How to choose a trustworthy auditor

How to choose a trustworthy auditor

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Reprinted from Network for Business Sustainability.

"Trust, but verify," said former U.S. president Ronald Reagan. Auditors verify by checking financial reports, environmental and labor claims, and much more. But not all auditors are equal. Professors Lamar Pierce and Michael Toffel have identified key qualities of trustworthy auditors.

For their work, Pierce and Toffel have won the 2014 Research Impact on Practice Award, which recognizes sustainability research that has important implications for managers and other practitioners. Pierce (Washington University in St. Louis) and Toffel (Harvard Business School) published their findings in the journal Organization Science.

Auditors often face conflicts of interest because they sell companies additional services such as consulting. Pierce and Toffel found that auditors are more lenient when auditing customers who buy their other services, perhaps because the auditing company is trying keep both revenue streams flowing. The researchers’ recommendation: If you want more stringent auditing, choose a firm solely focused on auditing.

Compared to independent firms, franchises and subsidiaries also tend to be more trustworthy auditors because they’re subject to monitoring by corporate headquarters and so have stronger incentives to audit stringently.

Auditing, certification and other private monitoring are widespread. Governments often require monitoring of compliance with environmental, labor, consumer and financial reporting rules, and firms seek to understand quality and workplace conditions in their supply chains. “If the monitoring isn’t credible,” explained Pierce, “this oversight is valueless.” In all these situations, said Toffel, “our findings should help firms make better choices about which auditors are more likely to provide a more accurate portrayal of the facts on the ground.”

The Research Impact on Practice award seeks to celebrate and share academic research that has the opportunity to change business. While academics produce high-quality research, much of it remains in publications and conferences targeted at other academics.

Award sponsors are NBS and the Organizations and the Natural Environment Division of the Academy of Management, a professional organization for sustainability researchers.

“Researchers and managers often care about the same issues,” says Tima Bansal, executive director of NBS. “This award is about connecting those two communities and sharing their knowledge.”