Sourcing Monitors to Monitor Your Sourcing: Strategies to Manage Shilling and Shirking by Supply Chain Auditors

Posted: 13 Jan 2021 Last revised: 5 May 2022

See all articles by Ashley Palmarozzo

Ashley Palmarozzo

Harvard Business School

Jodi L. Short

UC Hastings Law

Michael W. Toffel

Harvard Business School

Date Written: August 30, 2021

Abstract

Multinational corporations (MNCs) hire auditors to assess 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. However, outsourcing audits to third parties creates agency problems that can likewise undermine auditor performance. Synthesizing literatures on auditor independence, agency theory, and sourcing, we compare the implications for auditor performance of four sourcing strategies: insourcing, outsourcing, concurrent sourcing, and rotational sourcing. Using proprietary data from a global apparel brand, we find that insourced second-party auditors outperform outsourced third-party auditors and that third-party auditors’ performance improves when MNCs concurrently source audits, using both second- and third-party auditors. We also show that both types of auditors perform better when MNCs rotate auditing firms.

Keywords: sourcing strategy, concurrent sourcing; outsourcing; suppliers; monitoring

JEL Classification: M11, M14, M42, M54, J81

Suggested Citation

Palmarozzo, Ashley and Short, Jodi L. and Toffel, Michael W., Sourcing Monitors to Monitor Your Sourcing: Strategies to Manage Shilling and Shirking by Supply Chain Auditors (August 30, 2021). Harvard Business School Working Paper, No. 21-078, UC Hastings Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3758992 or http://dx.doi.org/10.2139/ssrn.3758992

Ashley Palmarozzo

Harvard Business School ( email )

Boston, MA 02163
United States

Jodi L. Short

UC Hastings Law ( email )

200 McAllister Street
San Francisco, CA 94102
United States

Michael W. Toffel (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States
617.384.8043 (Phone)

Do you want regular updates from SSRN on Twitter?

Paper statistics

Abstract Views
876
PlumX Metrics