China: The auditing impasse

There's a multi-million dollar business that most people haven't heard about. It's called auditing, and in China alone it keeps more firms cashed up than I care to think about. I don't mean financial auditing by accountants, or auditing for product quality by the QC folk. And I don't mean the kind of auditing that tests pressure gauges on industrial boilers (which used to be the backbone of this industry). The kind of auditing I'm talking about is social auditing, which didn't exist ten years ago but is now a kind of frontier industry into which anyone with connections, a few language skills and an eye on industry trends has jumped. The history of it goes something like this.

Company X - a large multinational retailer - sources products from hundreds or thousands of factories across Asia (and Latin America, Eastern Europe and the Pacific too). It's cheaper doing it this way, and increasingly easy as supply chain management techniques and technology have evolved and the cost of transportation has plummeted. But on the home front, not all customers see it quite the same way. Some of them boycott Company X, accusing them of exploiting workers by turning a blind eye to sub-contractors who work them long hours, pay them less than a survival – or minimum – wage, and care little about freedom of association or occupational health and safety.

At first, Company X denies any moral responsibility. After all, they don’t own the factories. In fact, they hardly know where these places are. Their only contact with the Chinese work force is via merchandisers in Hong Kong, and as long as products meet specific standards, price, and are delivered on time, who really cares where they’re sourced? But consumer groups persist, and after a while Company X is forced kicking and screaming to the negotiation table over workplace conditions. What to do?

Some bright spark with a sense of history hits on the idea of a set of standards for sub-contractors or vendors, and the code of conduct is born (well, reborn might be a better way to put it, but let’s not get sidetracked). Some guys at HQ – let’s say Chicago, just for the hell of it – bang out two A4 pages comprising a list for Chinese factory owners to follow. Chicago doesn’t want child labour on the factory floor. It doesn’t want to buy products made by prison labour. It would like workers to receive minimum wages and work hours pursuant with the country’s labour laws. It’s repelled by the idea of discrimination, so they insert a clause stating Chinese managers shouldn’t fire or refuse to hire people on the basis of sex, religion, kinky predispositions, and whatnot. And because the ILO makes such a big fuss about it, they stipulate the right of workers to bargain collectively and freely associate (join free and independent trade unions).

It’s a great idea. It must be, because pretty soon everyone has a code of conduct. And they all pretty much say the same thing. But on the home front, consumers and other trouble makers aren’t pacified. To their utter shock and dismay, people don’t believe just because Company X says these things occur that they actually happen; quite the opposite. People want to see some proof. CEOs waving pieces of paper don’t cut it anymore.

Back at HQ, the idea of verification is hatched. This solves everything. Social auditors with checklists start wandering around Chinese factories, ask workers questions, and ensure that the code is followed. What better way to prove to pesky consumers that Company X’s code of conduct is rigorously implemented? It’s a short lived victory. Back home, people wonder out loud about just how effective PricewaterhouseCoopers or any other auditing company is at this kind of thing. After all, these people are doing thousands of social audits but apart from a handfull of documents falling off the backs of trucks, noone besides a few people at Company X and the Chinese factory gets to see these reports. This is confidential stuff.

A few industry leaders toy around with open audits, post them on their Web sites, and paradoxically attract even greater criticism than if they’d closed ranks and said nothing. Company X is more touchy-feely. It engages with stakeholders, a prissy title for people involved in the enterprise other than HQ in Chicago and factory owners in China. Stakeholders are meant to be workers on site, their families, the communities in which enterprises are located, local governments, and others. What it means in reality is a handful of non-government organisations that have leveraged international prestige into the right to speak on behalf of people they sometimes hardly know. Pretty soon, NGO wallahs are on the global lecture circuit talking to anyone who will listen about codes, monitoring and working conditions.

It’s all a bit pointless by this stage. All of the big certification and testing companies are doing thousands of social audits every year on top of their ISO and boiler gauge testing. Hundreds of smaller companies have popped up, and NGOs have manoeuvred themselves into the market too. Company X has its own compliance team on the ground in Hong Kong and China, pays for external auditors, and tries to work with local NGOs. It’s costing a fortune, but they still can’t shake the tag of Big Fat Exploitative Multinational. And what’s more, no one’s actually sure that conditions for Chinese workers have improved.

By this stage, counter-auditing has evolved into a finer art than auditing itself. For every worker interview, desk audit, and factory walkthrough, Chinese managers have countered with interview training of their own, false sets of books, and clean factories on visiting day. Workers are taught how to respond to questions from social auditors. Do you work on Saturday afternoon? Nope! Do you work to midnight during peak season? Uh-uh. Ever get paid lower than [insert county minimum wage]? What, you kidding me? Books and swipe card records show a perfect 7:00am to 6:00pm work day, five days per week (in compliance with Chinese Labour Law’s 44 hours per week and 36 hours overtime per month). Payroll records show wages above the minimum. Auditors dodge and weave, checking production records against hours worked: can 1,900 employees working 8 hours per day produce this many widgets? Management counters every request, stonewalls on the ones they can’t really fudge, and after two days both sides call a truce, smile and shake hands, and thank heaven that’s all over for another six months or a year.

Auditing has had its day. Two tired boxers, clapped out and overweight, land soft punches on even softer flab. Neither will go down for the count. And all the while workers continue working as required in conditions that may have improved marginally. For all the money spent – and it must be billions by now – there are few signs that things have improved across the board. Company X keeps most criticism at bay. Consumers are kept in the dark. Auditors take their cut and insist on better ventilation, effective guards on machines, new personal protective equipment, payment of wages on time, and fewer beds in dormitories. Some remedial action occurs. Other recommendations are ignored until next time and the grand game starts all over again.

As the closing paragraph in Joseph Kahn’s story in the New York Times this week puts it: “I thank the inspectors for one thing," said a Kin Ki worker from rural Sichuan. She was crouching over a bucket of cold water in the warm afternoon sun, washing her hair. "I needed a rest," she said.

It's time to move on.

Source: Joseph Kahn, “Ruse in toyland: Chinese workers' hidden woe,” New York Times, 07 December 2003.

Stephen Frost is editor of Asian Labour News