Divider
Divider


Alan
Reinstein
 

Katherine Barker

CPAs As Certifying Organic Agents

Organic foods attestation is a growing industry with increasing problems. How CPAs can service this new practice area.

September 27, 2010
by Alan Reinstein, CPA, DBA and Katherine Barker, CPA, CFE

The U.S. Securities and Exchange Commission (SEC) was created to protect the public by enforcing regulations for public companies, but staffing limitations led to the rise of financial statement audits performed by independent CPA firms. The CPA’s opinion provided a type of assurance that consumers could not obtain from any other source. An opportunity to replicate this model of business growth for CPAs has reappeared with the emergence of the organic food market.

A 2008 Organic Trade Association survey showed a 17 percent to 21 percent annual U.S. organic food sales growth for the last 10 years, reaching $30 billion in 2009 (Lee, 2009). Once found only at specialty food stores, organic foods now appear on shelves of nearly three out of four (73%) of U.S. supermarkets (Organic Food Fraud, 2007). Consumers motivated by health, safety or environmental concerns willingly pay premium prices in exchange for the organic seal’s promise (Industry Statistics, 2007). As organic products often command prices of 10 percent to 40 percent above non-organic foods, temptation exists to fraudulently mislabel products as organic without adhering to federal guidelines.

Reader Note: Don’t miss the upcoming AICPA National Agriculture Conference, October 20-22, in Denver, CO.

Until the 1960s Green Revolution, little need existed to distinguish between organic and non-organic foods. Local farmers — the primary source of organic foods — rarely used pesticides or synthetic fertilizers. Sourcing began to change as agricultural conglomerates could boost production, extend shelf life and ship products from large farms across the U.S — all at lower prices. Similar to management’s financial reports to stockholders, asymmetric information held by sellers provides an opportunity for fraud by, for example, mislabeling products, including those shipped from unregulated overseas markets. Reports of organic fraud are on the rise: pesticide residues were found on “organic” spinach (Brady, 2006), “organic” oranges from a Florida grower were sold for over two years without any proof of organic processing (Kastel, 2007) and repeated reports of mislabeled organic food in five states came from the organic watchdog group the Cornucopia Institute (Wong, 2007).

CPAs As Certifying Organic Agents

While the U.S. Department of Agriculture (USDA) has established the National Organic Program (NOP) to create and enforce federal regulations over the coveted USDA Organic seal, the NOP lacks the resources to continually monitor and recertify farms and their organic processes. Despite USDA’s intent to protect the public from improperly labeled organic products, many document lapses arise primarily due to inadequate numbers of trained personnel (Agribusiness Marketing Report, 2006). The USDA reported that in 2009 the NOP had 54 domestic and 44 foreign accredited agents to certify all domestic and foreign organic farms (NOP, 2009). These accredited certifying agents review organic plans submitted by farmers, provide fieldwork inspection and residue testing and audit the farmer’s records related to all organic processes. Farms must be recertified annually to continue using the USDA organic seal. Ninety-nine accredited certifying agents simply cannot police the thousands of foreign and domestic farms that provide American consumers with organic products. Foreign import growth has so overwhelmed the system that the NOP inspects about one percent of all food imports (Blobaum, 2007).

So How Can CPAs Serve the Public Interest?

CPAs are well known for providing assurance services to the public. The AICPA’s Assurance Services Executive Committee’s White Paper (2008) supports CPAs providing additional assurance services, stressing that our increasingly complex business and markets need additional assurances. CPA attestation engagements have extended into attesting to compliance with environmental protection laws, e-commerce (WebTrust) and information technology systems (SysTrust). CPAs could render similar assurances to organic consumers who are not in a position to authenticate organic food labeling. Attestation reports could focus on compliance with federal organic regulations.

SSAE No. 10 (AT Section 101), Attestation Standards: Revision and Recodification, addresses reporting on subject matter that is another party’s responsibility. Such reports would state that the organic food producers’ assertions followed USDA standards. The NOP offers nationwide training courses on organic food certification and recent publications have invited private auditors to participate in this growing industry while the government fails to meet the demand. CPAs could attend these courses and read these publications.

Evolution of the Attestation Market: Open Evaluations of the Greater Good

Even with demand on a CPA’s side, success in providing such organic produce assurance services will face certain challenges. CPAs must overcome some governmental (e.g., FDA and USDA), professional (e.g., AICPA) and marketing hurdles to establish certified organic food assurance programs, as well as market this program to organic food producers, distributors and consumers. The AICPA’s Assurance Services Executive Committee recommended that CPAs provide additional assurance services to meet “emerging reporting and assurance opportunities and needs.” To this end, CPAs should use marketing tools to emphasize why assurance from an established firm with a solid reputation in risk-auditing can benefit the organic farmer in both quality assurance and increased profit margins.

CPAs should evaluate carefully each part of the organic supply chain and identify areas where they can not only meet the USDA’s standards, but think “outside the box” of common financial attestation limitations and truly add value. They could also review organic farmers’ and distributors’ paperwork provided to the USDA and other regulatory bodies. The AICPA and state CPA societies have long used push marketing to encourage CPAs to have their clients use SysTrust and WebTrust assurance services, which has seen limited success, in part, due to the public mistakenly thinking that CPAs only do tax returns and audits.

Conclusion

We recommend using pull (or demand) marketing (Kotler, 2003) to help educate organic end-users to the need for such services to help the organic food chain, from growers to warehouses to distributors to the general public. CPAs should devise methods of making organic data freely available and easily comparable to consumers, such as a website database. They could, for example, certify organic products’ scoring systems and have them be added to labels to provide incentives for consumers to choose one product over another.

Scoring systems invite consumers to learn more about factors such as where the product was grown and shipped from, how long the product’s farm has been certified organic and when the farm was last inspected. CPAs can score foods based on criteria such as years of continuous organic certification, frequency of inspection, distance travelled to the consumer and other relevant facts. The open availability of data and scoring system provide far more information than a simple USDA Organic label. By combining an innovative spirit with a CPA’s extensive background in independent compliance audits and deep-seated sense of professional integrity, the market for organic attestation services is bound to grow.

Rate this article 5 (excellent) to 1 (poor). Send your responses here.

Alan Reinstein, DBA, CPA, is a George R. Husband professor of accounting at the School of Business in Detroit, MI-based Wayne State University. He can be reached at 248-368-8842. Katherine Barker, PhD, CPA, CFE, is assistant professor of accounting at the College of Business in St. Petersburg, FL-based University of South Florida. She can be reached
at 727-873-4891.