Forensic Audit as A Tool to Fight FRAUD and Corruption- Case of Food Sector Companies in UK

Home / Forensic Audit as A Tool to Fight FRAUD and Corruption- Case of Food Sector Companies in UK

Chapter I: Introduction

1.1       Background

Corporate fraud has dominated the headlines of mainstream national news since the past several years. Accounting issues are now occurring all too often, constraining earnings reaffirmations, and are having a huge effect on the financial markets, companies’ books, and most critically, on the entire economy. During the past few years, the number of corporate earnings restatements due to aggressive accounting practices, accounting fraud or accounting irregularities have increased significantly and it has drawn much attention from regulators, analysts and investors; so it is not a new phenomenon. Accounting fraud is certainly not new, it has mislead the investors, auditors and the markets alike since the early days on Wall Street. And the recent cases involve sums of money far in excess of any before.

Fraudsters often display certain warning signs or red flags that they are engaging in dishonest activity, as reported by the Association of Certified Fraud Examiners (ACFE) Report to the Nation in 2010(Report to the Nations on Occupational Fraud and Abuse, 2010). It was seen that in 43 percent of the fraud cases, the cheats were living beyond their means. While on the other hand, in 36 percent of the fraud cases the fraudster had been experiencing financial problems. Powell asserts that with corruption, bribery and fraud being so widespread, it has become more and more necessary for companies to understand and perhaps implement lifestyle audits as a prevention method to crime (Powell, 2011). The lifestyle audit is called for by many sectors of government and business who believe they are necessary to expose cases of corruption and fraud and is considered by many to be an effective mechanism/tool in revealing irregular income (Powell, 2011). It is evident that lifestyle audits are used by investigators during investigations, as told by a forensic investigator while referring to his own research experience.

The prevalence of fraud continues to increase across private and public sector organizations and across states. Fraud is a worldwide problem as no nations is protected from it, though developing countries and their various states suffer the most pain. The engagement that results from actual or anticipated dispute or litigations is described as Forensic accounting, which is a rapidly growing field of accounting. The term Forensic means appropriate for use in a court of law, and it is to that standard Forensic Accountants mostly work. To determine whether an individual or an organization has engaged in any illegal financial activities, the investigative style of accounting, Forensic Accounting, is used. Specialized Forensic Accountant may work for public or government accounting firm. Forensic accounting has been in existence for several years, it has evolved over time to include several types of financial information inspection. Theft embezzlement, management and employee fraud, and other financial crimes are increasing, thus auditing and accounting personnel must have training and skills to identify those misconducts, both at the grassroots (local) level and the state level to better guarantee the states prospect in the area of fraud inhibition, restriction, recognition, examination and remediation.

1.2       Research aim

The main purpose of the research is to study whether the forensic auditing is an effective tool for reducing the fraud in the UK food sector.

1.3       Research objectives

  • To evaluate the forensic accounting frauds.
  • To study about the corruptions held in the food sector.
  • To appraise the case study of UK food sector
  • To evaluate the influence of forensic auditing in the UK food sector crimes.

1.4       Research Justification

As stated by Welman and Kruger, the adequacy of a research topic for study purposes may be judged by giving consideration to its value and viability (Welman and Kruger, 2001). Value involves demonstrating a degree of research competency or problem-solving ability and, to some extent and to a lesser degree, adding to the body of knowledge in a field of science.

Many of the recommendations in the final report relate to actions at a national level to ensure the reliability of food supply networks, but much of them are directed at groups and individuals working in the interests of the communities they serve. Fighting food crime (Croall, 2012) also requires leadership at a local level to ensure consumers have access to safe and authentic food. At the local level, tackling problems will form a key part of delivering a successful food crime prevention approach, with stakeholders working in partnership to develop preventative, coordinated approaches and deterrents to help protect consumers.

1.5       Research Structure

The structure of present research is as follows

  • First chapter provides a background of the study. Moreover, this chapter includes aim and objectives of the present study.
  • Chapter two is the literature view regarding the study.
  • Chapter three concerns with the methodology section which comprises of qualitative analysis.
  • Followed by the method chapter four provides the analysis and discussion of data on the survey questionnaire and case study.
  • Chapter five give the conclusion of the study.

 

Chapter II: Literature Review

2.1       Introduction

There has been much fraud and corruption cases reported in the food sector companies in UK and in spite of the all the measures taken to combat the concerned issue, it keeps on rising. The Fraud and Corruption involved in the food sector expands over a huge range of factors and impacts. They are resulting in social, economic and environmental losses. Before it gets too late, the companies should make an action plan to deal with them and try to decrease them in order to avoid the ultimate downfall.

