Exploring Audit Fatigue in Light of Sustainable Supply Chains: A Case of Pakistani Textile Sector

Abstract

Achieving sustainability is not only a source of competitive advantage for businesses but also projects a positive image among customer, investors and media. Hence, it has become a primary goal of corporations to become sustainable. However, sustainability is only possible if the entire supply chain is sustainable and not just the focal firm. Ensuring the entire supply chain to act in a responsible manner requires tremendous effort, coordination and time. Audits have become a source of verification and improvement in this quest. Organizations rely on audits and compliance related activities to prove their competency, credibility, firm performance and sustainability practice. Sustainability audits encompass entire supply chains and are very complex due to, firstly, the global nature of supply chains and, secondly, the expansive scope of sustainability, which may include financial, manufacturing, social, and environmental aspects. Adding to this dilemma is the absence of a consensus on standards related to sustainability, resulting in duplication, variations, and multiple interpretations. Owing to these reasons the frequency, complexity, and scope of audits has increased, thus giving rise to the emergent phenomenon called ‘audit fatigue’ in the industry. Unfortunately, the incidents of audit fraud have also risen. This has been getting increasing media coverage in recent times, often implicating major multinationals and their supply chains. This is an exploratory research based on a collective case study methodology, with a focus on the large textile exporters in Pakistan. The aim is to find the determinants and consequences of audit fatigue and further elaborate the concept. The study has shown that contrary to popular belief, audit frequency is not the only precursor to audit fatigue. Firm size, management support, sustainability standards’ complexity and variety, clients’ size and brand, transaction costs economics (TCE) also play an important role in driving audit fatigue. The depth of buyer-supplier collaboration also influences audit fatigue. An unexpected consequence of audit fatigue has been an increase in the systemic risk in the form of reduction in supplier base due to preference given to a few certified suppliers, and a gravitation of the textile suppliers to limited customers markets based on similarity of sustainability standards. TCE theory also served as a lens to explain why managers treat audits as a burden and hesitate to go the extra mile to achieve sustainability.

Achieving sustainability is not only a source of competitive advantage for businesses but also projects a positive image among customer, investors and media. Hence, it has become a primary goal of corporations to become sustainable. However, sustainability is only possible if the entire supply chain is sustainable and not just the focal firm. Ensuring the entire supply chain to act in a responsible manner requires tremendous effort, coordination and time. Audits have become a source of verification and improvement in this quest. Organizations rely on audits and compliance related activities to prove their competency, credibility, firm performance and sustainability practice. Sustainability audits encompass entire supply chains and are very complex due to, firstly, the global nature of supply chains and, secondly, the expansive scope of sustainability, which may include financial, manufacturing, social, and environmental aspects. Adding to this dilemma is the absence of a consensus on standards related to sustainability, resulting in duplication, variations, and multiple interpretations. Owing to these reasons the frequency, complexity, and scope of audits has increased, thus giving rise to the emergent phenomenon called ‘audit fatigue’ in the industry. Unfortunately, the incidents of audit fraud have also risen. This has been getting increasing media coverage in recent times, often implicating major multinationals and their supply chains. This is an exploratory research based on a collective case study methodology, with a focus on the large textile exporters in Pakistan. The aim is to find the determinants and consequences of audit fatigue and further elaborate the concept. The study has shown that contrary to popular belief, audit frequency is not the only precursor to audit fatigue. Firm size, management support, sustainability standards’ complexity and variety, clients’ size and brand, transaction costs economics (TCE) also play an important role in driving audit fatigue. The depth of buyer-supplier collaboration also influences audit fatigue. An unexpected consequence of audit fatigue has been an increase in the systemic risk in the form of reduction in supplier base due to preference given to a few certified suppliers, and a gravitation of the textile suppliers to limited customers markets based on similarity of sustainability standards. TCE theory also served as a lens to explain why managers treat audits as a burden and hesitate to go the extra mile to achieve sustainability.