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These 3 Sourcing Nations Flagged for ‘Unreliable’ Factory Audits

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This is the fifth installment in a limited series exclusively on Sourcing Journal of research provided by Cornell University’s New Conversations Project. The New Conversations Project is dedicated to independent research and action that seeks to discover what works on a global scale to end abusive labor practices.

In our February column we used a horse race analogy to classify the causes for the limited impact of codes of conduct on working conditions in supply chains. In our academic writings we argued that “opacity” results in policy-practice decoupling for global buyers of all stripes—apparel, home goods, food, and so on.

Some companies are not serious about private regulation. We called that horse “Not Trying Hard Enough.” Brands and retailers adopt policies but do not implement them. We called that horse “Symbolic Adoption.”  Other buyers go further but rely on poor factory audits or sourcing strategies that reward factories with weak labor practices. We referred to that horse as “Rearguard Action.” Whichever horse a buyer picks, the data shows that results for workers have been similar.

What about the dark horse, “Opacity?” If most brands and retailers can’t really see what’s working to improve conditions, what’s obscuring their view? There are three key causes of opacity. The first is  “practice multiplicity,” the profusion (and confusion) of CSR programs and messages at the factory, industry and global levels. We laid out the evidence of this in our last column.

Today, we take up the second cause, “behavioral invisibility”—global buyers are unable to accurately measure the behavior of their suppliers. Why? Richard Locke (in his 2013 book “The Promise and Limits of Private Power”) and many others have noted that buyer-supplier relationships are generally adversarial and the auditing regime is a kind of cat-and-mouse game: suppliers try to get away without complying in order to hold onto their margins, or in some cases just hold on. (An ILO survey in 2017 recorded that 52 percent of textile and apparel suppliers had taken orders below cost to maintain a business relationship).

Putting aside the “Not Trying Hard Enough” buyers, why can’t the others measure their suppliers’ behavior properly?

Many reasons have been identified, but here are the leading causes. One, the typical audit is too brief to uncover the gravest violations. Two, many auditors are poorly trained, particularly in identifying violations in safety, hazardous chemicals and other technical issues. (Remember that the Rana Plaza factory was given a passing grade by several different auditors contracted by major brands—as were Tazreen and Ali Enterprises and many others—just before the tragedy there). Three, the auditing function (initially in-house) is now outsourced at low cost to a range of providers, incentivizing some auditors to merely “tick the box” on the checklists provided by the brands. And four, there is some audit fraud where auditors are bribed by factory managers to provide them a good rating, or where factories keep an alternative set of books for wages and hours to show auditors.

NCPs latest research shows that the extent of unreliable information given to auditors is much, much higher than previously thought. Data shared with NCP by a leading auditing company classifies the information/data given to its auditors by suppliers as completely reliable (trustworthy) or unreliable (not trustworthy). In the table below, we have broken out the “unreliable” rates by country.

 

Proportion of Audits with Unreliable Information by Country, 2011 – 2017

Country Average proportion by year (%) Average (%) 2011 – 17
2011 2012 2013 2014 2015 2016 2017
Bangladesh 24.0 26.6 24.8 26.3 22.1 15.6 14.4 20.76
Cambodia 20 40 17.2 33.3 29.7 30.6 8.22 23.2
China 60.3 51.1 58.3 62.0 58.0 53.2 44.5 54.44
Ethiopia 0 0 0 0 0 0 50 50.00
India 49.3 28.1 65.3 66 69.6 52.5 41.0 55.24
Indonesia 25.2 19.6 14.7 4.52 4.3 6.25 4.66 9.6
Italy 0 0 0 8.7 0 0 1.77 1.44
Jordan 26.3 33.3 20 22.2 25 26.6 5 22.69
Mexico 5.17 0 0.79 0 0.71 0.41 1.29 0.95
Turkey 0 0 19.2 13.7 25.9 16.1 9.93 12.25
United States 2.22 0 0 3.33 1.49 0.78 0.72 1.15
Vietnam 17.5 18.4 8.41 0.37 17.24 30.21 11.86 14.91

Source: Kuruvilla (2021)

The average “unreliable” rate in apparel is 41 percent and 39 percent for footwear over the 2011-2017 time period. Our research also examined this issue for different industries and found that the incidence of unreliable information provided to auditors is highest in toys, soft and hard goods, housewares and jewelry (over 50 percent).

