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Audit & Assurance
Tackling Modern Slavery: What Role Can Accountants Play?
by Professor Muhammad Azizul Islam, PhD, CPA, CA, Chair in Accountancy & Director of Postgraduate Research Programme (Accounting & Finance) Business School, University of Aberdeen | February 12, 2018 |
Human rights issues are gaining greater prominence alongside economic concerns for contemporary organizations, due largely to increasing public pressure and stakeholder expectations. A range of stakeholder groups, including shareholders, employees, governments or regulators, non-governmental organizations (NGOs), the media and communities, have a growing interest in organizational human rights issues. As a result of human rights and modern slavery regulations and widespread stakeholder concerns, contemporary organizations face the challenge of developing sustainable solutions to deal with the complexity of integrating financial and human rights performance. New forms of disclosure regulations are emerging in this area, such as the California Transparency in Supply Chain Act, Dodd-Frank Act’s conflict minerals rule in the US, UK Modern Slavery Act, and the Australian Modern Slavery Act (when passed).
As members of the accounting profession respond to this changing landscape, the question is posed: Do accountants have a role to play in tackling modern slavery?
Modern Slavery and Related Corporate Disclosure and Audit
The new wave of modern slavery disclosure regulations require companies to disclose audits and associated monitoring mechanisms to address any concern over slavery arising from their business operations. Accounting firms engage in the process of disclosure production, and both internal and external auditing. When regulators and corporations decide to introduce modern slavery audits, they often claim that it is for accountability, emancipatory and sustainability reasons, with the ultimate goal of advancing society.
It is possible, however, that such audits are merely symbolic, and corporations are in fact using them to maintain public relations and maximize profit. Modern slavery audits can be conducted by an internal auditor, who is an employee of the company, or by an independent third party, who may be a consultant, an NGO member, or a public accountant. Different international voluntary guidelines exist for these audits—such as Social Audit Network, SA 8000, AA1100, International Labour Organization workplace standards, UN/Organisation for Economic Co-operation and Development Due Diligence framework.
A modern slavery-related audit is distinct from a financial audit. Since financial audits focus on financial implications (i.e., profit and loss statements), they do not tell the full story of a company. A modern slavery audit goes beyond financial attention and investigates if and how a company is complying with human rights standards. A financial audit has limited (or no) scope to explore modern slavery. People skilled or experienced in human rights issues are, therefore, required to audit a company’s performance with regard to modern slavery.
The UN’s endorsement of the Due Diligence Principles for business and human rights represents one of the most significant developments in corporate accountability; an audit is a key component of the due diligence process. Hand-in-hand with UN endorsement, the OECD adopted a due diligence framework, recommended by the US Dodd-Frank Act. According to Dodd-Frank, the due diligence procedure requires companies to take action to identify, prevent, mitigate, and account for human trafficking and forced labor. Evidence shows that companies are responding to the due diligence procedure. The due diligence approach in relation to slavery and human trafficking in business suggests that managers understand whether or not their suppliers are violating human rights through slavery.
Concerns Over Human Rights and Modern Slavery Audits
While regulators and companies are generally positive about their existing human rights or modern slavery control measures, critics argue that the way companies use them does not create accountability to the wider community. In a recent report, PwC noted that the nature of these audits is not held in high regard, with critics often referring to the audit history of factories in the Rana Plaza building in Bangladesh as an example of audit failure (the building collapsed in 2013). PwC also argues that some suppliers exploit weaknesses in audit plans and procedures. Many critics, including academics and NGOs, have argued that if modern slavery audits are simply one facet of risk management, they may not meet their regulatory purpose given that the regulators’ ultimate purpose is tackling modern slavery. If an audit is carried out with a profit maximization motive, this may create a dead-end to corporate accountability. While there are concerns over the misuse of modern slavery audits, extant acts (such as the UK Modern Slavery Act 2015) do not provide effective means by which an audit can be enforced.
The most important component of the UN/OECD due diligence approach is the use of independent third party auditors—vital in creating accountability. However, even independent third party auditors may find it difficult to trace or identify modern slavery within complex business operations, including supply chains, if they are not well trained and not independent enough. An auditor may encounter substantial levels of vigorous deception and denial from those involved in forced labor or slavery, rendering the use of normal audit mechanisms problematic (see “Modern Slavery and the Supply Chain: The Limits of Corporate Social Responsibility?”). While professional accountants in particular are involved in the audit production process, their role—as part of a management-driven internal or external audit—appears challenging enough to actually create positive change in corporate modern slavery.
