Every so often a company will be rocked by a scandal revealing a flagrant disregard for human rights, such as revelations that British grocery stores were supporting slave labor in Thailand by buying shrimp gathered by trafficked workers forced to work on boats. Often the response is to look at the company's supply chain to find out where these abuses occur and excise them from the process. Sometimes this even reaches the point where such supply chain audits become mandated by the government, such as was the case with the SEC's issuance of conflict mineral disclosure rules. Other times companies take on these audits voluntarily to show their good will and commitment to ethical business practices. 

Either way, though, a recent study from the University of Sheffield has cast doubt on the idea that these audits are effective in promoting corporate responsibility and, indeed, might actually be contributing to the problem. It noted that many of these abuses actually take place not only within supply chains that have been audited, but also within those that have been certified as free of the types of abuses that later pop up in the news. It noted, for example, that the aforementioned shrimp-gathering through the use of slave labor had already been certified by a non-governmental organization (NGO) as following safe and sustainable agricultural practices when news of the scandal broke. Meanwhile, the Rana Plaza Factory, the Bangladeshi garment plant that collapsed and led to over 1,000 deaths, had just passed a compliance audit the previous month. 

The study, which consists of 25 interviews with ethical auditors, business executives, NGOs and supplier firms in North America, the United Kingdom and China, as well as visiting factories in the Pearl River Delta region of China, concluded that “audits are ineffective tools for detecting, reporting, or correcting environmental and labour problems in supply chains. They reinforce existing business models and preserve the global production status quo.” 

A major reason behind this ineffectiveness, according to the study, is the degree of control companies have over the audit itself, from choosing the auditor to deciding the terms of the engagement. 

The audit itself only goes as deep as the client wants it to go, which often has led to a focus only on Tier 1 suppliers, where the final assembly of products take place. Because clients limit the scope of these audits, most of them fail to account for subcontractors further down the chain, such as those engaged in activities like harvesting, processing, mining and dyeing, even though, according to the study, this is the area that tends to contain the most exploitation. Further, the report said that audits fail to account for unauthorized subcontracting arrangements, with some companies saying they're just as surprised about abuses in their supply chain as anyone. 

The report also pointed out that auditors can inspect only areas that suppliers choose to show them, and are able to speak only to workers they happen to be able to see. Since most audits are announced, this allows the audited entities to drill people on what to say, as well as falsify records and shuffle exploited workers out on that particular day. Even if the auditors believe something is up, the report said that they have no investigative powers and so have a limited ability to verify information presented to them. And further, while auditors may make suggestions, there is no external accountability for whatever it is they find, and so companies can, and do, simply choose to ignore them. 

Also, there is no guarantee that anyone will even see the audit report. The study noted that the auditors are bound by strict confidentiality clauses, and clients exercise full discretion over what audit information is actually reported, which can make it difficult to understand the scope of the problem. 

"Auditors produce standardised metrics and rankings that give the appearance of transparent and neutral monitoring; yet the information audits provide is selective and fundamentally shaped by the client. Information about abuses and noncompliance is rarely made available to governments or consumers and, as such, they are rarely resolved," said the report. 

Despite these problems, though, supply chain audits give a veneer of legitimacy to companies looking to promote an image as a sustainable and ethical business, which the report said is another problem. By presenting this image, companies are able to deflect pressure for more strict state and international regulation, as well as enable the preservation of existing business models and the profits they generate. This, in turn, has undermined the role of governments in policing corporate behavior, with states ceding the field to NGOs with less power to influence corporate behavior. 

"As such, NGOs have arguably helped to codify and neutralise corporations’ poor social and environmental records and, in so doing, have undermined the role of states in global corporate governance," said the report.