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12 Mar 2019

Kebene Wodajo, Shanghai Jiao Tong University

Social audit reform options: towards auditor liability and multi-stakeholder oversight

This blog is part of our series on Beyond Social Auditing.

The social auditing regime has increasingly become a tool used by companies to enforce and verify standards in global supply chains and fulfill their human rights due diligence (HRDD) obligations. However, experiences and studies suggest that audits often fail to detect, report, and resolve serious labor and environmental problems. Flaws include problematic incentive structures (or conflict of interest), a checklist approach to labor issues, a tendency for corporations to commission lenient audits, and confidentiality of audit reports. Is it possible that the existing regime can be improved so that it delivers real protections against the exploitation of workers?

Worker-driven Social Responsibility (WSR) is an alternative model designed to replace audits with inclusive HRDD packages that put actors with the most vital interest – i.e. workers – at the center. Proponents of this view argue that the existing audit system is too flawed to be reformed given problems surrounding corporate power, politics, and profit which go beyond issues to do with institutional design or audit method. On the other hand, it can be argued that the existing audit system is already mainstream and it would be challenging, if not impossible, to completely abandon it in the short term. This article therefore explores options for reforming the existing audit system through increased oversight and auditor liability.

Despite the differences between social auditing and financial accounting, problems such as conflict of interest and corporate commissioning – i.e. problematic incentive structures – have been observed in both. Yet as the OECD notes, in financial accounting professionalism and independence of auditors is guarded through legal accountability (the risk of litigation). However, social audits are mainly conducted by private for-profit firms without genuine government regulation. Some studies argue that social auditors should be held legally accountable. Legal action in the event of an auditing failure would come either in the form of a tort claim or criminal charge against the auditor. However, for an auditing defect to fall within the margin of punishable fault under either tort or criminal law, several conditions would need to be satisfied. For example, the tort liability regime only covers damages when personal injury occurs (or when damage and causation, among others, are established). Criminal liability is only viable when the damage is the result of a criminal act provable beyond any reasonable doubt. Yet workplace risks and abuses are broader than these, and it would often be difficult to satisfy all those conditions. 

Legal liability could also be used as part of an auditing contract. Terms on quantity, delivery time, price and product quality constitute the central part of contractual terms. Currently codes of conducts and audits are excluded from contractual terms. This aggravates deep-rooted problems in social auditing: Certificates issued by auditors are used as assurances but carry no legal risk. One way to mitigate this problem would be to include liability terms in audit contracts. For instance, after the Rana Plaza, Tazreen Fashion and Ali Enterprises factory incidents KiK included a liability clause in its auditing contracts. This type of demand from a retailer can be seen as a step in the right direction which can eventually force audit firms to raise their standards. However, it could also be argued that this simply allows another avenue for brands to escape responsibility.

Strengthening multi-stakeholder social compliance initiatives is another option to improve the credibility of social auditing. This option is drawn from the concept of an oversight body in financial auditing. In the case of social audits, the initiative would comprise organizations such as retailers, labor representatives, civil society organizations, and universities. Its primary role is to oversee and ensure the competence and credibility of auditors to prevent the issue of inaccurate and flattering audit reports that conceal abuses. In addition, by undertaking the verification job, it can counter the negative incentives created through conflict of interest. The Association of Professional Social Compliance Auditors (APSCA) is one example of such an initiative. However, the initiative is not state – but self-regulated. The voluntary nature of social compliance initiatives may compromise their effectiveness – one reason being that in the absence of a statutory body to regulate such initiatives, retailers and auditors may go to competing initiatives. This is an inherent problem with voluntary governance programs. Moreover, given that multi-stakeholder initiatives are voluntary in nature, they lack universal coverage and rely on company buy-in which in turn means that they are often not sufficiently ambitious. Therefore, strengthening multi-stakeholder social compliance initiatives would require backup by hard law regulations. 

Better oversight of social compliance initiatives would require a system that allows for effective detection of sub-standard audit reports and sanctioning of negligent behaviors. Creating legitimacy would also necessitate disclosure of audit reports to the public to enable workers and their organizations to identify possible discrepancies between the report and actual conditions. Upon identification of a deficient report, social compliance initiatives could use their leverage over contractual arrangements to punish such behavior and create a deterrent effect.

In sum, the pitfalls of the social auditing regime have been well-documented and have led different stakeholders to suggest potential reform options. This article has discussed two options that seek to reform the audit system 1) through direct legal liability of auditors; and 2) by introducing multi-stakeholder oversight bodies that would identify and prevent inaccurate and flattering audit reports. Both these recommendations have their strengths and weaknesses, and it remains clear that for stakeholders to have confidence that the social auditing system can make a real difference to workers’ lives, there needs to be radical reform backed up by hard law.

Kebene Wodajo is PhD Fellow at Shanghai Jiao Tong University

Beyond Social Auditing


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