Individual or joint audit? Managing supplier social responsibility with extortion risk

Responsible sourcing has become an increasingly important concern for multinational brands. Adopting responsible practices can yield incremental benefits, while coverage of irresponsible practices can potentially harm profits. Due to the lack of transparency in supply chains, brands often rely on third-party audits to ensure supplier responsibility. Unfortunately, auditor extortion is rampant, which can undermine suppliers’ efforts and damage brand profits. Cooperation among brands may exacerbate the occurrence of extortion. Consequently, it is crucial for brands to determine whether to conduct joint audits with their competitors and to adopt measures to mitigate the risk of extortion. In this paper, we establish a game-theoretic model that examines a supply chain where two buyers source from a common supplier to produce a product. Our findings reveal that buyers’ defensive efforts against audit extortion take three different forms, depending on government intervention and the incremental benefits derived from supplier responsibility. Furthermore, cooperation in conducting joint audits is not always beneficial for buyers. Specifically, when both auditing costs and government intervention levels are low, joint audits may in fact be detrimental to buyers. Finally, we extend the model to explore the impact of penalizing corrupt auditors by auditing organizations. The results show that our insights are robust.