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Forensic accountants and food fraud

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  • Publish date: 11 September 2017
  • Archived on: 11 September 2018

When it comes to food fraud, we are working on how standard forensic audit tools might provide more evidence of what are essentially financial frauds.

What is food fraud?

In July 2017, two men were imprisoned and another given a suspended sentence for their role in the 2013 horsemeat scandal. Beef used in processed foods had been mixed with horsemeat and was judged to be no risk to human health. However, consumers were outraged that they were being ripped off and scathing about major retailers seeming inability to protect them. Now, there are three key lessons from this case. First, the City of London Police stated that this was primarily a fraud case. Second, falsification of paperwork played a major role in the fraud. Third, the motive was financial gain.

Food fraud is defined as “the deliberate and intentional substitution, addition, tampering, or misrepresentation of food, food ingredients, or food packaging; or false or misleading statements made about a product, for economic gain”. In worst cases, it can be fatal as in cases where peanuts are used as a substitute for almonds or milk has been adulterated with melamine. More often, there is very little risk to health as with the latest scandal of the pesticide fipronil, banned in food production, being found in eggs but in quantities unlikely to cause harm. This is what makes food fraud stand apart from other frauds, but to understand the nature of the fraud, the food and drink industry needs to think beyond food safety and quality.

Not just tampering with food

What we have are primarily supply chain frauds committed either by players in the chain or by organised criminals who infiltrate products into food systems. To get into the chain, a product should ideally be difficult to detect with testing, easy to perpetrate and profitable.  Given the wafer-thin margins most of the industry operates on, a fraction of a penny saved by item across a large volume of sales might be worth the small risk of being caught. For example, the apparently simple use of other leaves in tea and dried herbs is known widely. 

From prosecuted cases, the misrepresentation of the food or drink is not the only crime involved. There are also examples of tax and duty evasion, smuggling, bribery, terrorism funding, blackmail, false reporting, false certification, false accounting and food safety breaches. One case involved the manipulation of invoices for 500,000 litres of olive oil falsely passed off as Italian, for a total trade value of €3 million. In one of the largest cases in the world, which Bloomberg news dubbed the “ALW Honey Laundering case”, evidence was found of mislabelling, adulteration, substitution, false documents, false accounting, customs duty and sales tax evasion (Bloomberg Business Week, 19 September 2013).

Where the forensic accountant comes in

Unsurprisingly then, food crime investigators in different countries use forensic accounting techniques in their work. The Danish “Food Fraud Flying Squad” carries out traceability challenges, going through all records and interviewing staff to identify frauds. The Dutch Food Crime Unit employs at least three forensic accountants.
Part of the issue in the food industry is that the people carrying out vulnerability and threat assessments are experts in quality control, not fraud. For example, having a certificate can be a fraud risk mitigation. However, there is a significant risk that the certificate itself may be fraudulent. Our work shows that there needs to be more consideration of, for example:
businesses and employees that could introduce or be conduits for fraudulent activity in the supply chain;
unexpected profits/losses – for example, maintaining steady gross margins in a volatile market; 
VAT avoidance; 
substitution or adulteration from purchases of ingredients outside specifications; and
evidence of kick-backs.

Going forward

There also needs to be greater assessment of management and internal controls to identify weaknesses, especially in terms of collusion and overrides. The University of Portsmouth Centre for Counter Fraud Studies, the National Food Crime Unit and the Chartered Institute of Environmental Health have published the “Counter Fraud Good Practice for Food and Drink Businesses”

We are working on how standard forensic audit tools might provide more evidence of what are essentially financial frauds. In a very fragmentary industry, there is potential to use data analytics and machine learning to enhance traceability by linking up disparate data sets (diagnostic testing, finance, quality, HRM, traceability etc). With the industry losing a potential £12 billion annually to fraud in general, action on counter fraud and forensic accounting could go a long way to protecting the nation’s food supply.

By Professor Lisa Jack, Portsmouth Business School