Examining the Impact of Leniency Bias on Supplier Audits

Auditing is a critical governance instrument that enables buyers to monitor suppliers and thus reduce corporate social responsibility (CSR) risk. However, auditing is not an exact science: audits are subject to potential biases that can impact their accuracy. Given this, recent studies in the auditing literature emphasize the need to identify and explore multiple forms of bias that can occur during audits. In this paper, we examine the impact of one type of bias, monitor leniency, on supplier facilities’ CSR risk. Using a unique dataset consisting of historical, facility-level audits for a large global apparel brand, we find that monitor leniency in the current audit helps to reduce CSR risk (which we proxy using the severity score for audit outcomes in the next round of audits). To further understand how monitor leniency potentially influences facility CSR risk, we examine the interaction effects between leniency and the following factors: (i) facility compliance ability, (ii) whether the monitor changed from the last round of audits, (iii) the number of times a facility has been audited, (iv) the change in leniency a facility has experienced, and (v) whether the facility is located in a developing or developed country. We find that an increase in monitor leniency has a greater effect on facilities with low compliance ability, on facilities in developing countries, on facilities that have been audited a fewer number of times, and on facilities that experienced a greater positive change in leniency since their previous audit. Our work provides insight on both the positive and negative impacts of monitor leniency on the effectiveness of audits in reducing CSR risk. It also underscores the potential relational influences to which audits are subject and offers buyers insight into the relational factors that can influence supplier audit programs