Publications
Publications
- 2021
- HBS Working Paper Series
Sourcing Monitors to Monitor Your Sourcing: Strategies to Manage Shilling and Shirking by Supply Chain Auditors
By: Ashley Palmarozzo, Jodi L. Short and Michael W. Toffel
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
Concurrent Sourcing; Transaction Cost Economics; Outsourcing; Suppliers; Monitoring; Business Strategy; Vertical Integration; Supply Chain Management; Quality; Safety; Risk and Uncertainty; Apparel and Accessories Industry; Retail Industry; China; India; Bangladesh
Citation
Palmarozzo, Ashley, Jodi L. Short, and Michael W. Toffel. "Sourcing Monitors to Monitor Your Sourcing: Strategies to Manage Shilling and Shirking by Supply Chain Auditors." Harvard Business School Working Paper, No. 21-078, January 2021. (Revised August 2021.)
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