The increase in the prominence of the ‘S’ of ESG (Environmental, Social and Governance) in conjunction with new supply chain due diligence legislation has led to more focus on audit as a due diligence instrument. Here we look at the benefits and challenges of using audit as part of your supply chain due diligence process and provide practical advice for businesses embarking on an audit programme.
What is an audit?
An audit is a systematic examination or review of records, procedures or systems, carried out to verify their accuracy, completeness, and compliance with established standards, regulations, or best practices. The purpose of an audit is to provide assurance to stakeholders. An audit often involves assessing risks, evaluating controls, and making recommendations for improvement.
Audits undertaken to support supply chain due diligence can be either proactive or reactive inspection tools. Supply chain audits are most often deployed where there is believed to be a higher risk of adverse impact. The types of adverse impact that may prompt an audit include quality control, human rights, safety and environmental issues and concerns.
It’s important to remember that, whether the audit is delivered as an unannounced or planned, the audit findings can only ever be a snapshot in time.
Audit Challenges
Understanding the benefits of supply chain audits requires knowledge of the challenges and limitations. There are three key challenges associated with supply chain audits. These are equally applicable to social, environmental and quality audits:
Transparency
For an audit to be truly successful it requires transparency to be provided by the person or company being audited (“the auditee”). The level of transparency provided by an auditee can vary significantly for a variety of reasons.
Unfortunately, companies actively looking to deviate from international standards or agreed processes can deploy many different methods to hide improper activities, prevent impacted individuals from speaking to auditors, or restrict the auditor’s ability to work effectively.
Auditor knowledge
Effective auditing demands a high level of expertise, knowledge and professionalism. The most critical knowledge requirements for an auditor are:
- Detailed understanding of the standard(s) being audited against
- Knowledge of the legislative landscape of country and industry in which the audit is being undertaken
- A deep understanding of the societal norms and challenges in a specific country
Where auditors are deployed without such knowledge and understanding, critical issues can and will be missed – serving to undermine the audit process.
Financial constraints
Auditing, whether in-house or using third parties, is not an inexpensive business. The sheer size of the global supply chain monitoring task can present financial challenges for organisations that wish to use audit within their due diligence process. Cost pressures can impact the quality of audits and their effectiveness – because of insufficient time being allocated to conducting a thorough audit or using less experienced or knowledgeable auditors.
Audit Benefits
Audit is an increasingly important component of supply chain risk management and is specifically mentioned as part of the OECD’s Due Diligence Guidance for Responsible Business Conduct. There are many benefits to supply chain auditing for companies and their suppliers. These include:
Education
Experienced auditors share knowledge and make recommendations as part of the audit process that enable suppliers to improve performance and align practices with recognised standards and client requirements – equal to huge sums of money in consultancy fees.
Improved performance
There are many examples of effective audit programmes leading to improved supply chain performance. By visiting suppliers, auditors are able to impart valuable knowledge as well as identify improvements to operational practices which can improve supply chain performance and the wider working environment.
Greater collaboration
Collaborating more closely with supply chain partners increases transparency on a variety of subjects. Increasingly, legislation expects greater levels of supply chain transparency. Collaboration also enables knowledge sharing between suppliers and buying organisations which can lead to improved performance.
Getting The Best From The Audit Process
As supply chain audit experts, here are 4 Achilles recommendations to help ensure that your audit programmes are as effective as possible:
1 Define the Scope
No audit programme is a panacea for all possible issues in a company’s supply chain. Setting clearly defined, unambiguous goals for your audit programme enables effective budgeting, stakeholder engagement and resourcing.
2. Appoint appropriate auditors
Whether using in-house or external auditors, ensure auditors have relevant knowledge of the standards they will be auditing against, as well as any specific methods for delivery. For better outcomes, select auditors that are familiar with local language, laws and societal norms. Where possible use local auditors. When using a third party, look for audit providers that directly employ their auditors, to ensure closer communication and feedback.
3. Engage with your Supply Chain
Your suppliers may not welcome an audit. Engaging with them and treating the process as an opportunity to collaborate more closely, share knowledge and improve performance can help to remove barriers and increase transparency.
4. Ensure effective remediation
It is not uncommon for an effective audit to identify issues which may require corrective action or remediation. Given the serious nature of some issues that might be identified, an effective remediation process should be defined both internally and with the Auditor.
Work with impartial organisations or recognised charities, civic groups and non-government organisations to support you and any affected parties that are identified during your audit programme.
In summary, there are significant benefits that come with the effective implementation of an audit programme as part of a broader supply chain due diligence approach. Effective implementation relies upon an understanding of the limitations and an awareness of the challenges associated with audit.
Legislation is increasingly moving towards businesses having to conduct greater levels of verification of their supply chain and audit is an important tool in the verification process.
To learn more about how Achilles can implement an effective audit programme to support your due diligence activities contact us here.
Read how Achilles works with Tesco to support their Audit requirements.
