Selection, Payment, and Information Assessment in Social Audits: A Behavioral Experiment

<b> Problem definition: </b> Companies often rely on third-party social audits to assess suppliers’ social responsibility (SR) practices. However, empirical evidence suggests that these audits can often be too lenient and poor practices go unreported, particularly if the auditor feels beholden to the supplier. <br><br><b> Methodology/results: </b> We design and conduct an incentivized lab experiment to study how a supplier choosing and/or paying the auditor affects audit reports. In addition, we explore whether and how these levers affect auditors’ assessment of noisy signals about the supplier’s practices, and investigate the role of two behavioral phenomena: motivated reasoning and reciprocity. We find that auditors who are paid <i> and </i> chosen by the supplier are more lenient, and the effect is more pronounced when the information observed suggests poor SR practices. We do not find evidence of motivated reasoning, as auditors are not more likely to believe the supplier to have good practices when chosen by it. Conversely, reciprocity towards the supplier plays an important role behind our results. Finally, auditors who are merely paid by the supplier do not make more lenient decisions, which offers good news for practitioners.<br><br> <b> Managerial implications: </b> Our results can help guide companies' auditing and procurement policies. First, they show that removing a supplier’s ability to choose its own auditor is critical to increase the detection of poor SR practices, particularly when the risk of bad practices is high. Second, removing the suppliers’ ability to choose their auditor---while still paying for it---might be enough to reduce leniency risks. Finally, our findings shed light on some of the behavioral drivers behind auditors decisions, which can help design interventions to mitigate audit leniency.