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  • CFO Magazine

The Price of a Cheap Suit

Companies spend millions to assess overseas suppliers. So why are they still missing so many problems?

Indeed they do. Most companies haven’t even developed effective monitoring. Some argue that, at this juncture, what the monitoring process needs is some strict financial discipline. “The activists are pushing for the types of disclosure and reporting that are very familiar to the CFO,” says Pietra Rivoli, an associate professor at Georgetown University’s McDonough School of Business and author of The Travels of a T-Shirt in the Global Economy.

Far-fetched? Not necessarily. Finance chiefs routinely oversee other aspects of supply-chain management and increasingly are charged with protecting the value of corporate brands. Nor, as Rivoli points out, are they exactly strangers to monitoring compliance programs. “They have the most practice with regular audits,” she notes.

Coached to Lie

Of course, any finance chief will tell you that audits are only as good as the information they are based on. And therein lies the problem. Sweatshop operators go to great lengths to make sure nobody sees what is going on.

Indeed, as retailers and apparel makers have stepped up their compliance initiatives, factory owners have stepped up their deceptions. One of the biggest issues: many suppliers keep two or more sets of books to help hide overtime and wage violations. In fact, experts say software can be easily purchased in China to help factory owners maintain multiple sets of books. “It’s a problem that is gradually increasing,” admits Michael Kobori, director of global code of conduct for apparel maker Levi Strauss & Co. Kobori says the company will drop a supplier that is caught cooking the books.

Cheating can be difficult to detect, however. Kernaghan says he visited a factory in Bangladesh where the time cards for the next week were already stamped with the legal amount of hours allowed. He says lots of paperwork is falsified. “There is software they can buy,” he says, “that will put just a few errors into the records so that they look clean, but not too perfect.”

Interviewing workers is one way to smoke out fraud. In many cases, however, employees are coached to lie. They are told to say that working conditions are great — and are threatened if they tell the truth. Observers say that most workers won’t talk openly in the factories for fear of losing their jobs. And “worker interviews are rarely conducted outside the factories,” says Scott Nova, executive director of the Worker Rights Consortium, an antisweatshop group based in Washington, D.C. “It’s the weakest part of these audits.”

In extreme cases, factory owners set up front operations to fool inspectors. The fake facility may be one building of many the supplier operates, or even a factory owned by another company. “Factories always hide their actual ownerships and relationships,” says Gregory Ray, managing director of The Shiny Penny Ltd., a sourcing and supply-chain management advisory firm based in Shanghai.

Complicating the picture, he says, is the fact that buyers sometimes outsource to other buyers, or factories subcontract the order. “An apparel company might have no idea where the products are really coming from,” says Ray. “When they visit China, everybody’s in collusion to show them a nice, clean showcase factory where all the workers are smiling.”

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