The Limitations and Evolving Role of On-site Supplier Audits: 4 Reasons They Are Starting to Miss the Target

March 17, 2016 EcoVadis

Over the last 20 years the outsourcing of manufacturing and service operations to countries with inadequate laws, weak enforcement and feeble or non-existent worker protections has created significant need for a system for monitoring and verifying management controls of these suppliers and subcontractors to not only prevent negative social and environmental impacts, but ultimately improve their performance. As companies have tried to gain greater visibility over their supply chains, most have deployed an “audit cycle approach” to enforce supplier compliance with client company policies and expectations. However the empirical evidence overwhelmingly indicates a significant gap exists in making audits a truly effective tool for supply chain risk management. Evidence includes disasters such as the Rana Plaza collapse in 2013 (and other examples displayed in the graphic below), widespread supplier “audit fatigue”, and a booming industry of third-party audit “consultants”[1]. A recent study by Sheffield University[2] went so far as to say that “…the audit regime is ‘working’ for corporations, but failing workers and the planet. …Audits are ineffective tools for detecting, reporting, or correcting environmental and labour problems in supply chains.”

Despite the fact that vast numbers of supplier audits have been performed over the last several decades, there persist a number of issues that limit the value they deliver. We explore these issues including “genericization” of audit content, high costs, audit fraud, and lack of focus on and ineffectiveness on driving improvements. These issues hinder the ability of Buyers (purchasing organizations) to obtain accurate information about supplier performance—leaving them exposed to reputational, legal and operational risks.

Figure 2: Post-audit disasters at production sites contracted by large corporations

Limitation 1. Genericized Audit Content

One key limitation of audits is that they have become “generic”: The content has been generalized in a trend to pre-develope “packaged audits” that often fail to assess the material issues unique to the site’s business activity and hinders engagement between the trading partners (Buyer and Supplier). There are numerous international CSR auditing standards, including SA8000, Ethical Trade Initiative (ETI), Electronics Industry Citizenship Coalition and ISO 14001 that auditors use to assess supplier management of labor, human rights and environmental impacts. Third-party auditing companies offer Buyer organizations a range of products: From rigorous, costly audits that consist of numerous management standards combined, or stripped-down versions that are inexpensive. This creates several issues that ultimately limit the level of accuracy of audits.

Monitoring and testing companies that perform most CSR audits have developed simplified check box inspections that require only one day to complete, but completing audits in such a short timeframes likely prevents auditors from digging deeper into certain elements of supplier management systems. The amount of time it takes to complete a thorough site audit depends on the size of the operations, but critics of the auditing system have attributed the short amount of time audit companies spend on single site audits (generally 1 day) with flawed inspections[3]. One such instance occurred when a one day checkbox audit performed by one of the top auditing firms using the BSCI standard failed to address significant worker grievances that escalated to worker strikes. Upon a second audit request by the factory owner—performed by Verite over three days—a significant number of issues that went far beyond the issues behind the worker grievances[4].

Social audits provide a view of working conditions only at the site level without illuminating systemic issues that take place outside of the “visible” operations, often through unauthorized subcontracting. One such issue—recruitment practices—which through broker‐induced debts and document retention practices enable human trafficking to persist[5]. To identify such issues, auditors would need to audit the practices of labor providers in order to provide a thorough analysis for how the client company manages the issue, requiring more time. Audits also fail to include external stakeholders—NGOs, trade unions and community stakeholders—which leaves an important source of impartial information on violations & business impacts to local communities. The CSR landscape is changing rapidly and sustainable procurement programs are directing their efforts toward new standards and frameworks, including the Ruggie Principles. The framework recommends that companies include external human rights impacts in their policies, meaning that auditors need to require auditors to engage local communities.

Limitation 2- Cost

On-site audits are often accompanied by a daunting investment. For example a third-party social audit (for example based on SA 8000 or SMETA standards) can cost $600-$800 USD or more per man-day (varying according to geographical region). At the suppliers’ end, additional expenses are unavoidable in the form of manpower and time required to accompany the auditors during the whole process which may extend for several days. In cases where suppliers are requested by multiple clients to complete audits, this just amplifies the problem.

Factory audits in Asia increased 61% in 2013 from a year earlier, according to AsiaInspection-a Hong Kong based firm that administers auditing and testing services. If the figure above is accurate, it is becoming ever less viable for Suppliers and Buyers alike and indicates neglect by buyers to respond to the widespread reports of audit fatigue from suppliers. While some client companies absorb the costs of auditing suppliers, suppliers that source to numerous companies or brands operating in the same sectors are often subjected to—and required to pay for—audits for numerous buyers. Even in agreements where the buyer pays for the audit, suppliers must still extend resources for preparation and potentially personnel to guide auditors.

The cost issue becomes greater for small and medium-sized companies that have low profit margins.  Reports of parallel or duplicate audits resulting in significant additional costs for factory owners are not uncommon, up to $50/day in the Vietnamese garment sector, as reported by the World Bank[6]. While buyers believe they must police their suppliers into compliance, and cost associated with CSR auditing is counter-productive to CSR aims to improve efficiency and reduce operational costs.  It is important for buyers to develop constructive relationships with their small suppliers because they require the most attention due to immature understandings of CSR. Small businesses account for 70% of businesses worldwide[7], therefore multinationals likely source vast amounts of goods and services from small suppliers. Companies must engage these suppliers in a more cost efficient way because repeat and overlap audits can be detrimental to their financial sustainability.

Limitation 3-Audit Fraud

As global supply chains rely on operations in countries with inadequate laws and weak enforcement institutions, bribery and other fraudulent practices have created obstacles for audit accuracy.

