14 Nov 2013  Working Papers

What Shapes the Gatekeepers? Evidence from Global Supply Chain Auditors

Executive Summary — Private gatekeepers, from credit rating agencies to supply-chain auditors, are supposed to provide unbiased, objective assessments of companies' internal operations, and such private assessments play a central role in contemporary regulatory regimes. While the impartiality of gatekeeping organizations has come into question over the past decade, little is known about what drives the decisions of the individual accountants, auditors, analysts, and attorneys who work at these organizations. Using data from a private, third-party social auditing firm that assesses global supply chain factories' adherence to corporate codes of conduct governing workplace conditions, this study reveals that external auditors' findings are shaped by a combination of economic incentives and social factors. The study highlights opportunities to design and staff audits to maximize their impartiality and credibility. Key concepts include:

  • Gatekeepers, such as accountants, attorneys, auditors, and analysts, typically have substantial professional discretion to make vital gatekeeping decisions on the ground.
  • In the supply-chain auditing context, gatekeepers are influenced by conflicts of interest and by social factors, including ongoing relationships with clients, on-the-job experience, professional training, and gender diversity.
  • Companies using auditors and other gatekeepers should consider not only which organization to hire, but also the characteristics of the staff deployed on the gatekeeping teams.
  • Auditing teams can benefit from gender diversity, professional training, and experience, although the marginal benefits of the latter attenuate over time.
  • Regulatory systems reliant on private gatekeepers should be designed to mitigate the effects of conflict of interest and leverage social factors of team compositions to enhance the reliability and integrity of gatekeeping decisions.

 

Author Abstract

Private gatekeeping institutions, from credit rating agencies to supply-chain auditors, are important players in contemporary regulatory regimes. Yet little is known about what influences the decisions of the individual accountants, auditors, analysts, and attorneys who interpret and apply the rules embodied in the regulatory schemes they help to implement. Drawing on insights from the literatures on street-level bureaucracy and on regulatory and audit design, we theorize and investigate the economic incentives and social institutions that shape the gatekeeping decisions of private supply-chain auditors. We find evidence to support the argument that auditors' decisions are influenced by financial conflicts of interest. But we also find evidence that their decisions are shaped by social factors, including an auditor's experience, gender, and professional training; ongoing relationships between auditors and audited factories; and gender diversity on audit teams. By demonstrating the contributions of both economic incentives and social institutions to gatekeeping decisions, our research significantly extends the gatekeeping literature's narrow focus on economic incentives. By providing the first comprehensive and systematic findings on supply-chain auditing practices, our study also suggests strategies for designing private regulatory regimes that will more effectively detect and prevent corporate wrongdoing.

Paper Information