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The chicken or the egg

Which came first in the Chipotle turmoil?

The views expressed here aren't necessarily those of the ACFE, its executives or employees. — ed.

Happy International Fraud Awareness Week! In light of Fraud Week, I wanted to write about a current corporate case that highlights the challenges that organizations face when weathering hard times.

When I teach fraud classes to internal auditors, I try to emphasis how important it is to establish how your organization defines fraud, and how fraud differs from waste and abuse or bad business decisions. The term "waste and abuse" is very vague and used a lot. Organizations' assumptions and definitions span the entirety of the spectrum. So creating an anti-fraud culture based on fraud awareness should be the foundation of any organization's anti-fraud program.

Take Enron, for example. Few today would deny that what occurred was fraud. But if you look at the statements Andrew Fastow, former Enron CFO, immediately made after the Enron collapse, you'll find he frequently proclaimed that his accounting methods weren't strictly illegal — at least not at that time. (See Numbers manipulator describes Enron's descent, by Emily Primeaux, CFE, Fraud Magazine, March/April 2016.)

Clearly defining fraud

An organization's corporate culture and tone at the top establish an environment that will be less susceptible to fraud if it emphasizes deterrence, directive controls and a no-nonsense attitude toward fraud. But it can be difficult sometimes to differentiate between fraud, waste and abuse, or a bad business decision while an event is occurring because emotions and personal priorities are frequently involved.

Internal pressures like meeting business targets or receiving incentives (promotions, increased salary, etc.) means individuals might decide to take short cuts. When it comes to large-scale corporate frauds and scandals, we've seen time and again how a small or minor action can spread and become the new norm — a now acceptable practice that management would've easily rejected if it'd closely examined it in a vacuum previously. Oh how perspective and tolerance change when faced with meeting business targets.

The Chipotle crisis

While people are currently focused on Wells Fargo — which I'm pretty sure will turn out to be a textbook example of fraud as a result of internal pressures to meet business targets — I believe that Chipotle is an even tastier example.

Chipotle is facing a large class-action lawsuit for unpaid wages by more than 10,000 employees. A year ago, Chipotle was in the news due to an E. coli scare that forced management to temporarily close dozens of stores and, subsequently, close all their stores for a half day to retrain the entire employee base on proper food handling requirements. (See Chipotle to close all restaurants on Feb. 8 for food safety meeting, by Aaron Smith and Ahiza Garcia, CNN Money, Jan. 5.)

Chipotle took a significant financial hit and hasn't rebounded despite an unprecedented amount of customer outreach, special offers and marketing. Sales are still down more than 20 percent and Chipotle hit a new low when its profitability plummeted 82 percent. That's a lot of burritos to make up for in an organization. (See Chipotle profits down 82% in wake of E. coli outbreaks, by Jackie Wattles, CNN Money, July 22.) For those of us in the anti-fraud business, we know that these kinds of challenges create internal pressures, opportunity and even rationalization — a ripe environment for fraud.

Is it any surprise then to discover the allegation that an existing practice of forcing employees to work unpaid hours became an epidemic? If we were to take a closer look, is it conceivable that this practice led to poor morale? And that poor morale led to an environment of rule breaking, which could have resulted in improper food handling? Which in turn created the E. coli problem? (See Nearly 10,000 workers sue Chipotle for unpaid wages, by Heather Long, CNN Money, Aug. 29.)

Let's take a look at the significant issues in the Chipotle wages matter:

  • Nearly 10,000 employees and former employees are participating in the class action suit. The sheer volume of participants in the case is indicative of how widespread the wage issue is.
  • It's not just one geographic area; the wage involves every state where Chipotle operates.
  • Employees claim it's been going on for years.
  • It might still be happening. Chipotle hasn't offered any proof or explanation on how this abuse would be prevented going forward.

Now a quick look at the food handling and illness issues. The E. coli breakout wasn't the only recent instance of contaminated food and foodborne illnesses at Chipotle locations:

  • In July 2015, three months prior to the E. coli breakout, five people were made ill from eating at a Seattle Chipotle.
  • In August 2015, 234 people contracted a norovirus at a Simi Valley Chipotle.
  • In August and September 2015, salmonella-contaminated tomatoes made 64 people ill in 22 Minnesota locations.
  • In December 2015, a norovirus struck again in Boston where more than 140 Boston College students were infected at a local Chipotle. The cause? A sick employee wasn't sent home even though he was entitled to sick pay.
  • And again in December 2015, shortly after the E. coli outbreak, health officials shut down a Seattle location because the cooked meat on the prep line wasn't being kept at an acceptable temperature for food safety.

The E. coli breakout clearly wasn't an unfortunate isolated instance of a foodborne illness, but a widespread problem of improper food handling. What could possibly lead to such a widespread issue — coast to coast — in an organization that preached "food with integrity" and whose entire existence is dependent on the proper handling of food? It could've begun with corporate culture and attitude.

It's easy to see how an organization with a meteoric rise in the industry and significant financial issues could become singularly focused on meeting targets to retain investor confidence and how that could've led to employee abuse and unpaid wages to meet those targets. It's also possible that perhaps employee abuse and unpaid wages led to poor morale, which in turn led to the lack of food handling protocol.

The chicken? Or the egg? Which came first? Either could be a plausible explanation for the other. Chipotle's issues might be indicative of a management culture and attitude focused more on operational and financial targets than on customer safety or employee satisfaction. And management throughout the organization not only allowed, but allegedly expected and condoned, the behavior that caused both of these very significant issues. As an auditor, I can't help but ask: What else is going on that we don't know about yet?

The issues at Chipotle could be related, but could both have been prevented? The question remains whether the organization has clearly defined fraud versus waste and abuse. Chipotle should determine the consequences for making bad business decisions and hold those people accountable. Organizations that don't clearly define fraud and unacceptable behavior might find themselves dealing with not just one issue that spreads throughout the organization but several. Just like Chipotle.

So during this International Fraud Awareness Week, I challenge you to examine the corporate culture in your organization and ask yourself whether your goals and targets are fair or if they create an environment that invites bad behavior.

Mary Breslin, CFE, ACA, CIA, is the president at Empower Audit. Her email address is:

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