Auditor Independence and Outsourcing: Aligning Incentives to Mitigate Shilling and Shirking
51 Pages Posted: 13 Jan 2021
Date Written: December 3, 2020
Multinational corporations (MNCs) hire auditors to assess their business partners’ compliance with quality, working conditions, and environmental standards. Independent third-party auditors are widely assumed to outperform second-party auditors employed and thus controlled by MNCs. Synthesizing literatures on auditor independence and outsourcing decisions, we compare how independence and control can affect auditor performance. Using proprietary data from a global apparel brand, we find that second-party auditors outperform independent third-party auditors, and that third-party auditors’ performance improves when MNCs concurrent source audits, using both second- and third-party auditors. However, both second- and third-party auditors perform better with more independence from the entities they audit—specifically, when auditing factories most recently audited by a different firm. These findings yield important insights for more effective monitoring of business partners.
Keywords: Working Conditions, Supply Chain, Auditing, Monitoring, Concurrent Sourcing, Labor, Corporate Social Responsibility, Sustainability, Sustainable Operations, Sustainable Supply Chain, NGO
JEL Classification: M11, M14, M42, M54, J81
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