The Integrity of Private Third-Party Compliance Monitoring

Key Insights for Managers

Private, third-party monitors are hired to ensure that firms or individuals comply with various standards or laws. But how accurate are their assessments, and how can monitoring regimes be designed to improve their accuracy? This review article by Jodi Short and Michael Toffel highlights five key findings from numerous studies of third-party financial auditors and auditors of government regulatory programs and supply chain working conditions.

Third-party monitors tend to be more lenient when: (1) they have a longstanding relationship with the firm they are auditing, (2) the monitor has an opportunity to cross-sell their other services to the monitored firm, (3) the monitor faces more competition from other monitors, (4) the monitored firm pays the monitor directly, and (5) the monitor is less well trained. Thus, more robust and accurate monitoring regimes should prevent monitors from being paid directly by the firms they monitor, prevent monitors from cross-selling to monitored entities, rotate third-party monitors, and establish sufficient training standards for individual monitors.