In this podcast episode, Lori Mathison, FCPA, FCGA, LLB, president and CEO, CPABC talks with MNP’s Peter Guo, CPA, CA, about the potential impact of Bill S-211, the Fighting Against Forced Labour and Child Labour in Supply Chains Act, on Canadian businesses. Part of our Coffee Chats with CPABC podcast series.
A recent piece of federal legislation—Bill S-211, the Fighting Against Forced Labour and Child Labour in Supply Chains Act (the Act)—requires that many Canadian businesses begin reporting on forced labour and child labour risks.
By greatly strengthening supply chain disclosures, the Act is intended to fulfil Canada’s international commitment to combatting forced labour and child labour. In seeking to protect vulnerable populations from human rights abuses and exploitation, Bill S-211 connects directly to the “S” or “social pillar” of ESG.
To gain some insight on Bill S-211 and its potential to move the dial on ESG, I recently spoke with Peter Guo, CPA, CA, founding partner of the enterprise risk services team at MNP and first vice-chair of the CPABC Board of Directors.
Lori: How big is the problem of forced labour and child labour in Canada?
Peter: It’s estimated that in recent years, G20 countries have imported almost half a trillion dollars of goods annually that are at risk of unfair labour practices, such as forced and child labour. These goods include electronics, textiles, and agriculture and food products, among others. From a social justice and human rights perspective, these products have a significant impact on the people who produce them, as well as on (often unsuspecting) consumers.
Lori: Why do you think the scale is so significant?
Peter: Organizations and businesses are trying to manage profitability, and to do so, they need to drive up sales and/or reduce costs. We know that for most businesses, one of the highest costs is labour. As businesses try to manage, contain, and drive down these costs, we often see labour arbitrage from high-cost to low-cost jurisdictions, and these lower-cost jurisdictions don’t necessarily have the social framework and protections that we enjoy in Canada.
For example, manufacturers or distributors in these jurisdictions may not have to pay the same wages as those in G20 countries or guarantee the kind of workplace rights and protections found in the Canadian Human Rights Act or Employment Equity Act. This has been a major problem and one that disproportionately affects women and children.
Frankly, the scale is bigger than we can even imagine, and if we, as consumers, are aware of this issue, it follows that we can (and should) do something to change it. With Bill S-211, Canada has joined global efforts to raise awareness about forced and child labour. Hopefully these efforts will cause organizations to assess and adjust supply chains and influence behaviours.
Lori: We touched on the Act in a previous podcast and how it would come into effect January 1, 2024, with a formalized reporting deadline of May 31, 2024. To go a little deeper, can you describe how and why the legislation is significant for Canadian businesses?
Peter: The Act is designed to affect organizations that import, distribute, and/or manufacture goods, so it’s unlikely that it will apply to many services organizations; however, all businesses should still read the Act carefully, do their due diligence, and determine where they land in terms of compliance requirements.
Generally, if you’re a publicly traded company on a Canadian exchange, Bill S-211 applies. If you’re a private enterprise owner-managed business, the Act applies if in one of the last two fiscal periods, you meet two of the following three criteria: $20 million in assets, $40 million in revenue, and 250 or more employees.
As part of this assessment, many organizations will need to analyze their consolidated entities, joint ventures, partnerships, and so on. If they determine that the Act applies, they will then need to assess their supply chain and identify those suppliers who pose a higher risk of using forced or child labour.
Lori: How challenging will this assessment be?
Peter: The challenge is in determining which categories and/or origins of goods might drive a higher risk profile in the supply chain. For example, let’s look at forestry: When you look at global databases, this industry has a very high or extreme risk of forced and child labour—particularly if the lumber supply comes from southeast Asia, parts of South America, and some of the former Soviet republics. If timber is harvested or lumber is produced in North America, however, the risks are relatively low.
Additionally, many of our supply chains are dependent on distribution networks—for example, wholesale distributors that may buy goods from manufacturers worldwide. If your wholesale distributor is based out of Chicago, you might think the majority of your products and supply chain materials are low risk because they come from an American distributor. But if you examine the distributor’s catalogue and understand where these materials truly come from, you may discover a patchwork of different risk levels stemming from their true origins.
