Discussion Questions: Assurance and Verification

1.       What type of audit do you think multinational companies should demand from their suppliers in developing countries?

2.      Do you think that multinationals should be responsible for the cost of the audits?

3.      Do you think that certification will provide suppliers with a competitive advantage or will it put them at a disadvantage?

Because of the deluge of corporate scandals, stakeholders have become more skeptical of company claims.  They demand the same treatment that shareholders were presumed to be getting, transparency – i.e. credible evidence of performance, with third-party verification.

Social audits are designed to communicate a company’s social record.  General Motors produced a social report as early as 1970, but without an outside review.  Carl Jung once said it takes one generation, 30 years, for an idea to become part of the culture. Effective measurement and communication of a company’s commitment and performance has become a key component of successful social accountability, which led to some experiments with outside social audits.   Social and environmental reports were designed to benchmark, track progress, address challenges, reflect consultations with stakeholders, and on occasion respond to allegations. The social auditor was asked to attest to the fairness of these reports.

Concept: The Need for Verification

The first example of independent verification of a major company CSR report by a large financial auditor was the Shell annual report for 2001.[1]  Social audits are designed to communicate and lend credibility to a company’s social record.  They are also a response to independent external reports on companies.[2]  They present the company’s record in a way that the company has some control over.  Effective measurement and communication of a company’s commitment and performance has become a key component of successful social accountability.   Social and environmental reports are designed to benchmark, track progress, address challenges, reflect consultations with stakeholders, and on occasion respond to allegations.

 Certification

Certification is the process whereby products or facilities undergo an impartial third party audit against a set of standards. In order to provide credibility with consumers, government, and the business, and to overcome the consumer confusion and suspicions that self proclamation engenders, it is essential that standards be subject to independent, impartial verification by properly accredited certification bodies (these can be NGOs) and that sufficient transparency be evident.  For products, it means actual testing of samples; for facilities, it means a process that includes on-site inspection:

1.       Product certification: These certifications often entail “cradle to grave” standard elements for the item or service itself; for the facility where it was produced; and for the raw materials and energy use involved in its production, use and disposal.

2.      Facility certification: These certifications entail compliance with standards that typically include both management systems and performance elements for a facility.

If a facility or a product or service can demonstrate to a qualified impartial third party that it meets a standard, it will earn a certificate attesting to its compliant attributes, policies, management and/or operations. Generally, for facility certification, in contrast to product certification, the Mark or Seal signifying that it meets the standard can be displayed at facilities (a banner or framed certification or signs), on advertising, in general promotion, on packages and on hanging tags, but not on products themselves.

To qualify for facility certification, an applicant undergoes a three-step process:

1.       Office visit involving review of policies and procedures and documentation, inspection of the central office, and interviews with staff;

2.      Witness audits involving the observation by an accreditation audit team of the certification body conducting an audit; and

3.      Periodic re-evaluation in the form of surveillance audits at levels 1 and 2 above.

Three Types of Audits

An audit is a systematic, independent and documented process for obtaining audit evidence and evaluating it objectively to determine the extent to which audit criteria are fulfilled.[3] There are three types of assessments:

1.       First party, or internal, when a company audits itself;

2.      Second party, when a company contracts with a consultant to audit a supplier or when the company’s own staff conduct the audit of a supplier; and

3.      Third party, an open system, when an accredited certification body conducts an independent verification audit to a consensus-based standard, under procedures established and overseen or licensed by an accreditation body.

Since the interest of auditors is not identical to that of the management of the facility, sophisticated interview techniques are required.  This means interviewing management in ways that make it more difficult to avoid answering important questions relating to compliance with standards.  It means interviewing workers under conditions in which they are not afraid to speak and protecting them from any possible retribution. 

Preparation for an Audit

Each audit is a special challenge requiring an audit plan.  Auditors must organize their visit to each facility to make the best possible use of time, coordinate the inspection activities and findings of each member of the audit team, enable confirmation of allegations of non conformances that might be garnered in interviews, to make it likely that all necessary aspects of the audit can be completed in the pre-arranged time frame, and to open and close the audit with clear and productive communications with management.

Generally, before undergoing a full environmental and/or social accountability certification audit, an applicant will first take a course in the operation of the standard and its management system (if any), study the Guidance Document for the standard, perhaps hire a consultant to assist in its implementation, implement the standard, then arrange for a pre-assessment to determine if it is “certification ready”.  A Guidance Document is an updated interpretation of each element of a standard, with special attention to its application to particular locations and sectors.  For example, in a fair workplace standard: How does one determine if minimum wage requirements are met where workers are paid on a piece basis? How does one interpret freedom of association in China?  What is a living wage and how is it to be determined for a particular location? 

Complaints and Appeals

Should any interested party (e.g. a competitor, neighbor, worker, trade union or NGO) observe a non-compliance at a certified facility (that escaped the notice of the certification body), a complaint should be lodged with the certified facility itself. Failing satisfactory resolution of the complaint, another complaint or appeal of the certification can be lodged with the certification body that issues the certificate. Certification bodies are required to operate a complaints and appeals system that calls for timely, impartial investigation and resolution of all documented complaints and appeals. Should the allegations be substantiated, a Corrective Action process must be initiated and implementation of Corrective Actions confirmed for the certification to remain in effect. Failing satisfactory resolution, the complainant can further complain or appeal against the certification body to its Accreditation Agency.