Even more importantly, NCP’s research finds that there is an active and growing industry in China that helps suppliers falsify audits. And this industry functions quite openly. Our researchers studied the advertisements of about 15 “audit consulting firms” that provide a range of audit management services for the suppliers they serve. These firms advertise openly that their services can guarantee that supplier factories that engage them will pass audits of major companies. Some ads mention the global buyers by name and list the range of services provided: “tips” to factories regarding the audit requirements of many global brands and their “connections” (Guanxi in Chinese) with auditors of various brands that will ensure a successful “pass.”

Through an analysis of detailed blog information over several years, Cornell NCP cataloged how audit consultants work, including the roles consultants play before the audit as well as during the audit. Activities before the audit including preparation of documents, coaching workers to give desired responses, and preparing the factory space to minimize violations.

Most audit consulting firms highlight software they use to “generate with one click” hundreds of documents for payroll records, hours, leave requests and so forth. They are completely falsified and show total compliance. In one case, the audit consultant documented his instructions to the supplier to box up all factory payroll records and take them out of the factory to be replaced by new records. Consultants will also handle the coaching of workers to provide the desired responses to auditor questions, and help with making the shop floor look clean and organized.

One of the most astounding services on offer by consultants is to use their connections to designate which auditor will come to the factory. And when all else fails, audit consultants suggest renting or borrowing another better-organized factory for the day of the audit, especially if that factory is close by.

During the audit, the audit consultant is willing to impersonate the factory manager. The consultant would likely be better prepared to answer the auditors’ questions, and might be more versed in the language of CSR.

The evidence suggests that many auditors—given the close connections between audit consulting firms and auditors—are well aware of all this. In fact, former auditors started many of these audit consulting firms realizing that there is more money to be made from factories wishing to supply to global companies than from the audit process. A successful factory recommends the audit consultant to other factories and more successes have cemented the relationship between audit consultants and auditors.

Are global brands aware of all of this—weak audits, falsified findings, substitute managers and factories? If so, to what extent do they trust the average audit? It seems unlikely that they are naïve enough to trust the audits fully. But how many are complicit, condoning this elaborate myth and its associated rituals?

Behavioral invisibility is less of a problem where the global brands’ own employees are doing the audit.  In-house auditors tend to spend a far greater amount of time auditing a factory and have different incentives. Similarly, it is less of a problem with the ILO’s Better Work factory assessors who are well trained themselves and provide training for workers and management over multiple cycles. But there is not enough of either—in-house auditors or ILO Better Work teams—to go around.

Wisely, big apparel brands have agreed after several false starts to combine their audits to get a grip on fraud, audit quality and supplier fatigue through the Social and Labor Convergence Program (SLCP). In a recent academic study of the impacts of SLCP’s sister project, the Higg Index, the authors concluded that the ‘tool’ was working well enough but that “it is critical to advance both greater transparency of supply chains and clearer incentives for motivating real improvements in factories and in the lives of workers… It is time to move from measurement and the good intentions of individual buyers, to a system with clear mechanisms and incentives to drive improvements at scale.” (Lollo and O’Rourke, 2020).

Behavioral invisibility can only be solved if brands and suppliers develop collaborative long-term partnerships that are based on high levels of trust and where the buyers’ sourcing and pricing practices are constructed so that they help suppliers meet not just quality and delivery standards, but decent work.  And it is possible that new legislation on Mandatory Due Diligence or buyer liability being considered in different parts of the world will shake up buyers to get smart about sourcing and supplier relationships.

Solving practice multiplicity (the first cause of opacity) and behavioral invisibility (the second cause of opacity) will not, by themselves, fix fashion’s complex opacity and policy-practice decoupling. That will also turn attention to the third cause of opacity, “causal complexity.”  We’ll take that up in our next installment and also look ahead to what buyers and their suppliers, unions and regulators can do about it.

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