By Ching-Fu Lin
About a month ago, Jensen Farms pleaded guilty to federal criminal charges for introducing adulterated food into the nation’s food supply via interstate commerce. In 2011, cantaloupes produced by Jensen Farms resulted in a listeria outbreak that spread across 28 states, killed 33 people, and sickened hundreds. The now bankrupt and out of business owners—brothers Eric and Ryan Jensen—are to be sentenced in January 2014.
The Jensens took responsibility for one of the deadliest food safety outbreaks in the United States, but they also turned around to sue Primus Labs, a food safety audit firm. The brothers allege that Primus Labs acted negligently, breached its contractual obligations, and engaged in deceptive trade practices in performing third-party audits on the farmlands and packing house. Merely weeks before the outbreak, Primus Labs sent one of its subcontractors (Bio Food Safety) to Jensen Farms to perform a third-party audit. After the audit, Bio Food Safety gave Jensen Farms a “superior” rating with an almost impeccable score of 96 out of 100, which was later found by the Food and Drug Administration (FDA) to be “seriously deficient in its inspection and findings.” As claimed by the Jensens, Bio Food Safety failed to observe several practices that were in violation of Primus Labs’ standards and relevant FDA guidelines or to inform them of any microbiological risk. Despite these deficiencies, Jensen Farms cantaloupes were “Primus Certified” and entered into the retail market.
The Jensen Farms case raises questions on the credibility of third-party audits and certifications in the area of food safety.
Many large retailers (such as Wal-Mart and Costco in the Jensen Farms case) require their upstream suppliers to have third-party food safety audits and certifications. The purpose behind the requirement is to avoid legal liability, reduce reputational risks, and also to fuel product sales. Therefore, third-party audits and certifications serve as both a safety/quality control and a marketing tool.
In an ideal market, both suppliers and buyers are fully informed in making decisions to exchange homogeneous products. In reality, however, goods are not homogeneous and buyers are not always well informed. This is particularly true for the food sector characterized by varying risks, complex processing, biotechnology, and global sourcing. According to Albersmeier et al., while some qualities are easily ascertained (e.g., shelf life, appearance, smell, or freshness), whether a food product is “safe” (or possessing other “credence qualities”— such as GMO, cage-free, organic, and pesticide-free) cannot be easily known by consumers or procurers at the time of purchase. Such information asymmetry is one of the root causes for the market failure in contemporary food safety regulation, since the public authority does not have the resources to test comprehensively and food suppliers are incentivized to go easy with safety to minimize production costs. Therefore, large retailers require growers and producers to be inspected and verified to meet safety standards; and consumers look for reliable certification labels as quality signals while grocery shopping. As rightly pointed out by Albersmeier et al., the key function of third-party audits and certifications is to reduce such information asymmetry.
But how can we be sure that the auditor and the audited do their jobs? Many commentators have pointed out the problematic agency-client relationship between the third-party auditing firm and the company to be inspected. As the company to be audited selects the auditor and pays the certification fees, and numerous auditors are competing for clients, it is rational to expect that auditing firms would cut corners instead of living up to the highest safety standards. There is, in effect, a race to the bottom due to a conflict of interests. In addition, given the rapid but young expansion of the third-party audit and certification business, there might not be enough well-trained and experienced expert auditors in the industry. This may result in the crucial problem of “checklist governance”—where unprofessional auditors simply stick to a formalistic checklist (for business efficiency reasons) without paying attention to material deficiencies or special risk circumstances of the industry/sector. Consequently, a regulatory failure may surface because of a state which I call “second-level information asymmetry.” “Second-level information asymmetry” exists where the buyer uses the auditor to cure the first-level information asymmetry between the buyer and the supplier, but in the end fail to even know if the auditor lives up to his responsibilities.
Third-party audits and certification have numerous merits in constructing a food safety regulatory framework based on supply chain control and prevention, but they also face serious challenges that may undermine the overall effectiveness. Under the new Food Safety Modernization Act, although the FDA has proposed new rules to implement Title III for accreditation and monitoring of third-party auditors of imported food products, there is nothing on the regulation of domestic auditors. As third-party audits and certification will continue to develop as an integral and indispensable part of modern food safety regulation, an FDA rule or guideline that addresses the abovementioned issues seems desirable.