 

2.2       Fraud and Corruption in the Food Sector

2.2.1    Fraud in the Food Sector

Food fraud is generally accepted as a deliberate action carried out for financial gain. Different types of food fraud include adulteration, counterfeiting, substitution and intentional mislabelling of goods; as shown in the figure below.

What is Food Fraud? (Pimentel, 2014)

 

These fraudulent practices have been going on for centuries– from the colouring of preserved fruit and vegetables with copper salts in London to the sweetening of wine with lead in ancient Rome in 19th century. Food fraud has increased in importance as a result of our complex global food supply chain and costs the food industry an estimated $49 billion each year (Nsf.org, 2016).

According to the statistics food fraud is on the rise. A report by the UK National Audit Office discovered that local authorities registered almost 1,400 new reports of food fraud in 2012, up two‐thirds on 2009 figures (Fighting Food Fraud, 2014).

2.2.2    Corruption in the Food Sector

Corruption has been defined by the World Bank (The Role of the World Bank, 1997) as the abuse of public office for private gain. The opportunity to act in an exploitative manner occurs in a number of ways. An example is the availability of payments that can be obtained from those requiring a commodity or service that significantly exceeds the official price demanded of the consumer. Command economies that seek to control the supply of commodities are seen by some as ideal breeding grounds for such corrupt practices (Lui, 1996).

Corruption in the health and food sector can be classified into four main types – bribes, theft, bureaucratic corruption and misinformation (EN: Regulating entrepreneurial behaviour in European health care systems, 2002). Each is motivated by potential gain from exploiting one’s position in the system- either direct financial gain through individual or institutional financial transactions or, more increasingly through an increase in power and influence.

2.3       Impact of Fraud and Corruption

2.3.1    Fraud

Food fraud affects consumers, businesses, and ultimately the economy. If customers buy horsemeat, e.g. when they intended to buy beef, they are paying a high price for a cheaper substitute. The adulteration of food also poses potential health risks. Even though the EU is considered to have some of the toughest food safety regulations in the world, but consumer confidence was shaken when the horsemeat scandal arose, and it was a matter of food fraud rather than food safety. There was particular alarm in the UK and Ireland where horsemeat is not commonly eaten. And this is not the only one, there are more such cases reported in the past.

 

Some of the Intolerant Food Fraud Cases reported in UK (Poulter, 2008)

These fraud cases have sown the seeds of doubt and unreliability in the hearts of the consumers. Since agro‐food provides work for 48 million people in Europe, being the second biggest industrial sector, and the food chain is worth some €750 billion a year the food industry, politicians are eager to see consumer confidence rebuilt (Fighting Food Fraud, 2014).  As observed, food fraud and corruption is affecting a lot of areas and the food sector should find out effective ways to tackle and prevent it.

2.3.2    Corruption

The effects of corruption in the food sector have many dimensions related to economic, social and environmental effects. If governments do not control the corruption existing, it can lead to escalating costs and a misallocation of resources. Furthermore, corruption is said to have been factors for the downfall of many organizations as it weakens their structures, reduce productivity, hinder in development, creates social unrest and then eventually leads to their decline (Transparencyethiopia.org, 2016).

Corruption discourages people to work together for the common good and promotes social inequality, hatred and insecurity. Demanding and paying bribes becomes the tradition. While the economic effects of such corruption can be categorized as minor and major and both in one way or the other have severe impact on the individual community and country. Most importantly, corruption leads to the reduction of national wealth. Corruption is to be blamed for increased costs of goods and services, conversion of public wealth to private and personal property, imbalanced economic development, weakling work ethics and professionalism, diversion and misallocation of resources, inflation, hindrance of the development of fair in market structures and corrupt competition thereby discouraging competition. Large scale corruption hurts the economy and impoverishes entire population.

2.4       Forensic Auditing – as an effective tool to fight Corruption and Fraud in the Food Sector Companies

2.4.1    How can Forensic Auditing help the food sector?

Forensic auditing is a blend of traditional accounting, auditing, and financial detective work (What Is Forensic Auditing? 2016). Fraud investigation, forensic accounting and/or fraud auditing put things together rather than take them apart. Forensic auditors design their audits to gather evidence to prove the existence of fraud and corruption. And they often have to give expert evidence at the eventual trial (Crumbley et al. 2005).

The sceptical mind-set is something that has long been in forensic accountants and other internal investigators when inspecting for evidence of fraud. The investigator generally has asks a set of questions different from those of conventional auditor, i.e. the one who is monitoring the financial statements, to see whether they are in compliance with generally accepted accounting principles (GAAP) and, by this means, fairly represent the financial conditions of the corporation (Silverstone and Sheetz 2007).

2.4.2    Forensic Auditing as the Game-changer for the Food Sector Companies

Forensic auditing can be really helpful in combating the fraud and corruption issues in the food sector companies.

