Food Fraud is Still Hard to Detect – So Follow the Money

September 8th, 2014
in econ_news

by Lisa Jack, The Conversation

Food fraud is a huge problem in the UK, and much of it is as a result of organised crime. Unfortunately, as the report of the Elliott Review on the 2013 horsemeat scandal now points out, there is too little evidence to gauge the full extent of fraudulent practices in the industry.

Follow up:

Food mis-labelling is widespread, as is the practice of substituting premium commodity products in whole or in part with cheaper ingredients. Actually, substituting modestly priced ingredients with even cheaper ones is not unknown. We might have guessed that substitution was happening – there must be a reason some foods are so cheap – but it becomes serious when, say, ground peanuts are substituted for ground almonds and appear in restaurant meals. This could prove dangerous or even fatal to people with allergies.

At the other end of the scale come foods which are systematically adulterated with chemicals or are even completely counterfeit. As an Observer editorial warned, such organised criminal activity could have catastrophic consequences.

Spot test trouble

The obvious response to this growing threat is to do more scientific spot testing on products, of which a wide range are now available. The horsemeat scandal was probably the first time it occurred to most people that DNA testing could be used on meat for human consumption. Testing, however, can be costly and time consuming. Large quantities of data are collected but not necessarily aggregated into information on trends. In an industry as frenetic and as large-scale as the food industry, it is not possible to scientifically test every batch of food.

Deterrence and prevention of food fraud, however, is not just a matter of tests. Defences can also be found in three rather less glamorous areas: management controls, forensic accounting and information processing. And the food industry is beginning to explore these ideas.

Changing allegiances

Generally speaking, businesses across all industries usually lack specific practices designed to prevent fraud. Like householders with minimal security, there is a tendency to hope that break-ins are something that other people experience. Food supply networks, however, are vulnerable. They are characterised by a relatively small number of major retailers and caterers being supplied by thousands of small and medium businesses which are owner-managed.

Allegiances and arrangements between suppliers, intermediaries and customers change frequently. Contracts are used less often than is supposed and verbal communication is often preferred, to keep things moving. Some chains, as noted in the interim Elliott Review, are very long and one batch of one product can be widely dispersed.

In the Sudan 1 dye scandal that affected chilli powder and which broke in 2005, more than 470 products had to be recalled and a recent case of carcinogenic dyes in sweets seems to be set to replicate that situation.

Blow the whistle

The Elliott Review into the horsemeat scandal suggests that whistleblowing mechanisms be set up for food fraud as they have been for other areas where anonymity is needed.

There are supply chain management standards in the industry and most suppliers have certification to show that they comply with them. Retailers, caterers and manufacturers rely on these certifications but until recently, these standards and recommended supply chain audits contained very few, if any, questions on fraud.

Forensic accounting

Forensic accounting reconstructs transactions for presentation in court but includes audit-based techniques that assess the possibility that fraud has occurred. Regular analytical reviews of prices offered by suppliers against commodity prices – and against costs of processing and production – should indicate when prices are too low and the product is likely to contain substitutes.

Unexpected variations in prices offered, or prices that are slightly too high, can be also be detected, perhaps indicating that an employee is receiving a kickback to accept fraudulent goods. Tracing back products to their origins and reconstructing the audit trail for high-risk products can highlight where unusual suppliers have been used or there is variation from normal supply routes.

Finally, few businesses appear to have the systems in place to turn the mass of data that they do have on food safety events and traceability into useful information for management. Businesses which monitor agri-food news and other data have an advantage. However, the small and medium-sized businesses that make up the majority of companies in the middle of the food supply chain do not have the resources for management control, audit or pro-active data seeking that are required.

Making these resources available is one of the challenges for UK agencies overseeing food safety on behalf of consumers. Agencies will also have more evidence for the extent of food fraud if these techniques are used more widely.

Lisa Jack works with BDO LLP through the Centre for Counter Fraud Studies at University of Portsmouth and consults to NSF International Ltd. She receives funding from the Chartered Institute of Management Accountants.

This article was originally published on The Conversation. Read the original article.

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