Supply Chain Audits Work for Corporations, But Not The Planet, Says New Report

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A new report argues that supply chain audits are ineffective at improving compliance and act merely to embed an unhealthy status quo in multinational offshore sourcing.

The Sheffield Political Economy Research Institute (SPERI) based at the University of Sheffield, in the UK, conducted a series of interviews with experts and practitioners.

In one interview, a former director of CSR at a US retailer, painted a bleak picture of the sector: “Within the social compliance world, it is now standard operating understanding that audits don’t work to achieve change within organizations”.

The authors claim that supply chain audits are “ineffective tools for detecting, reporting, or correcting environmental and labor problems in supply chains.”

The supplier audit industry, the report argues, “is ‘working’ for corporations, but failing workers and the planet” For example, in 2013, just months before the collapse of Bangladesh’s Rana Plaza factory, in which hundreds of workers lost their lives, the facility passed a compliance audit.

The industry that ‘certifies’ suppliers is frequently subject to criticism. That auditors are paid by those that they are certifying creates an inherent conflict of interest, many argue.

The primary objective of audits is to provide information. Corrective action, if it is to succeed, can only be effective if is grounded on facts. But, the study contends that the “information audits provide is selective and fundamentally shaped by the client”. That is, the framework under which auditors operate is pre-defined to minimize the likelihood of uncovering wrong-doing. Suppliers below the first tier, for example, are rarely audited, despite their more numerous representation of the supply base and their greater probability of non-compliance.

As such, audits, taken as a whole, provide an over-optimistic picture of supply chain compliance levels. They do not so much as identify weaknesses, the authors contend, but confirm the status quo.

The increasing use of audits as a tool of governance is bolstering corporate interests and influence over consumers and policymakers and, ultimately, deepens corporations’ power to make their own rules and norms and evaluate and report on their own performance.”

If auditors are as ineffective as this report suggests, it may explain some of the recent revelations made by investigative journalists. In October of last year, reporters traced evidence of child labor in the Turkish textile market, which services high street retailers across Europe. Undercover journalists also exposed practices of illegal employment in Australian fruit farms in November 2017.

The report is hard-hitting and perhaps unfair on those working in the supply chains of multinationals who are earnest in their ambition to improve the lot of workers and the environment. In my experience, many are proud of their work and believe they are making real progress. They would be horrified by the suggestion that supplier audits are cynically abused by myopic corporations that only look for profits.

There are other factors that may explain the imperfect record of supplier audits about which the report does not directly engage.

Multiple audits standards, for example, undermines the industry’s effectiveness. Selling to a corporation is often accompanied by a range of demanding specifications regarding quality, production methods and delivery timetables, alongside sustainability compliance. These requirements can often be unique to a single multinational. Consequently, suppliers can find themselves in a situation where they duplicate production lines as they try to meet disparate and contradictory standards.

Another factor that may diminish the power of audits is supplier deception – where companies deliberately deceive both the auditors and the sourcing company. SEPRI notes that “deception in the audit regime is widespread and known to corporations” but blames the multinationals, who are also arguably victims to the lie.

But supplier deception is hard to detect. Even one of the interviewees in the study noted that suppliers would “drill their people on what they need to say” prior to audits. How can you uncover non-compliance when it is concealed by ruse? And, even knowing that audits are subject to such games, is this sufficient reason to abandon them in entirety?

Although multinationals appear flush with wealth, these resources are often spread thinly. It is not uncommon for a major corporation to source from over 100,000 suppliers at the tier 1 level. However, companies are keen to create an impression to the investor community of unbridled success. Observe the regular ceremony around the recent record-beating multi-million dollar quarterly results that projects an image of effortless prosperity.

Yet, in the battle for resources, the rich multinationals, strangely enough, will always be out-financed by cash-strapped investigative journalists that have the staying power to stick around with a supplier for as long as it takes to unearth a scoop to embarrass the corporation. Auditors, by contrast, must divide their limited time to cover 100,000 suppliers. They have tough targets under time pressure and suppliers can exploit this divided attention to hide skeletons.

To address this challenge, auditors can emulate journalists. Investigators may consider spot-testing fewer suppliers deep in the supply chain and engage in the tactics used by journalists to ensure compliance. This can involve following logistics routes, visiting sites unannounced or using other creative measures to reach the truth. All contracts should be written to allow for these techniques.

SPERI goes further and calls for the supply chain audit industry to move from the private sector to public governance. Self-policing, the authors contend, has failed and now radical remedies are required.

There are challenges to this proposal. The cross-national nature of supply chains has created patchy governmental regulation. No one is sure who has legislative authority. Moreover, in an era of declining international cooperation and even protectionism, this may not be the time to introduce a new multi-national regulating body.

Perhaps a greater degree of transparency within the industry may provide a move in the right direction. Opening results for public scrutiny and admitting the limitations of the methodology may ensure that audits are more effective. If the industry does not look to reform itself, perhaps governments will take calls for more stringent legislation more seriously and look to forcibly expose the supply chain to public scrutiny.

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