Lori: What steps can organizations take to address this?
Peter: I think, as CPAs, we have a big role to play in determining how businesses respond to the Act. It starts by determining if the Act applies to your entity. If you establish that it does, the next step is to look at your financial statements and figure out which transaction streams matter on your supplier and vendor lists. Then you can work on a spend analysis.
CPAs will need to be mindful that there is a concept of significance—there’s no definition, but you can use your judgment. If you do a stratification of your spend by vendor or by category of goods, it will give you a sense of the magnitude and scale vis-a-vis your entire supply chain. That’s where financial analysis will really help guide, define, and refine this process.
The next step is to look into your supply chain and complete a risk assessment of the spend, the types and categories of goods, and the countries of origin. If the goods are low-risk, you probably don’t have to do anything further, and you’ll have shown a diligent process based on factual data and financial information that enabled you to reach this conclusion.
For high-risk goods, however, you will need to produce an action/remediation plan. Supply chains are built on relationships, which you will want to maintain and strengthen through this process. There may be contracts in place with your suppliers that will stipulate terms and conditions and the degrees of freedom you might have.
For example, there may be a right-to-audit clause in your contract or a compliance clause stating that your supplier must abide by Canadian law. You might choose to inform your supplier that because of Bill S-211, there is a new expectation for a compliance report. You could also send suppliers a questionnaire to determine the level of risk for their goods.
Lori: What if businesses can’t get everything done by the reporting deadline of May 31, 2024?
Peter: If you’ve done your analysis and risk assessment and developed an action plan, you can at least report factually and show that you’ve made a diligent, fact-based effort. Bill S-211 is an annual requirement, so you will need to complete this baseline effort and then refine it over time. If your action plan is incomplete, your management and board will have to track the resolution around the high-risk elements of your supply chain. Note that your report must be publicly accessible on your website as well as on that of Public Safety Canada.
Additionally, you will need to complete a very detailed questionnaire in which you’ll be asked to provide information and data from your report.
Lori: What are the consequences of non-compliance?
Peter: Businesses face a fine of up to $250,000 per instance. In addition, you have to consider social policy, social impact, and reputational risk—your supply chain is at the heart of your business, but your business also has goodwill, a brand, and relationships. Bill S-211 really speaks to the fact that you’re judged by the company you keep.
Lori: You noted that businesses can take this as an opportunity to enhance relationships within their supply chains—could you expand on that?
Peter: Bill S-211 underscores the fact that we can all make better choices. These are good practices that will help supply-chain practices evolve. If businesses do this well, they’re going to create concentric circles of wins that will feed upon each other. And once they get beyond the challenges of compliance, they will be able to leverage this as an opportunity that benefits their brand and their reputation.
Lori: From a macro perspective, what do you think the overall impact of this legislation will be?
Peter: To me, this is another iteration of performance improvement, but one that will not just have a quality and profitability impact. This will have a life impact, a cultural impact, and a social impact. These impacts are largely unmeasurable—we simply know they’re good business, good for our communities, and good for our environment—so it’s likely that some businesses will struggle to understand and quantify them.
And along the way, there’s going to be some pain. There will be instances where businesses discover unethical practices in their supply chains but can’t find alternative suppliers.
Lori: What should businesses do if they find unethical practices in their supply chain?
Peter: If you discover that your only available supplier is high-risk, there may not be a quick fix. But you might think: “That’s our only supplier for now. What can we do to change this? Should we search for a different product? Or should we perhaps vertically integrate and create our own supply capability?” That’s the evolutionary impact of what this Act could do for us, and I think there will be a positive domino effect if we do this well.
Lori: Are there any related resources that you’d recommend?
Peter: I recommend visiting the Government of Canada’s website to read about the Act and the guidance on the questionnaire. Also, many professional services firms have published thought leadership pieces on the Act. Industry groups can provide a wealth of knowledge as well. Additionally, accountants, lawyers, regulators, and other professionals all have extensive experience in this area, and you can consult with them—there’s no need to reinvent the wheel.
Lori Mathison, FCPA, FCGA, LLB, is the president & CEO of CPABC.