Do Accountants Have a Role to Play?
While modern slavery-related disclosure and audit is the cornerstone of corporate accountability and transparency in the era of modern slavery, along with regulators themselves accountants face challenges coping with the regulations that surround the phenomenon. Accountants and auditors need to know that while existing legislation suggests carrying out independent third party audits, challenges may arise when aiming to tackle modern slavery. For examples:
- An audit could be conducted by an inefficient and incompetent independent person.
- Firm managers may not give adequate and sincere attention to the audit and its results.
- Audits may be conducted occasionally or on an irregular basis, or they may only be conducted when a company faces a crisis (a number of companies only began using independent audits after the Rana Plaza disaster). Companies’ audit notions, therefore, do not follow the “going concern” assumption;
- If audit results reveal non-compliance, there is no follow-up.
- As modern slavery audits are mostly worker-centered, worker voices need to be heard. However, auditors may neglect workers’ voices and audit results may not be communicated back to them. Auditors’ rule-based (or “tick box”) approach may undermine workers’ voices and limit interaction, collective action, interconnectivity, and dialogue. Auditors’ unilateral risk mitigation process does not actually reduce the risk of non-compliance and associated broader stakeholder concerns. Slavery, forced labor and physical or verbal abuse may not be fully discovered until auditors talk to factory workers and the local community or create a dialogic environment where workers are free to talk.
- The cost of audits (or audit fee) are much higher for suppliers if lead firms shift such costs to the suppliers. This is especially true for emerging economies.
- It is difficult for auditors to locate or identify slavery in high-risk supply regions. As slavery is not conducted on a formal basis and is not a visible aspect of formal employment relationships, detection can be difficult.
There is debate over who might be an appropriate independent third party to conduct modern slavery audits. In practice, NGOs, private consulting firms, and accounting firms may fill the position. I would argue, however, that none of these bodies are currently sufficiently trained to run an efficient and truly independent audit. While NGOs or private consulting firms may be arguably more independent than accountants, and have more experience in dealing with human rights issues, they may lack specific professional skills. Most importantly they may not be organized and disciplined in the right areas to run an audit in a systematic way.
On the other hand, while accountants are disciplined professionals who are experts in financial issues and financial auditing, they lack expertise in human rights issues, and without adequate training may not be competent enough to conduct modern slavery audits. However, accountants may be able to run effective and systematic modern slavery audits if they are given intensive training on morality, ethics, and human rights (including human trafficking and slavery).
Unfortunately, right now I do not see any other disciplined professionals or skilled groups who could provide the required level of assistance. Therefore, regulators are faced with the challenge of identifying the appropriate people, groups, or professionals who are well qualified as auditors and who can play a part in the process of tackling and alleviating human suffering.
Some researchers have discussed community or civil society-driven audits, in which independent NGOs lead the audit to verify a company’s operations. However, the business community may not accept such community-driven audits. There is scope for regulators to train relevant third party auditors (NGO members, private consultants, or accountants) on modern slavery. There is also scope for collaborative auditing, where NGOs and accountants work together to tackle modern slavery. In responding to the changing regulatory environment, accountants in particular will need to engage in collaborative auditing with NGOs. In fact, the regulatory concern for modern slavery, along with the associated measurement and reporting complexities, has allowed accounting professionals to open their minds to the possibility that accounting has the capacity to affect real change. An important implication is that all professional accountants will be expected to look beyond the numbers, which will, in turn, enhance collaborations with members of other professions, including doctors, lawyers, human rights activists, and sociologists, to name a few.
Organizational modern slavery may not be eliminated if audits ignore the voices of the potential victims of slavery. A well-educated auditor may be able to capture workers’ voices, including the level of violence, abuse, and slavery, in his/her audit report and communicate the audit outcomes to management, employees, and the broader community—as well as the victims of slavery.
A question for further discussion: To what extent do we need to educate our tertiary level students to be socially responsible accountants and auditors?
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