An effective, open and transparent complaints and appeals system increases reliability and credibility or a certification program. Auditors are nor infallible. For facility certification, workers are in a facility every day, whereas auditors come in on a regular but far less frequent basis; for product certification, auditors check a sample, not every item. A facility might be incompliance one day but not thirty days later. 

Corrective Action

Non conformities identified in the process of an audit fall into three categories: Major (systemic violation), Minor (oversight or non-systemic problem), and Observation (non mandatory).

Majors and minors are written up and presented at the closing meeting with management in the form of Corrective Action Requests. These are designed to elicit plans for Corrective and Preventive Action. Ideally, at the closing meeting, the CSR manager and other key members of management are joined by the elected worker representative, and the team develops corrective and preventive actions together. Under no circumstances can a third party auditor design the Corrective Action, as this would pose a conflict of interest.

In the case of a major, the audit team does not recommend certification. Instead, if the Corrective Action plan is approved by the auditors, a date is set for a return audit visit to ascertain whether or not the Corrective Action is emplaced and effective. Once all majors have been cleared, the audit team will recommend certification.

In the case of minors, the audit team may decide to recommend certification. Management will be expected to notify the auditors when the Corrective Actions are in place.  If certification takes place, confirmation will occur at the next scheduled surveillance, in six months. The emphasis should be on continuous improvement, so Observations are also important, even though no action in response is required. Observations are among the value added contributions an audit team can provide without posing a conflict of interest.

Management Systems

Frequency of Audits

Certification audits are conducted at regular intervals, frequently on a three year schedule with surveillance audits annually or more often. At both levels, a Corrective Action process is utilized. To qualify for certification or accreditation, no major Corrective Actions can be outstanding. A system of checks and balances provides for approval at several levels, generally both a positive auditor recommendation accompanied by an audit report with no outstanding major non-conformities and review and approval by an Accreditation Review Panel.

A company operating a group of facilities that share a management system and operate in rigorously similar manner can apply for group certification. In such cases, the certification body utilizes a sampling process to select individual facilities for auditing.

Global Accreditation

Companies seeking certification or relying on certification in business-to-business relations, look to certification bodies for assurance. Business prefers to rely on certification bodies that are accredited. Two global associations of accreditation bodies seek to assure high quality and consistency in standard setting, the interpretation of standards, and accreditation. 

International Accreditation Forum (IAF)

The older and more dominant is the International Accreditation Forum (IAF), which brings together national conformity assessment accreditation bodies for mutual recognition, harmonization, and high professional quality. Accreditation bodies which are members of IAF agree to operate in compliance with ISO standards for accreditation agencies and to require the bodies they accredit to comply with appropriate international standards. IAF is designed to establish Mutual Recognition Arrangements (MLA) to move from their national systems to a single global one, thus removing the need for duplicative recognition in each country where certification bodies operate.  IAF seeks to accomplish this integrative goal through Mutual Recognition Arrangements attained via peer audits among its members. IAF also develops guidance for and seeks to harmonize accreditation procedures and contributes to the work of ISO. IAF members include virtually all national accreditation agencies, but it has been hostile to global accreditation agencies, which it seems to view as posing a competitive threat to the nationals.[4]

International Social and Environmental Alliance for Labeling (ISEAL)

In a global world, the national accreditation agency system has been viewed as obsolete for global trade and business, just as is the system of the separate development of standards for each nation that apply to business products, services and processes that operate and trade globally.  A number of multinationals are on record as preferring not only global standard setting processes, but also global accreditation and certification systems, to avoid the higher cost and complexity of complying with multiple standards and multiple systems for their verification.

Therefore, eight global accreditation agencies formed ISEAL[5] (the International Social and Environmental Alliance for Labeling), to provide a home for the new wave of global standard setting and accreditation bodies established to develop and oversee the standards designed to assure ecological sustainability and social justice and verification of compliance with them.  ISEAL seeks to raise professional standards among accreditation and certification agencies and to seek harmonization among the standards.  Today most of the voluntary international standards and accreditation programs focused on social and environmental issues belong to ISEAL. Its mission is to support its member programs to attain a high level of quality, public credibility, political recognition, and market success.

Regular Members of ISEAL are committed to operate in accordance with international normative documents for standard setting and accreditation and to meet the requirements for Peer Review (in effect within two years of  joining). ISEAL is establishing a Multilateral Recognition Agreement (MLA) based on this Peer Review system.

ISEAL also operates programs in monitoring and analysis of policy and seeks to build capacity and promote best practice. Its first collaborative project is SASA (Social Accountability in Sustainable Agriculture). SASA seeks to improve social auditing processes in agriculture and to foster closer cooperation and shared learning among initiatives trough a series of pilot exercises. Optimal outcomes include the identification and adoption of best practice, harmonization of standards, development of procedures for integrated audits, and perhaps even laying the groundwork for joint public education and promotion among the project partners.[6]