Horsing Around With Food Fraud
Three men are arrested on suspicion of fraud at a processing plant and a slaughterhouse over their alleged involvement in the U.K.'s horsemeat scandal.
March 04, 2013
Three men have been arrested on suspicion of fraud at a processing plant and a slaughterhouse over their alleged involvement in the U.K.'s horsemeat scandal, as it emerged that horse DNA had been detected in fresh beef products for the first time, according to the Financial Times (registration required). The Food Standards Agency raided both premises after horsemeat was found in products linked to the plants, but both companies have denied any wrongdoing.
While the outcome of this particular case likely won't be known for some time, it represents an apparently growing, serious fraud that auditors should be on the alert for — supply chain fraud, particularly food fraud. In its latest Global Fraud Report, Kroll Advisory Solutions shows that in some sectors, supply chain fraud has increased fivefold in the last six years, likely a result of increasing globalization of markets and complexity in managing diverse supply chains. Recent events touched upon in this news article have embroiled several European countries and large multinational corporations such as Ikea in questions regarding their practices and vigilance in managing supply chains related to food products.
Broadly speaking, auditors should be focused on assessing the adequacy of controls over the supply chain, using a supply chain map of the end-to-end flow of goods and services — from raw materials going into suppliers' factories to finished products delivered to customers. All of the physical, financial, and information flows in the supply chain and, most importantly, every point where a product, dollar, or piece of information changes hands must be identified and examined for weaknesses.
Where physical goods such as food products are involved, auditors should look to ensure that controls surrounding parties who handle the goods are in place, that appropriate security measures and quality assurance processes exist, and that there are clear segregation of duties between different individuals. For example, where third parties are used, the same person who selects the supplier and places the order should not perform quality assurance.
Quality assurance fraud could include the passing of inferior or substituted food products as first or pure quality, allowing them to move on to inventory for distribution to customers. The fraudulent supplier provides a bribe or kickback to the employee in charge of buying. Equally, quality assurance personnel may feel pressured by internal company priorities (e.g., manufacturing or distribution) to fast track product inspection, reduce the quality sampling percentage, or overlook results that marginally fail tests. The fraud here may be less overtly criminal, but just as damaging to the company.
To deter parties with less than honorable intentions and prevent fraud, auditors working in these areas need to keep current and advise management about evolving approaches to monitoring and quality assurance processes (e.g., automated vendor registration systems) to track all vendors, their certifications, ownerships, insurance policies, track records, and agreements in one system and the increased use of DNA testing on food products — particularly animals — to assess their composition.