Publications
Publications
- 2021
- HBS Working Paper Series
Auditor Independence and Outsourcing: Aligning Incentives to Mitigate Shilling and Shirking
By: Ashley Palmarozzo, Jodi L. Short and Michael W. Toffel
Abstract
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
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. "Auditor Independence and Outsourcing: Aligning Incentives to Mitigate Shilling and Shirking." Harvard Business School Working Paper, No. 21-078, January 2021.
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