to the minimum is an obvious tactic used by respondents.)

- Have all financial statement costs been attributed to the product under investigation? -Cost accounting systems often adjust costs between the finished goods cost of the product and cost of goods sold in the audited financial statement. When the finished goods cost is lower, respondents often attempt to report this as the cost of production. Commerce Department accountants therefore always trace to the cost of goods sold account in the audited financials even when the product under investigation has its own profit and loss statement.

- Does the company's cost accounting system have any internal flaws that result in underreporting of costs? - All cost accounting systems are not created equal. Commerce Department accountants often concentrate - to the respondent's surprise - on seemingly academic cost accounting issues if they believe there is a flaw in the company's system. For example, in one case Commerce Department cost accountants determined that a respondent's work-in-process system inaccurately expressed work-in-process quantities. The cost accountants completely recalculated the quantities on the grounds that they had not been adjusted to a 'completed-unit' basis. Be prepared to explain any idiosyncratic aspects of the company's system.

Unfortunately, companies usually do not have accounting systems that are specifically designed to answer the questions posed by the Commerce Department. The preparation for a cost verification is thus often very difficult and time consuming.

The best preparation for a cost verification is to anticipate possible Commerce Department questions. Often foreign cost accountants have not thought very carefully about their cost accounting system; they simply follow the system. As part of the preparations, the lawyers and cost accountants should think about the possible weaknesses in the system, and prepare defences of those weaknesses. If a company is prepared to show that a particular distortion is insignificant in calculating the total cost of the products under investigation, the Commerce Department usually pays much less attention to the distortion.

Source: Business Guide to Trade Remedies in the United States: Anti-dumping, countervailing and safeguards legislation practices and procedures