Fraud Auditing, Detection, and Prevention Blog

What a Fraud Auditor Can Learn from Food Fraud

Dec 16, 2021 7:51:52 PM / by Leonard W. Vona

Last month’s trivia questions and answers

In the movie “The Accountant”, as the protagonist solves the financial statement fraud scheme, what real life financial statement fraud did the Accountant sketch out on the glass walls of the conference room?

 Hint: Think the 1980’s. 

Answer: “Crazy Eddie financial fraud.”

 In what non-fraud movie was there a critical scene that was reflective of Fraud Data Mining?

 Hint: Based on the life of the American Mathematician.

Answer: “A Beautiful Mind”

What do you know about food fraud?

Over the last few years, I have written about fraud and the auditing profession. Well, I thought I would write about something on a lighter note but relevant to all of us. Food fraud!

The food industry defines food fraud as “the deception of consumers through intentional adulteration of food: (a) by substituting one product for another; (b) using unapproved enhancements or additives; (c) misrepresenting something (e.g.: country of origin); (d) misbranding or counterfeiting; (e) stolen food shipments and/or; (f) intentional contamination with a variety of chemicals, biological agents or other substances harmful to private- or public- health.” (FSNS, 2016)

The most well-known and widely accepted definition of food fraud was published in 2011by Michigan State University Professors Dr. John Spink and Douglas C Moyer:

Food fraud is a collective term used to encompass 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. (Spink and Moyer (2011))

The professors, leaders of the Food Fraud Initiative, identified seven distinct kinds of food fraud:

Adulteration: A component of the finished product is fraudulent.

Tampering: Legitimate product and packaging are used in a fraudulent way.

Over-run: Legitimate product is made in excess of production agreements.

Theft: Legitimate product is stolen and passed off as legitimately procured.

Diversion: The sale or distribution of legitimate products outside of intended markets.

Simulation: Illegitimate product is designed to look like, but not exactly copy, the legitimate product.

Counterfeit: All aspects of the fraudulent product and packaging are fully replicated.

Some of the most common food items involved in fraud schemes are cheese; honey; saffron; 0live oil; spices; milk and seafood.

Is this a real risk to you?

Food fraud can damage brand reputations and hurt the revenue of food retail businesses as well as processing establishments. But the ramifications don’t stop there. Food fraud can lead to health complications for the consumer due to its impact on food safety. Experts say fakes cost the industry up to $40 billion a year, and it’s a difficult problem to solve. 

 One of the industry’s tools for preventing food fraud is a special type of risk assessment. Known as a vulnerability assessment, it became part of all major food safety standards in 2018. You know what that sounds like? A fraud risk assessment.

Other tools include enhancements to the traceability of food and ingredients, tightening of purchasing specifications, and increased testing and inspection of foods, ingredients, and suppliers. And that sounds like internal controls.

A deep dive into food fraud examples in the Seafood Industry

 On the plate, one fish looks like another. And most people don’t eat enough squid and octopus to tell the difference once it’s in the sauce. But there’s a pricey difference and that seems to invite fraud on many levels. Here’s a roundup of some cases from recent years.

Meta-analysis reveals more than one-third of seafood falsely labeled

Earlier this year, The Guardian released the results of its own meta-analysis and, if anything, the report is even troubling. The newspaper reviewed 44 studies that looked at restaurants, markets, and fishmongers in over 30 countries. The results? 36 percent of over 9,000 seafood products were mislabeled. More than one-third! This issue isn't just afflicting other parts of the world. Of the countries included, the United States was the third-worst, with 38 percent of seafood mislabeled—behind only the United Kingdom and Canada (both of which had an appalling 55 percent mislabeling rate).

Squid or Octopus?

Two Long Island, New York, corporations and their owners plead guilty in 2019 in federal court for their scheme to falsely-label seafood that they sold across the country. They admitted to importing giant squid from Peru, marketing it as octopus, and using e-mail and wire transactions to sell it to grocery stores in interstate commerce.  Octopus and squid are distinct species of fish with great variance in their taxonomy, habitat, and physical characteristics. Food companies selling squid are required to market it by its name or as calamari. Octopus, which has a greater retail price than squid, must be labeled as octopus. From 2011 to 2014, the defendants imported, processed, marketed, sold, and distributed over 113,000 pounds of squid labeled as octopus. It was worth $1.1 million. The defendants admitted to defrauding over ten grocery stores, which in turn sold the product to consumers.

Something Fishy in Iceland

An Icelandic fish processing company was accused of selling a cheap type of fish under the guise of a more expensive one to foreign markets. The claim is that the company sold ling as Atlantic wolffish in 2010 and 2011. The Iceland Review reported that processing company was allegedly working with an Icelandic fish dealership to commit fraud.

Crab Meat Blues

A North Carolina seafood company was charged with selling almost 200,000 pounds of foreign crab meat falsely labeled domestic Atlantic Blue Crab for $4 million, the Insurance Journal reported. According to their plea agreements, the company and its owner admitted to repacking more than $4 million of crab meat from South America and Asia as jumbo domestically harvested blue crab. Most of the meat was sold to wholesale membership clubs, but officials say some was sold directly to retailers.

Audit Relevance

There is an old concept in the legal profession: substance over form or form over substance. I am going to guess that all the paperwork was in order on the above cases. Therefore, the form was okay, the problem was that the substance was fraudulent. The control-centric audit is great at seeing the control, but it is simply not the right audit tool to see the fraud.

By understanding how fraud occurs in a product line, we are better able to assess if the risks are being properly managed. Knowledge is the key to improving the audit profession’s ability to prevent, detect and deter fraud.

Fraud Trivia

What is the full name of the person who first perpetrated the Ponzi scheme?

A common theme among Ponzi schemes is “irrational exuberance”. Which flower was the first to be involved in a Ponzi scheme?

 I wish all my readers a happy holiday.


Hear Leonard Speak

Topics: Fraud Schemes, Fraud Auditing, Fraud Detection

Leonard W. Vona

Written by Leonard W. Vona

Leonard W. Vona has more than 40 years of diversified fraud auditing and forensic accounting experience. His firm, Fraud Auditing, Inc., advises clients in areas of fraud risk assessment, fraud data analytics, fraud auditing, fraud prevention and litigation support.