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8. Audits Not Carried Out in Person, Among Other Procedural Weaknesses

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Weaknesses in a scheme’s audit procedures that govern how worksites are inspected for standards compliance can increase the likelihood that infractions will go undetected. Deceptive or incomplete reviews are more likely when audit procedures allow companies to self-report compliance. Even with in-person audits, deception is a widespread problem that has been documented in various countries and sectors.[1] When auditors announce site visits in advance, for example, there are numerous documented instances in which site managers “prepare” by falsifying records of worker ages, payroll, safety logs, or other relevant documents, or by coaching workers on how to respond to audit questions.[2] Even when audits are on site and unannounced, without a requirement for auditors to interview a sufficient number of rights holders (see Red Flag 9 in Audits) or for interview protocols to protect rights holders from reprisal, the reliability of the audit findings is undermined.
 
Studies have shown that announced audits can be helpful in monitoring issues such as worker health and safety, but not issues with clearer prohibitions, such as child labor. An empirical study of thousands of audits conducted by a single auditor found that announced audits led to greater improvements in occupational safety and health issues. However, compliance with child labor prohibitions improved significantly less after announced audits compared to unannounced audits. The authors posit that announced audits allow for better communication between the auditor and supplier, which can foster improved compliance, whereas factory managers are already aware that child labor is a zero-tolerance violation, such that auditor support to prevent violations is not needed.[3] Other scholars have noted that “the risk of losing contracts from buyers with zero tolerance policies creates an incentive to conceal” labor violations.[4]
 
Similarly, while privacy and confidentiality of the worker or community member must be strictly respected, sometimes people feel more comfortable speaking in groups. In this case, a focus group may be more appropriate.
[1] Transparentem, Hidden Harm: Audit Deception in Apparel Supply Chains and the Urgent Case for Reform (October 2021), 8-10, https://transparentem.org/project/hidden-harm/.
[2] This issue was first brought to the public’s attention in 2012 following revelations of  harsh working conditions at Foxconn, a major supplier for Apple. Investigations revealed that prior to announced audits, managers at Foxconn would falisfy records by adjusting payroll records and safety logs to show compliance with labor laws. In addition, they were found to coach workers on what to say to auditors to paint a favorable picture of working conditions. See also, Kathy Chu, “A Look at How Some Chinese Factories Lie to Pass Safety Audits,” China Labor Watch, April 30, 2012,  https://ecommons.cornell.edu/server/api/core/bitstreams/3d3393d1-0686-4ad4-a23c-2ed8575a8a15/content.
[3] Jodi L. Short, Michael W. Toffel, and Andrea R. Hugill, “Improving Working Conditions in Global Supply Chains: The Role of Institutional Environments and Monitoring Program Design,” ILR Review 73, no. 4 (May 4, 2020): 873–912,  https://doi.org/10.1177/0019793920916181.
[4] Genevieve LeBaron et al., Forced Labour Evidence Brief: Social Auditing and Ethical Certification (Re:Structure Lab, July 2022), 17, https://static1.squarespace.com/static/6055c0601c885456ba8c962a/t/62d746146f5dc5205a17621c/1658275349325/ReStructureLab_SocialAuditingandEthicalCertification_July2022.pdf.
Deficiencies in audit procedures leave companies exposed to the legal risks that certification is supposed to address. A report published by the European Center for Constitutional and Human Rights (ECCHR) and its partners analyzes four cases where severe violations of the standard went undetected. In one case, a safety audit of a French breast implant manufacturer failed to detect the company’s use of industrial grade rather than medical grade silicone because it had temporarily switched production to medical grade when the auditor announced the inspection. According to the authors, the fraud continued for years, until, following more reports of breast implant ruptures and cancer in France and Germany, the French regulatory authority intervened.[1]
 
→ Demonstrates: Reputational risk, operational risk, legal risk, direct financial loss
[1] Claudia Müller-Hoff, Human rights fitness of the auditing and certification industry? A cross-sectoral analysis of current challenges and possible responses (ECCHR, Brot für die Welt, and MISEREOR, 2021), 51,  https://www.ecchr.eu/en/publication/human-rights-fitness-audits/.
Investors can check the website of the certification scheme to see if it publishes its audit requirements online. At a minimum, the scheme should indicate:
  • Whether audits are conducted on-site, and a clear indication and rationale for the circumstances in which audits are unannounced or announced.
  • Whether the scheme publicly reports on its track record of identifying audit errors, instances of corruption, and the steps taken by certifiers to improve (see Red Flag 6 in Audits). Since any scheme will have flaws and bad and corrupt auditors, investors will want to know how open the scheme is to looking, finding, and reporting.
In corporate engagements, investors could ask whether the entity that contracts with the auditor – the company or the supplier – has indemnity and liability clauses in contracts to transfer potential liabilities associated with inadequate risk identification.
 
Investors can reference the following examples of good practices and advocate for initiatives lacking them to incorporate these standards:
➔    GoodWeave International publishes its policies and procedures, including its certification requirements. To comply with the standard, organizations are subject to regular and unannounced inspections at all of their production sites. Worker interviews are conducted within the community members’ surroundings and include interviews with family members of children and workers.[1]

➔    The Fair Food Program’s annual report describes its audit procedures, which include full access to farm payroll records, presence in the fields and worker housing through announced and unannounced audits, and interviews with farm management and supervisors and at least 50% of workers present at farm locations.[2]
[1] Goodweave, GoodWeave Certification System Overview (April 2023), 4-5, https://goodweave.org/wp-content/uploads/2023/05/Appendix-B-Certification-System-Overview-APRIL-2023.pdf.
[2] Fair Food Standards Council, Fair Food Program State of the Program Report (2021), 11, 
​https://fairfoodprogram.org/results/.
Do the scheme’s audit procedures include all of the following: 
•  Audits conducted onsite
​•  A rationale for when announced and unannounced audits are conducted
•  Interview protocols to protect rights holders from reprisal
•  Requirements for audit coverage – i.e., the percentage of workers or community members interviewed per site and the percentage of audited sites
•  Ongoing monitoring after the audit to prevent retaliation or other adverse consequences for audit participants.

​Does the scheme require that certified (member) companies publicly report on their process for identifying audit errors, instances of corruption, and efforts it makes to rectify these problems?
❐  Yes 
❐  No
❐  Partially
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