UK food producers can bump profits by cutting fraud costs

The cost of food fraud to UK companies - estimated at £12bn a year - could be reduced by 40 per cent within 12 months and boost profits by up to 50 per cent, if they take measures to tackle the issue.

The estimates are based on a case study reported by national audit, tax and advisory firm Crowe Clark Whitehill and exemplify a best-case response to fraud. Other case studies highlighted in the firm's Minimising Fraud and Maximising Value in the UK Food and Drink Sector 2017 report show loss savings of 60 per cent over eight years.

According to the report author Jim Gee, head of forensic and counter fraud services at Crowe Clark Whitehill, there are many costs that companies identify and take into account but many organisations do not treat the cost of fraud in the same way and have tended to take a more reactive approach to tackling the illicit activity.

While fraud had been difficult to cost in the past, Gee said "it is now recognised that the total cost of fraud can be accurately measured and that, because of this, it can be managed and minimised like any other cost".

The report outlines the results of a review of 75 FTSE listed food and drink companies and nine of the largest privately owned companies, which have total annual sales of almost £205bn ($).

According to the report, the average loss rate from fraud over the researched 19-year data period was 5.85 per cent. Although, losses from fraud have increased by 43 per cent since the start of the global recession in 2008, it notes.

For the UK food and drink industry specifically, the report concludes that almost £12bn a year is being lost to food fraud, and claims that reducing this cost could boost the profitability of the sector by 42.9 per cent or £4.8bn.

"The first step to solving a problem is to stop being in denial about it," the report says. "The key is to acknowledge fraud is ongoing and ever present for every business in every sector, and to prevent fraud losses from being incurred in the first place."

As such, the report lists seven steps in how to reduce the cost of food fraud by pre-empting fraud and improving resilience:

• establish the nature and scale of the problem, including the financial cost to the organisation;

• develop a counter fraud strategy, including actions and a monitoring and evaluation framework;

• establish an implementation structure within the organisation that includes counter fraud authority and skills and which treats fraud like any other business cost;

• design and implement fraud-prevention measures such as deterrence and removing weaknesses from the system;

• design and implement fraud detection measures such as reporting measures and data analysis;

• design and implement investigative processes and include action to recover losses; and

• monitor outcomes to demonstrate return on investment.

Reducing food fraud is paramount for improving profitability and reputation, as well as reducing the price of food and drink, the report says.

Based on the report's analysis of 13 companies that made profit losses, by reducing fraud costs, six would reduce their losses by up to 10 per cent, four by between 10-50 per cent and three by over 50 per cent, while some companies making profits could double these.

Meanwhile, the report calculates that the almost £12bn cost of food fraud represents an additional cost of over five pence in the pound, which is added to the price tag of goods.

"The potential benefits of removing the unnecessary cost of fraud are clear. Fraud is not just a one-off high value event which causes reputational damage; it is an ongoing, measurable, high volume, low value cost which has an adverse impact on all of us," the report says.

It adds: "We now have the tools to accurately measure fraud as a business cost, and to focus our skills and resources on reducing that cost. Rapid reductions have been shown to be possible and there are very significant financial benefits which can be delivered. As with any new way of doing things, the question initially is 'Why would we do that?' – it is now becoming 'Why wouldn't we do that?'… If you consider fraud just to be a crime, then you police it; if you think of it as a business cost like any other, then you manage and reduce it. Those who follow this path are reaping a significant competitive advantage."

In response to the report, Gee called food and drink fraud a "crime in our shopping baskets" and said the industry was under pressure to manage and reduce costs at a time of increasing inflation.

"Shareholders and investors should be asking food and drink businesses about their cost of fraud and what is being done to manage and reduce the cost. Businesses that cannot provide a response, or suggest that fraud is not an issue for them, should be a cause for concern."