  • It supports regulatory mechanisms, be they potentially disastrous one-off events that could threaten the viability of the business, or smaller-scale but repetitive misappropriations of company assets over a number of years.
  • Companies under review by regulatory authorities can find forensic auditing important as it is vital to ensure regulatory compliance. For instance, it can also be useful in helping companies ensure that their anti-money laundering processes are both effective and robust.
  • Forensic auditing can help guard organizations from the long-standing damage to reputation caused by the publicity associated with insider crimes. This will help the food sector save and maintain their reputation as quality food providers, and it is really needed. Not only this, a forensic audit also provides a sound base of factual information that can be used to help resolve disputes in case the victim seeks legal redress.
  • Food Sector companies might observe efficiency in their business as the forensic auditing may identify areas of waste for them.
  • Forensic auditing improves transparency and probity in the way resources are handled, in both private and public entities, and help with the detection and recording of potential conflicts of interest for executives(What Is Forensic Auditing?, 2016).

Researchers see Forensic Auditing as a game-changer for the food sector and they highly recommend them to go for it.

2.4.3    Forensic Audit – Fraud and Corruption Management

Forensic accountants are also gradually playing more proactive risk reduction roles by designing and performing extended techniques as a part of statutory audit, helping in investment analyst research, acting as advisers to audit committees and fraud deterrence engagements.

Fraud and corruption management involves a whole gamut of activities: early warnings and alarms; tell-tale signs and patterns of various types of frauds and corruption; profiles of users and activities; fraud and corruption detection, inhibition, and avoidance; minimizing false alarms and avoiding customer dissatisfaction; assessing losses; surveillance and monitoring; risk analysis; security (of computers, data, networks, and physical facilities); data and records management; gathering of evidence from data and other sources; links to management information systems and operation systems (such as billing and accounting); report summaries; data visualization; and control actions (such as employee education, prosecution and ethics programs, hotlines, and corporation with partners and law enforcement agencies) (Ulucan O¨ zkul and Pamukc¸u, 2012).

Higher-profile full forensic audits can deter future fraud but could also reduce the chance of witnessing the culprit carrying out a deceitful act. These practices might help the food sectors in UK in predicting exploitation and deception issues to some extent and making a counter plan to tackle them. One step in the right direction can save and restore the UK food industry’s reputation and quality.

Chapter III: Methodology

Introduction

This chapter states the methodology applied in this study. It emphases on the explanation of the methods applied in this study and generated knowledgeable consequences. This chapter illuminates all specific strategies and the foremost determination for selecting them. It is also accountable for the rationality, validity and the consistency of the exploration and analysis. The motive for this segment is to emphasis on the method used in the thesis. The study is assembled on data of primary as well as data of secondary; however, the proceedings are solely quantitative.

Purpose of the research

The expansion of the objective and analysis query should be the motive of choosing the precise examination approach. There are three methods from which we can establish an appropriate approach of the investigation studies in which explanatory, exploratory, and descriptive are included (Saunders, Lewis and Thornhill, 2011).

Descriptive study

Patel and Tebelius (1987) specified that this is given that in the enlightenment of numerous understandings connected to individuals, conditions or occurrence that occur. The experiential simplification is the foremost purpose of it. Such impressions are appreciated once it elucidate and foremost the enlightened philosophy (Reynolds, 1971). Moreover, descriptive study is normally executed when a delinquent is straightforwardly identified and there is no detached to discover the cause-effect relations (Wiedersheim-Paul & Eriksson, 1999). This form of study generally endorse when the facts is normally subordinate, so as to articulate a diminutive sorts of a noticeably intended delinquent (Aaker & Day, 1990).

This research will be descriptive in nature and will mainly focus on the previous researches to analyze the main theme of this study that is either forensic auditing is an effective tool in search of food sector fraud or not.

Nature of Study

According to Phillibers et al., (1980), on explanation of the statistics assortment twofold approaches are extensively castoffs that are the quantitative of explanatory and the research design of empirical qualitative. In this research we will purpose Qualitative data.

Secondary data

It is a realistic another source of material which presents comparative and suitable data that can progress in other conclusions. Secondary data assortment will embrace with other third-party records, case studies and newspaper articles, former researches obtainable in the articles of journal, records and other theoretical literature. The perceptions obtained and variables recognized will be cooperative in scheming queries for the primary (Donnellan and Lucas, 2014).

This study has begun with describing and distinguishing the concepts and then progressing to study empirical technique can be active for this exploration. As deductive method permits to necessitate a quantitative inquiry, this study is accumulated on deductive technique. So, study first composed the secondary indication with respect of perceptions, beliefs and existing empirical evidences regarding forensic auditing.

