The auditing industry is under the cosh for poor-quality work – this is shown by the numbers of the UK Financial Reporting Council who imposed fines of over £46 million, including on the industry’s leading audit firms, in the last year. This inevitably brings us back to the ongoing question: where audit firms perform below standard in what has been their bread and butter work since the industry’s infancy, what is their role in businesses’ human rights due diligence obligations as non-human rights experts? Or better, what should be the role of an industry whose social auditing practice is essentially designed for the purpose to evaluate a company’s reputational risks and business damage?
Whatever one’s answer to these questions is: in line with the UK regulator’s message to a moaning auditing industry for being held accountable for poor-quality work – stop complaining and do better.
A common conflation of two distinct concepts
With good ESG performance high on the global investment agenda, compliance with international human and labour rights standards is every company’s must-do commitment. Businesses often publicly highlight their commitment to respect international human rights in line with the UN Guiding Principles on Business and Human Rights (UNGPs) on their websites. However, when human rights violations are found to take place in supply chains, the most common answer is: the audit carried out several months ago did not illustrate any issues.
This inadequate but continuous reliance on social audits by companies as a tool to discharge their obligation to conduct human rights due diligence, which lies at the centre of business’ responsibility to respect human rights, allows for the blame to be shifted onto auditing firms and, ultimately, significantly conflates one concept with the other. As a voluntary formal evaluation of companies’ procedures and programmes, either against their own internal codes of conduct or various industry-recognised certification standards, social auditing is essentially an assessment of businesses and their suppliers on their corporate social and environmental conduct. In contrast, human rights due diligence foresees companies themselves, rather than third parties, to identify, prevent, mitigate and human rights risks and remedy where violations occur along their entire supply chain. This conduct is a proactive, circular and a continuous process rather than a one-off exercise and requires holistic, comprehensive and adequate processes and action plans that are tailored to companies and their supply chains.
The human rights shortfalls of the current auditing industry
That is not to say that social audits are irrelevant in human rights due diligence practices. To the contrary, the commentary to the UNGPs explicitly recognises that audits can support companies in tracking the implementation and effectiveness of their human rights due diligence processes. To caveat, this requires that social audits which include or target human and labour rights compliance are carried out by professionals that have sufficient expertise in these fields, and, importantly, does not mean that they can substitute human rights due diligence.
Independent from the misconceived perception that audits suffice as due diligence processes, there is also something to be said about the recurring substandard auditing practices on human and labour rights that have failed to detect significant human rights risks. One example that showcases the impact of poor-quality work was the raid of a Malaysian glove manufacturer in December 2020 by Malaysian officials where, allegedly, workers were found in shipping containers similar to conditions of “modern slavery”, notwithstanding a labour audit by multinational sourcing companies months before. In this case, which has attracted renewed attention following the filing of a lawsuit by former factory workers against two multinational healthcare companies supplied by the Malaysian company, it was reported that the audit reports had concluded that there had not been any indications of forced labour despite the same audit reports detailing numerous breaches of Malaysian labour laws and international labour standards.
The future role of social audits
The recurrence of such tragic events really begs the question of responsibility for continuous failing practices. Companies that audit current or future suppliers must recognise that social audits have their limitations in showing a comprehensive picture and cannot in any way absolve the company from carrying out separate human rights due diligence processes. Sole reliance on audits not only risks significant reputational and legal consequences where human rights violations are later discovered as undetected, but fails to grasp a fundamental point: the potential continuous exploitation of human beings due to a check-box exercise.
From a business and human rights perspective, auditing firms themselves have a business responsibility to respect human rights. An industry that is not designed to capture the multitude of sensitive human rights abuses that can occur within business operations – acknowledged by some auditors themselves – needs to either upskill their internal capacity by bringing in experts and practitioners in international human and labour rights or refrain from offering services that they are not equipped to carry out.
One thing is clear: firms that significantly expand their auditing services to include human and labour rights without the necessary expertise and skills to navigate complex layers of human rights violations is not only the complete opposite to respecting human rights but ultimately allows other companies to get away with abusing human rights.
With decades of experience, Global Rights Compliance (GRC) works with companies, investors, and organisations to address the potential adverse human rights and environmental impacts resulting from business operations. We work side by side with our clients to help ensure they become leaders among their peers on these issues. Our services include legal advice, consultancy services on human rights due diligence policies, procedures and training, and grievance mechanisms – from the initial stages of design, to implementation, tracking and evaluation.
To learn more about our work, please click here. To make an enquiry please email bhr@globalrightscompliance.co.uk.