A Refresher on the Elements of Fraud; Look for the Warning Signs

David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of forensic accounting services including fraud investigation and fraud deterrence programs in Philadelphia and the Delaware Valley.

In several earlier blogs, I discussed the three key elements of fraud – Pressure, Opportunity, and Rationalization – a.k.a. The Fraud Triangle – which must be present for a fraud to be perpetrated.  This past week, one of my clients discussed a fraud in which her company had unknowingly been involved.  This brought to my mind the need to refresh my readers on these three elements of fraud.

Here is what happened:

  • A little over six months ago, my client ordered and received certain products from one of its vendors. Upon receipt of the vendor’s invoice, my client paid the invoice in full.  The check cleared my client’s bank, and as far as her company was concerned, the transaction was completed and over.
  • It turns out that what my client didn’t know was that the vendor’s employee who processed receipt of my client’s check had stolen the check, altered the payee name, and deposited the check in his own bank account.
  • When caught, the vendor’s employee confessed to stealing customer checks so that he could use the money to support his drug problem (Pressure).
  • My client learned the vendor’s employee had responsibility for opening mail containing customer payments, entering those payments into the vendor’s accounting system, and processing credits against customer accounts. These credits were for such items as:  mischarges on the vendor’s invoices; short shipments; and shipment of defective merchandise.  The vendor had a practice that all orders over $2,000 for which the customer claimed the merchandise was defective required that the customer return the entire order so that the vendor’s quality control staff would examine the defective merchandise. However, for orders under $2,000, the vendor would tell the customer to just dispose of the defective merchandise, and then the vendor would process a credit for that defective merchandise.  It is this practice that was exploited by the fraudster.  The fraudster would look for certain orders under $2,000, steal and alter the customer’s check, and instead post a credit for defective merchandise to the customer’s account (Opportunity).
  • The vendor only learned of the fraud when it noticed an uptick in the amount of credits for defective merchandise. The vendor engaged a quality control consultant to help it address the issue.  When the quality control consultant contacted several customers for whom defective merchandise credits were applied, the consultant learned that none of the customers had ever contacted the vendor about defective merchandise.  This in turn sparked a forensic investigation which uncovered the fraud.
  • As part of the fraudster’s confession, he said he thought the vendor company expected to lose a certain amount of profit due to its policies regarding defective merchandise, and that it could therefore afford to lose the income from his theft of customer checks (Rationalization).

So how could the vendor have avoided this fraud from occurring?  The answer is by removing one or more of the elements of the fraud triangle.  Although it’s unlikely the vendor could have removed the Pressure that caused the fraudster to act, it could have removed the Opportunity by separating the three financial duties performed by the employee (so that the employee couldn’t steal the checks and process credits) and by changing its procedures for processing customer credits (such as by requiring a manager to approve each credit and/or by requiring the sales department to contact each customer who claimed defective merchandise in order to find out about the defective merchandise, and then requiring a copy of the sales department’s report be attached to each customer credit).

Additionally, the vendor company could have helped remove or reduce Rationalization by regularly educating its employees about fraud, reinforcing the fact that management does not condone fraud, and letting employees know that it is regularly looking for fraud.

If you require the services of a forensic accountant in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert in Philadelphia who has more than 30 years of experience in financial and operational leadership positions and is a Certified Public Accountant, a Certified Valuation Analyst and a Certified Fraud Examiner in Philadelphia.