Internal audit’s important role in combating modern slavery
The role internal audit has in helping businesses implement their anti-trafficking and human slavery statements.
Back in April 2017 I wrote an article which set out the reporting requirements of businesses with respect to the Modern Slavery Act 2015 and the role that internal audit can play in both an assurance and advisory capacity.
September 2018 will see the first tranche of organisations publish their second ‘anti-trafficking and human slavery’ statements. But how successful have these statements been to date and what more is required to drive real, tangible change when it comes to awareness and behaviours?
To recap, the introduction of the Modern Slavery Act 2015 was a key initiative of Theresa May during her time at the Home Office and has received continued focus during her time as Prime Minister.
The Act requires organisations conducting business in the UK, with a global turnover greater than £36m, to produce a report annually detailing the steps they have taken to ensure that slavery and human trafficking does not exist within their organisation and their supply chain.
While its impact remains a work in progress, the Act has helped to raise awareness of these terrible and harrowing crimes. Police in England and Wales recorded 2,255 modern slavery crimes in 2016/17, up from 870 cases in 2015/16, according to Kevin Hyland, Britain's anti-slavery commissioner.
This heightened awareness is slowly starting to influence customers, suppliers, investors and stakeholders more broadly when engaging with businesses. This in turn is forcing organisations to be more proactive in taking steps to mitigate potential slavery and human trafficking risks. However, there is also increasingly a recognition of the value generated beyond simply complying with legislation.
From a reporting perspective, companies such as Marks and Spencer and Unilever have sought to lead the way with respect to the level of detail and transparency within their Anti Slavery and Human Trafficking statement.
Unfortunately, in a significant number of cases progress is more limited. In April 2018 TISCreport (Transparency in Supply Chain) reported that 50.8% of organisations (9,627 out of 18,939) required to report annually still have no locatable statements on modern slavery. This suggests there remains a lack of awareness of the legislation or that the potential implications are not sufficient to ensure this is a priority. This has not been helped by the government reiterating that it will not proactively monitor compliance; it has been left to NGOs, charities and the voluntary sector to fill this void.
Tick box templates
Having reviewed a number of those published statements a significant number do not comprehensively cover the required information as detailed within the Home Office guidance. Many statements are bland, templated documents which suggests that many businesses still view the reporting element as a tick box exercise. These conclusions are further supported by a report from the UK business and human rights resource centre in October 2017 which identified similar issues when looking at statements published by the FTSE100.
There appear to be a multitude of reasons for this: the resource and cost implications, a lack of expertise or knowledge as to what is required within these reports, or other avenues being used to promote efforts in this area without effective referencing within the statement. Irrespective, this appears to be a lost opportunity to communicate proactively with stakeholders on those positive actions which have quite often taken place behind the scenes.
The lack of understanding around modern slavery reporting requirements has also created a number of misconceptions. One of the most common is that a business’s obligations to take steps to prevent modern slavery is limited to their organisation only. The reporting requirements are clear that businesses must also take steps to ensure that modern slavery is not occurring throughout their supply chain.
For specific sectors the risks are clear, present and generally understood. The construction, travel and leisure and hospitality sectors, for example, often rely on migrant labour, some of whom may not be able to communicate effectively in English. Slavery and human trafficking risks within these sectors are, therefore, inherently higher. Likewise, manufacturers of a range of products often have to source materials or engage with suppliers who operate in countries where modern slavery (as defined within the Act) is commonplace or even legal.
For other businesses, modern slavery risks are less obvious. This has created a degree of complacency with regards to supply chain risk - particularly those organisations which tend to be single sited, UK based with a predominantly local supplier base.
In these instances it is commonplace for modern slavery risks to be dismissed as irrelevant. However, cleaning firms, catering companies, temporary staffing agencies, office suppliers, providers of outsourced or managed services (eg IT) all represent the supply chain, and therefore slavery risks should at least be considered by businesses, yet are often overlooked.
Additionally, many organisations have raised concerns over how they can assure themselves over modern slavery risks where their supply chain is broad, complex or has multiple layers.
It is important to remember that businesses are not required to ‘guarantee’ that modern slavery does not exist within their supply chain; simply to report what (if any) action has been taken to assure themselves that it does not.
In order to achieve this, a risk-based approach is recommended allowing a level of enquiry and validation which is reasonable and proportionate to the nature of a business’s activities and those of its supply chain.
An approach taken by many organisations applied a variety of factors and weightings to determine those areas of the supply chain which are considered to be riskier. Factors may include value of trade, location of the supplier (UK vs. international), nature of products or services provided or a reliance on human labour.
The outcomes can then be used to drive the action required to obtain the desired level of assurance. For example, those suppliers considered to be low risk may be required to sign a declaration annually that they have taken appropriate steps to ensure modern slavery does not exist. As the perceived risk increases suppliers may be asked to provide policies, procedures or evidence of action they have taken through to announced or unannounced supplier audits, specifically focused on slavery and human trafficking risks.
Leverage what exists
It’s also important not to reinvent the wheel. Leverage what already exists. There are likely to be processes already in place which can easily be enhanced to help mitigate modern slavery risks within a supply chain. For example:
what information can be obtained or provided to suppliers as part of the supplier due diligence or on-boarding processes regarding modern slavery and how is this information used to inform the supplier selection criteria?
do formal contracts with suppliers and subcontractors include obligations to comply with modern slavery rules or other related policies?
do performance targets and reward structures incentivise suppliers and subcontractors to comply with ethical policies and requirements?
are accounts payable staff aware of modern slavery risks which could be identified through the invoicing and payment processes?
do buyers or management visit supplier sites and are slavery and human trafficking risks considered as part of any walk around or interaction with supplier staff?
This risk-based approach enables effort in this area to be much more focused and maximise those activities which already take place within an organisation.
The Modern Slavery Act is clearly an incredibly important piece of legislation which is having a positive impact. However, the level and quality of the reporting around this remains below what would be expected from businesses of all shapes and sizes.
Given the absence of proactive monitoring by government it will require greater pressure from customers and investors to push the desire for improved modern slavery reporting up the board agenda. However, with the increased focus on corporate culture, ethics and sustainability more broadly I remain hopeful that businesses will rise to the challenge and play an ever increasing role in the fight against modern slavery and human trafficking risks.
Daniel Maycock – director of risk and assurance, Pennon Group plc and a member of ACCA UK’s Internal Audit Network Panel