One of the potential impacts of over-auditing is that it fosters resentment by suppliers, resulting in negative motivation: Suppliers feel incentivized to present fraudulent documents regarding employee timesheets, compensation and health and safety incidents when they believe their sourcing contract is in jeopardy if they fail[8]. Over auditing in some cases pushes suppliers to invest in secondary ‘model’ work sites that are used specifically for auditing purposes while the actual production occurs elsewhere. These sites require minimal preparation because they have been arranged to meet the requirements of the various audit standards deployed by client companies and 3rd party auditors. In one particularly egregious example, a supplier was hiding children in industrial ovens during audits (fortunately not turned on)[9]. These actions are enabled by the practice of pre-announcing audits by client companies or 3rd party auditors.

Accusations that site managers coach workers in how to respond to audit questions and prevent less obedient workers from interviews are also commonly reported practices. Without access to objective workers, intangible workplace issues like harassment, discriminatory hiring or working practices go undiscovered as these issues require worker information to identify[10]. Such workers cooperate with managerial demands out of fear of retaliation, job loss, while other workers might be unaware of their rights and therefore agree to the instructions provided.

The practice of bribery is also quite common during site audits, particularly in countries where such behaviors are viewed less punitively, which happen to be major supply hubs. Again, suppliers are incentivized by the loss of business in the event they fail the audit, and to make matters worse, there is little incentive for auditors in some countries to reject bribes due to low regional wages, creating an opportunity for suppliers to coerce auditors. Auditors are virtually always local employees, since they have to decipher records about working hours and pay and interview site workers. Auditors can get much more money from bribery than they get from their “official” employer: In China auditors make an estimated 3,000 RMB—roughly the going rate to bribe an auditor in southern China[11].

The incentives and opportunities are 2-way streets. Auditors have significant leverage over suppliers given that their approval can determine the outcome of contracts with buyers. Auditors have been accused of extorting suppliers in exchange for a site stamp of approval. The use of foreign auditors to reduce opportunities of bribery is impractical due to the language and cultural competency that local auditors provide the process.

Limitation 4: No focus on driving performance improvements

When companies perform audits in greater numbers without engaging suppliers more closely to help improve their management systems, they risk having suppliers perceive audits as a “going through the motion” process to earn or retain contracts. Interviews by NGOs and media outlets highlight the perception by suppliers that believe audit results are only used to eliminate the most high-risk factories (i.e. for the brand’s image), and that there is no reward for truly compliant factories, which have to make do with costs higher than those of their competitors[12]. In the worst case scenario, the approach creates incentives for suppliers to engage in fraudulent behavior (discussed above). Nevertheless, the image that suppliers have of on-site audits indicate a pending compliance crisis for buyers as suppliers become more resentful of the system as it is currently administered.

Conclusion

CSR audits deployed as a method to police suppliers into compliance with supplier codes of conduct do not deliver consistent, ongoing improvements in working conditions or environmental management. Suppliers ultimately drift in and out of compliance with foreign buyer expectations and should therefore only be used as an information gathering tool to highlight where further supplier engagement is necessary. Part 2 in this series, will discuss effective ways to integrate CSR audits into sustainable procurement programs as part of a diversified, multi-input approach to achieve performance monitoring and improvement.

This article contributed by EcoVadis staff:

Michael Smith, CSR Analyst

Anuksha Boojhawon, Junior CSR Analyst

[1] Brown G. “Bangladesh: CSR Audits Fail to Protect Workers and Threaten OSH Profession’s Integrity”. EHS Today. http://ehstoday.com/standards/bangladesh-csr-audits-fail-protect-workers-and-threaten-osh-professions-integrity (Accessed 2/15/2016)

[2] http://speri.dept.shef.ac.uk/wp-content/uploads/2016/01/Global-Brief-1-Ethical-Audits-and-the-Supply-Chains-of-Global-Corporations.pdf

[3] Clifford S, Greenhouse S. “Fast and Flawed Inspections of Factories Abroad”. The New York Times. http://www.nytimes.com/2013/09/02/business/global/superficial-visits-and-trickery-undermine-foreign-factory-inspections.html?_r=0(Accessed (Accessed 2/15/2016)

[4] ibid

[5] “The Role of Recruitment Fees and Abusive and Fraudulent Practices of Recruitment Agencies in Trafficking of Persons”. UNODC. https://www.unodc.org/documents/human-trafficking/2015/Recruitment_Fees_Report-Final-22_June_2015_AG_Final.pdf (Accessed 2/15/2016)

[6] Wilshaw R. “Social audits flawed as a way of driving sustainable change”. The Guardian. http://www.theguardian.com/sustainable-business/blog/social-audits-flawed-companies-developing-world (Accessed 2/15/2016)

[7] Raynard P, Forstater M. “Corporate Social Responsibility-Implications for Small and Medium Enterprises in Developing Countries”.  https://www.unido.org/fileadmin/user_media/Services/PSD/CSR/CSR_-_Implications_for_SMEs_in_Developing_Countries.pdf

[8] Plambeck E, Taylor T. “Supplier Evasion of a Buyer’s Audit: Implications for motivating Supplier Social and Envirnomental Responsibility”. Stanford University/ University of California at Berkely. 2015

[9] Chu K. China Labor Watch. http://www.chinalaborwatch.org/newscast/168 (Accessed 2/15/2016)

[10] “Resonsibility Outsourced- Social Audits, Workplace Certification and Twenty Years of Failure to Protect Worker Rights”. AFL-CIO. http://www.aflcio.org/content/download/77061/1902391/CSReport.pdf

[11] “Corrupt Audits Damage Worker Rights”. China Labor Watch (2009). New York

[12] CITATION

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