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‘Effectively and Systematically Gamed’: Why Audits Need an Overhaul

As an inferno ravaged a five-story footwear factory in southern Thailand last week, leaving massive cracks in the blackened walls that had firefighters fearing the building’s collapse, human-rights experts are debating the limits of social audits, particularly in the context of voluntary due diligence in global supply chains.

The fire at Summit Footwear, which shipped sandals to Aerosoft as recently as April, according to import data, took firefighters hours to quench. Because the hundreds of workers who were present were able to make their way to the exits in time, no deaths or injuries were reported. The building is likely to face demolition, however, because its structural integrity has been comprised, officials say, blaming the blaze on an electrical short circuit and pegging damages at roughly 20 million baht, or $551,000. Neither Aerosoft nor Summit Footwear immediately returned emails requesting comment.

Preventing workplace disasters from occurring is a key reason behind the proliferation of social audits, also known as private inspections, in recent decades. Even as brands and retailers have cast their sourcing nets farther afield, they’re feeling increasing pressure to rein in any potential human-rights or environmental abuse they may be responsible for, however indirectly. This was thrown into relief in 2013, when the multi-factory Rana Plaza complex came crashing down in Bangladesh, killing more than a thousand workers and hurting or maiming scores more.

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Audits, whether conducted by buyer representatives, third-party certifiers or other independent groups, are a critical tool for assessing on-the-ground conditions at far-removed factories, said Ben Skinner, founder and president of Transparentem, a Washington, D.C.-based nonprofit that investigates labor and environmental violations in global supply chains. At the same time, audit deception remains a “pervasive” problem because suppliers have a strong incentive to ensure that they pass these inspections, resulting in potentially misleading or inaccurate findings. Recruiters who funnel workers into jobs may also “hide” abusive practices, such as excessive recruitment fees or passport retention, from suppliers that prevent auditors from uncovering them later, he said.

Referring to Transparentem’s work at garment factories and spinning mills in India, Malaysia and Myanmar, Skinner said that audits are “so effectively and so systematically gamed” that the industry needs to “fundamentally revisit” how they are being done. Workers, for instance, are frequently coached to give certain answers when they’re being interviewed. Factory personnel might bribe auditors, remove underaged workers from production lines or wall off entire sections of their facilities when these visits take place. The deception may extend to paperwork as well: In 2010, the Fair Labor Association found that 40 percent of the suppliers it had audited that year presented “fake records” of workers’ wages.

There’s also a problem with the time allotted to many audits, said Human Rights Watch, which last week published a report about the failings of social audits in the retail supply chain. The pressure to lower costs by limiting the time available for audits, the New York advocacy group said, undermines auditors’ ability to interview workers offsite in safe settings, follow leads or corroborate information. While there is a need for strong regulation, policymakers in the European Union and elsewhere mulling mandatory due-diligence legislation should not depend on such audits or certifications as “proof of compliance,” it added. Neither should they create “safe harbors” or allow companies to “immunize” themselves from administrative penalties or civil liability on the basis of such audits and certifications.

Brent W., an auditing industry expert with decades of experience, framed the issue as such: “If one auditing firm spends three days when another auditing firm will take half a day or one day and that’s cheaper, then where are the incentives for a supplier to choose an auditing firm that will do more work and cost more?” he told Human Rights Watch.

“Policymakers and companies should not confuse social audits and certifications of suppliers with proof of human-rights and environmental due diligence,” said Aruna Kashyap, the organization’s associate economic justice and rights director. “Companies should be aware of the problems around social audits and certifications and make smart choices about how they invest resources for human-rights due diligence.”

Transparentem has seen this firsthand. A number of workers it spoke to said they felt compelled to lie to auditors because a failing grade could result in the factory losing business. Worse, the supplier could shutter altogether, leaving them unemployed.

Skinner doesn’t recommend killing auditing budgets because “then we go back to an entirely anarchic system,” he told Sourcing Journal. “There does need to be money spent on compliance; there does need to be money spent on oversight.”

But better audits are possible, he added. Brands and retailers, for example, should structure processes to minimize opportunities for fraud while maximizing worker agency. They should also improve auditing techniques and increase transparency around audits and any subsequent remediation. Most of all, they must step up worker involvement.

Indeed, workers and trade unions know the “reality on the ground” and are in the best position to recognize and address human-rights risks, said Kemal Özka, assistant general secretary at IndustriALL Global Union, which also penned a report about human-rights due diligence last week.

“No due diligence approach can claim to be credible without the full involvement of workers and trade unions to safeguard freedom of association, collective bargaining and health and safety,” he said. “Due diligence is part of the industrial relations system as a means of engagement through collective bargaining agreements, global framework agreements, protocols and any other negotiated document. It is an important tool for unions to achieve their main objectives, that is to defend and promote workers’ rights and interests.”

So far, however, “very few” companies have demonstrated a “real willingness” to adequately engage with worker and trade unions on a voluntary basis, Özka said. In fact, freedom of association and collective bargaining have come under attack, causing workers‘ conditions and wages to deteriorate in the wake of the Covid-19 pandemic. This needs to change as voluntary codes of conduct and other unilateral approaches continue to shed credibility, he said.

“Due diligence is a leverage for trade unions to ensure that workers’ rights, especially the right to organize, are upheld in companies and along the whole supply chain,” Özka added.