Social compliance audits in factories: perverse effects

Several articles and books have described the perverse effects of audits for social compliance. An auditor goes to a factory, looks for evidence of non-compliance to local law and some international standards, and produces a report used by importers to eliminate the worst suppliers.

There are several issues with this type of audit:

  • Auditors can get much more money from bribery than they get from their “official” employer, so corruption is quite frequent and findings are not always reported in full.
  • Auditors are virtually always local employees, since they have to decipher records about working hours and pay, and they have to interview some workers. Using foreigners to reduce chances of bribery would be quite impractical.
  • Factories have learned how to fake their records of working hours (and their whole accounting books), and they tell the workers to lie if questioned by auditors. Some “consulting companies” help them if necessary.
  • Some buyers actually don’t want the auditors to be too tough; they want to be able to say something like “70% of the factories working for us are 90% compliant”.
  • The vast majority of buyers keep giving business to the cheapest suppliers. Audit results are only used to eliminate the most risky factories (i.e. risky for the brand’s image). There is no reward for truly compliant factories, which have to make do with costs higher than those of  their competitors.

I just came upon an interesting report by China Labor Watch (A Case Analysis Of Corruption) which confirms some of the above points. (Note: if you are in China, this website is blocked)

They did a study after Chinese media widely denounced the behavior of the auditors working for one of the largest QC firms (I won’t name them because I believe the 3 or 4 major QC firms all suffer the same issues in China). The story goes like this: the factory supposedly refused to pay bribes, and the auditors came back 3 times–each time producing a failed report. Finally the factory lost orders and went bankrupt.

During [the factory’s] first [QC firm’s] audit last November, auditors mentioned that an outside consulting company could help the factory to pass its audit. After the failed audit, factory managers received calls from a consulting company that claimed it could guarantee a successful second audit if the factory paid 30,000 RMB ($4,412). The factory refused, and failed the second audit too. Following this second failure, the factory recorded one of the calls with the consulting company, this time with a demand for 70,000 RMB ($10,294) for a guaranteed pass. [QC firm] itself paid for a third audit in which an independent third-party monitor from the International Council of Toy Industries (ICTI) accompanied the auditors. Once more, the factory failed. The factory claimed that in this and a subsequent fourth audit, [QC firm’s] auditors took a retaliatory attitude toward the factory, leading the factory to fail and subsequently move to the brink of bankruptcy.

[QC firm] explains that the fraudulent consulting company was not connected to any current employees at the company, but rather was the work of an auditor previously terminated for corruption ([QC firm] has not addressed, however, how the consultant company knew of the supposedly unannounced audit, which suggests that some current employee was involved in this corruption).

China Labor Watch (CLW) sent auditors to factories that had previously been audited, and “of 19 [QC firm’s] audits investigated by CLW, 10 or 53% yielded significant evidence of corruption”.

What shape did corruption take? I pasted some excerpts below, but I advise all readers interested in these issues to read the report in full.

Auditors often extort factories to give bribes. The process of extortion begins with a question. During the audit process, after auditors have identified proof of violations at a factory, they will present the proof to factory management and ask how the violation should be handled.

Many factory managers know that when they are asked this question, the auditor is asking for a bribe. Paying this bribe will allow the factory to successfully pass the audit and is therefore in the best interests of the factory (at least, their short term interest). Thus, most managers will respond, “We hope you can help us out, please tell us what we must do to avoid having this violation recorded in the report.”

And if a factory denounces the auditors’ behavior, what happens? The audit fails and the buyer asks for a re-audit, which is not always conducted objectively:

When auditors came to inspect the factory [the first time], they reported a number of violations. One factory manager got into a heated argument with the auditors about the report. This fight soured the relationship between the factory and the auditors, setting the scene for a retaliatory audit.

During the follow up audit three months later, the auditors used an irregular, retaliatory method to conduct the audit. They requested the last 10,000 pages of production records, and announced that working hours were inconsistent with the records. The factory manager once again argued with the auditor, and demanded to be told the auditor’s name and contact information as well as information on the complaint process. The auditor refused to provide this information and simply told the factory to call [the QC firm]’s office.

What can QC firms do to reduce corruption risks? This is a complex issue, but it starts with small things. I’ll take 2 examples below.

First, QC firms usually force their inspectors/auditors to have a notice given to a factory manager before service starts, with clear instructions for factory complaints. If the auditor’s name is not communicated to the factory, this is already a problem. The inspector/auditor should be clearly identified.

Second, QC firms usually have their own investigation (or “internal audit”) team. It might be effective… But in China, I can very easily picture how such an “independent” body can monetize its position. As written in CLW’s report, “factories fear reporting extortion because they do have some issues and suspect that after reporting they will face an even stricter audit.”

An easy solution is to systematically give re-audits and re-inspections to another QC firm. Yes, I know, they would lose some business, and the practical implications are not very clear. But maybe that’s the price for conducting clean operations!

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Comments

  1. cb says

    Thanks for the interesting article. I just would like to add the names of the audit organisations which failed to conduct the social audits correctly: 1) “Rina” in the case of Ali Enterprise in Pakistan (which gave the SA8000 certificate to the factory one month before it burned down) and 2) “TUV Rheinland” which audited Rana Plaza in Bangladesh according to the BSCI system before the building collapse.
    Whereas SAI had openly communicated which audit organisation had failed the audit in Ali Enterprise, BSCI did not divulgate the name of the audit organisation which conducted audit in Rana plaza according to its system.
    Social audit organisations do not have incentives to do the compliance investigation in details. If they report to many non compliances, they will not receive the audit contract next time. So they tend to close their eyes. The only way to put the incentives back in place is to name the social audit companies for their failures and shame them.

    • says

      I agree with you on the principle. But things might not be that simple.
      – Does the SA 8000 certificate require unannounced visits to check if exit doors are open at all times? If not, I would criticize the certification itself rather than Rina.
      – Does the BSCI standard include checking the structural strength of a building? If not, let’s not write bad things about TUV Rheinland.