Internal audit’s role in providing assurance over the Modern Slavery Act
Internal audit is well positioned to support organisations with their anti-slavery and human trafficking framework and accompanying statements, explains Daniel Maycock.
When people hear the terms ‘slavery’ or ‘forced labour’, many believe it no longer exists in today’s society and think of it simply as a relic of history, abolished with the introduction of the Anti-Slavery Act in 1883. Tragically, this could not be further from the truth.
Obtaining precise statistics around the number of people in slavery is notoriously difficult; however, the International Labour Organisation estimates that there are a shocking 21m victims of forced labour globally, which generates estimated profits of $150m. This covers labour exploitation, sexual exploitation and state imposed forced labour.
It is also too easy to simply dismiss this as an issue which applies only to third world or developing countries. The British government has estimated that there are up to 13,000 people in modern slavery in the UK: a truly terrifying statistic. Most commonly people are trafficked into industries such as agriculture, construction and hospitality and women and girls are often forced into prostitution.
The increased focus on social responsibility has helped to significantly raise the profile of modern slavery, and many organisations are already taking proactive steps to promote ethical business practices to prevent their workers from abuse and exploitation. However, slavery continues to be an issue globally and some businesses continue to turn a blind eye either within their own organisation or within their supply chains, which are increasingly complex and global.
So what is the Modern Slavery Act? The UK government wishes to be a global leader in reducing the prevalence of modern slavery and in October 2015 introduced the Modern Slavery Act. This is a piece of legislation championed by the previous Home Secretary (and now Prime Minister), Theresa May, which covers the offences of slavery, servitude, and forced or compulsory labour.
A key provision of the Act places a reporting requirement on those organisations that meet a defined set of criteria to produce an annual statement, setting out the steps they have taken to ensure that slavery and human trafficking do not exist within their business and, crucially, their supply chain.
It is important to note that the purpose of the Act is not for a business to guarantee that slavery or human trafficking does not exist within its business or its entire supply chain, only to formally set out what steps it has taken to assure itself that it does not exist; in theory a business could report that they have taken no action whatsoever; however, it is likely this would not be looked upon favourably by stakeholders and therefore this is an unlikely scenario.
Is my organisation required to produce a slavery and human trafficking statement? Organisations are required to produce a statement if they:
are a body corporate or a partnership, irrespective of where they were incorporated
carry on a business, or part of a business, in the United Kingdom
supply goods or services
have a global annual turnover of £36m or more.
Of course it would not be a classic piece of UK legislation without a smattering of vagaries and grey areas. No definitions are provided for ‘carrying on a business’ or ‘in any part of the United Kingdom’. Instead the government expects a ‘common sense approach’ to be taken (again, this is not defined). Ultimately it is hoped that this will create a ‘race to the top’ and both the benefits, and potential reputational implications in particular, will encourage organisations to err on the side of caution when it comes to the interpretation of these rather ambiguous criteria.
What about groups which have only a minor presence in the UK? Each parent and subsidiary company that meets the requirements above must produce an annual statement. However, it is possible for the parent to produce a single, overarching statement as long as it adequately covers all of the steps they have taken to ensure slavery does not exist within each subsidiary, and their respective supply chains, which is captured within the scope of the Act.
Just because a group does have a UK subsidiary does not, in itself, mean that the parent is carrying on business in the UK if the subsidiary is acting ‘completely independently’ of its parent or other group companies. Exactly how an organisation can demonstrate this is not specified within the legislation and the lack of legal precedent adds greater uncertainly in this area.
Who should approve the statement? The statement must be signed by an appropriately senior individual within the business depending on the type of organisation:
for an incorporated business it should be approved by the board of directors and signed by a director
for a charity it should be approved by the board of trustees and approved by a trustee.
for a Limited Liability Partnership (LLP) it should be approved by the members and signed by a designated member
for a partnership it should be signed by a partner.
Where should the statement be published? The statement must be published on the organisation’s website in a prominent position on the homepage (eg a direct link or within a dropdown menu). For those businesses with more than one website, or where a single statement has been created for multiple entities as part of a group structure, it is recommended that a link is included on each relevant website.
If your organisation does not have a website, a copy of the statement must be provided within 30 days of any request.
So what does this have to do with internal audit? As businesses try to understand and comply with the requirements of the Modern Slavery Act this offers a fantastic opportunity for internal audit to demonstrate added value to the business, in either an advisory or assurance capacity.
Internal audit is one of the few functions within an organisation which will have an excellent understanding of its operational, financial, technological and compliance processes, and where weaknesses may exist.
Internal audit is therefore perfectly positioned to support their organisation with their anti-slavery and human trafficking framework and accompanying statement. There are various ways in which internal audit can do this. Examples include:
Facilitation of slavery and human trafficking risk workshops: Until a business understands its modern slavery risks, both internally and within their supply chain, it cannot effectively identify what mitigation exists or where further action is necessary. Attendees at such workshops will often view risks through the prism of their own function; however, by supporting the facilitation of such workshops internal audit can bring together the various inputs to provide a ‘helicopter’ view and contribute to a roadmap of further action to be owned and undertaken by the business.
Data analytics: The use of data analytic tools is becoming increasingly common to identify areas of control weaknesses within large volumes of data. Where the capability or skills do not exist within the business, it may be appropriate for internal audit to undertake some targeted analysis to identify trends or patterns which may indicate unusual activity. For example, multiple workers registered to the same address or the same bank details being used for the payment of multiple staff are often indicators of exploitation.
Targeted assurance: Internal audit may focus on processes or controls which mitigate slavery and human trafficking risks to provide independent assurance over their effectiveness (eg supplier due diligence and on-boarding). This may even include undertaking announced or unannounced supplier audits. It may be that elements of key processes or controls have already been subject to review by internal audit. If so, what existing knowledge can be leveraged and shared with the business to assist in the identification or mitigation of slavery and human trafficking risks?
Independent challenge of the Slavery and Human Trafficking Statement: The requirement for a senior individual to formally sign the statement will require these individuals to challenge the accuracy of the content within the statement. Internal audit could undertake an independent review of the evidence base which supports and underpins the assertions made within the statement, providing a level of comfort to those who are charged with its approval.
On-going monitoring of further action required: In the same way that internal audit recommendations should be revisited to assess whether they have been adequately implemented, internal audit could also monitor the status of specific actions required to further strengthen an organisation's anti-slavery and human trafficking framework, providing visibility to senior individuals on progress and where slippage has occurred.
While internal audit functions should remain cognisant of their independence, and the balance between advisory and assurance activity, this undoubtedly provides yet another fantastic opportunity for an internal audit function to demonstrate and apply its knowledge of the business in a way which has a meaningful and tangible impact.
Daniel Maycock – risk assurance director, RSM
Daniel provides internal audit and risk management services, including supporting organisations in establishing and developing anti-slavery and human trafficking frameworks.