Case study investigation

In the field of social sciences, case study place an significant role, in certain studies of ethnographic and anthropology (Voss et al., 2002). According to Westbrook (1994), Kurt Lewin was the creator of field theory, which between other things, highlights the implication of seeing the general conditions rather than abstracting certain variables from a circumstance.

While case studies are usually measured to be qualitative studies, but it not only a qualitative but the quantitative approach may be also suitable. Therefore, case studies can be created on qualitative and quantitative proof as well (Yin, 1994). It is an objective, detailed analysis of an existing occurrence where the researcher has slight commands over concerns (Yin, 1994). This clarification masks numerous important facts.

Here we will mainly focus on the frauds attempted in UK food sector. Different researches will be focused in analysis the details so as to achieve the desired aim of this research.

Key words:

The keywords that are used for this study including:

  • Forensic audit,
  • Fraud audit
  • Forensic challenges
  • Fraud and corruption in food sector

Study limitations

Following are the inclusion and exclusion criteria for this study

Inclusion Criteria

  • UK based
  • food sectors frauds
  • 2005-2015 research papers
  • Peered papers

Exclusion Criteria

  • Other state
  • Other sectors
  • Prior to 2005 research papers

Bibliographic databases:

  • John Wiley & Sons
  • Cengage Learning
  • Google books

Key journals:

  • The CPA Journal
  • Journal of Financial Crime

BMC international health and human rights

Timescale

Months November week 1-2 November week 3-4 December week 1-2 December week 3-4 January week 1-2 January week 3-4
Tasks                        
Define aims and objectives                        
Make research questions                        
Draft research method and strategy                        
Review literature                        
Completed research proposal                        
Further review of literature                        
Survey                        
Analyse data                        
Results and conclusions                        
Prepare draft report                        
Write dissertation                        

 

 

 

 

 

Özkul, F.U. and Pamukçu, A., 2012. Fraud Detection and forensic accounting. In Emerging Fraud (pp. 19-41). Springer Berlin Heidelberg.

What Is Forensic Auditing?. (2016)  1st edition. QFinance. [online]. Available from: http://www.financepractitioner.com/contentFiles/QF02/hnrfm9bx/13/1/what-is-forensic-auditing.pdf (Accessed 7 January 2016).

Silverstone, H. and Sheetz, M., 2007. Forensic Accounting and Fraud Investigation for Non-Experts Second editions J Wiley and sons. Hoboken, New Jersey.

Crumbley DL, Heitger LE, Smith GS (2005) Forensic and investigative accounting. CCH Group, Chicago, IL

Fighting Food Fraud. (2014) 1st edition. European Parliamentary Research Service. [online]. Available from: http://www.europarl.europa.eu/RegData/bibliotheque/briefing/2014/130679/LDM_BRI(2014)130679_REV1_EN.pdf (Accessed 7 January 2016).

Poulter, S. (2008) Exposed: the great ‘luxury’ food fraud [online]. Available from: http://www.thisismoney.co.uk/money/bills/article-1630428/Exposed-the-great-luxury-food-fraud.html (Accessed 7 January 2016).

Transparencyethiopia.org, (2016) What are the effects of corruption? [online]. Available from: http://transparencyethiopia.org/index.php?option=com_content&view=article&id=17%3Awhat-are-the-effects-of-corruption&catid=7%3Afaq&Itemid=7&lang=en (Accessed 8 January 2016).

EN: Regulating entrepreneurial behaviour in European health care systems. (2002) 1st edition. Open University Press. [online]. Available from: http://www.euro.who.int/__data/assets/pdf_file/0006/98430/E74487.pdf?ua=1#page=122 (Accessed 8 January 2016).

Lui, F. (1996) Three aspects of corruption, Contemporary Economic Policy, 14: 26-9.

Rose-Ackerman, S., 1997. Role of the World Bank in Controlling Corruption, The. Law & Pol’y Int’l Bus.29, p.93.

Nsf.org, (2016) Food Fraud – NSF International [online]. Available from: http://www.nsf.org/services/by-industry/food-safety-quality/food-fraud/ (Accessed 7 January 2016).

Powell, S. 2011. Lifestyle audits are a critical management tool to identify fraud. The Mercury, Advertising Supplement, Business Update, 29 July. From: www.ens.co.za/images/news/business%20update_110729_p4.pdf( (accessed 19 March 2014)

Welman, J.C. & Kruger, S.J. 2001. Research methodology. 2nd edition. Oxford: Oxford University Press.

Croall, H., 2012. Food crime. Issues in green criminology, pp.206-229.

Report to the Nations on Occupational Fraud and Abuse. (2010) 1st edition. [online]. Available from: http://www.acfe.com/uploadedfiles/acfe_website/content/documents/rttn-2010.pdf (Accessed 14 January 2016).

 

 

 

 

 

 

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