Audits can play a large role in ensuring supply chain compliance. A common safeguard against compliance risks, they are a key element of third-party due diligence. However, audits tend to compete with other business needs, leading to internal debate about the conduct, subject matter and scope of the audit. Below are three of the top supply chain audit challenges as identified by TRACE Trends:
Raising the Bar
Demand for responsible supply chain management is increasing. Additionally, companies are subject to increased regulations on conflict minerals and human trafficking. Despite these developments, many companies only audit their top tier suppliers when, in fact, the most exploited workers and environmental hazards are lower down the supply chain.
Companies may need to re-evaluate their audit design and look deeper into their supply chains. For example, companies should consider obtaining information from top-tier suppliers about their lower-tier suppliers and then begin auditing those suppliers as well.
The findings of a recent report by the University of Sheffield Political Economy Research Institute indicate that conventional supply chain audits may fail to detect human rights and environmental abuses. In particular, scheduled and announced audits provide suppliers with the time to falsify records, remove exploited workers and tell workers how to act and what to say.
To address this issue, companies should consider conducting audits unannounced. If a company must announce the audit before it takes place, it should put procedures in place to ensure it receives the best information possible, be it through interviews, document reviews or physical inspection of labor and environmental conditions.
Going Beyond Check Boxes
Supply chain audits have also been criticized for having a “check-the-box” mentality. For example, a supply chain audit might check whether profits are being properly passed along from a first-tier supplier to a farmer, but go no farther to see whether the farmer is paying his staff. Or it may include interviews of employees, but only on-site, where the employee will be less comfortable divulging any issues.
To ensure additional action is taken when needed, companies may create protocols for handling deficiencies or other issues that come up in the audit. Companies should also remind business teams of the consequences of skimping on audits, including legal, financial and reputational risks.
While there are many obstacles to conducting effective supply chain audits, companies may structure their audits to avoid the abovementioned problems. In doing so, companies will meet their obligations for compliance and ensure that business needs are met, too.
TRACE International and TRACE Incorporated are two distinct entities with a common mission to advance commercial transparency worldwide by supporting the compliance efforts of multinational companies and their third-party intermediaries. TRACE International is a nonprofit business association that pools resources to provide members with anti-bribery compliance support while TRACE Incorporated offers both members and non-members customizable risk-based due diligence, anti-bribery training and advisory services. Working alongside one another, TRACE International and TRACE Incorporated offer an end-to-end, cost-effective and innovative solution for anti-bribery and third-party compliance. For more information, visit www.TRACEinternational.org.