Fraud Tales: Fraud Investigation Reveals Fraudulent Junior Partner

The senior partner at an auto dealership was a successful businessman who owned multiple businesses.  As a result, he relied heavily on his junior partner to act as the general manager of the dealership.  With the dealership running smoothly and turning a profit, the senior partner had no reason to suspect anything was amiss until a fraud investigation conducted by a forensic accountant found that his trusted junior partner had defrauded him of tens of thousands of dollars over a number of years.

“This was a classic case of fraud in that the fraud was made possible by the clear presence of the Fraud Triangle, the three key factors necessary for fraud to occur — pressure, opportunity and rationalization,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation and fraud deterrence programs in the Delaware Valley.  “The junior partner’s pressure came in the form of college tuition bills for his two sons and a wife who felt her husband was underpaid and under appreciated by the senior partner.  Opportunity came from the trust the senior partner placed in the junior partner to run the dealership and set up the necessary controls and reporting procedures.  And rationalization came when junior partner felt entitled to the illicit financial benefits because he worked so hard and his name — not the senior partner’s — was on the dealership.”

Anderson, a Certified Fraud Examiner in Philadelphia, said the junior partner actually carried out three frauds simultaneously.

The first occurred when the junior partner presented his family with expensive Christmas gifts – ATVs for each son and an RV for his wife.  He purchased the vehicles through the dealership at significant discounts not normally available to retail purchasers and then, even though they were in his possession, listed the vehicles in the dealership’s vehicle inventory, Anderson said.  The junior partner’s plan to repay the dealership evaporated when he realized after about a year that the senior partner never looked closely at the vehicle inventory, so he could just leave the vehicles listed there and never pay for them.

The second fraud occurred when the junior partner learned that some insurers cover only vehicle repairs made using cheaper after-market parts instead of genuine auto manufacturer-supplied parts.  The junior partner set up a wholesale auto parts business (essentially a small office with two delivery trucks) to buy after-market parts.  Anderson, a Certified Fraud Examiner in Philadelphia, said the fraudster then swapped those parts with the genuine auto manufacturer-supplied parts in the dealership’s inventory and sold the more expensive parts to other auto dealers and body shops, pocketing a larger profit than he could make selling the cheaper parts.  Meanwhile, the value of the auto dealership’s inventory carried on the books was higher than the actual inventory value because the books reflected the value of the more expensive parts instead of the value of the cheaper after-market parts the junior partner had fraudulently put into inventory.

The third fraud occurred when the junior partner persuaded the senior partner that used cars purchased for resale and serviced customer vehicles should be detailed instead of merely washed by the dealership, claiming he had an agreement with a local car wash to detail each vehicle for $35 (instead of its normal $75 rate).  The junior partner then purchased a nearby car wash and sent more than 100 vehicles a month to it for detailing.  The car wash billed the dealership $35 per vehicle, Anderson said, but instead of actually detailing the vehicles, the junior partner had each vehicle washed and then paid a car wash employee $5 per vehicle for cosmetic cleaning to make it appear the vehicles had been detailed.  The junior partner pocketed more than $25 on each vehicle.

“The fraud could have continued indefinitely except that a disgruntled former employee of the auto dealership tipped off the senior partner about one of the frauds,” said Anderson, a forensic accounting expert in Philadelphia who recommends that every organization enact a comprehensive fraud deterrence program developed by an experienced firm that provides forensic accounting services in Philadelphia and the Delaware Valley.

As a result of the tip, Anderson said the senior partner hired a forensic accountant to conduct a thorough fraud investigation, which not only confirmed the tip, but also uncovered the other two frauds.  The forensic accounting expert’s fraud investigation further found that the frauds could have been easily prevented by removing a key element in the Fraud Triangle – Opportunity.

“Had the senior partner engaged a forensic accountant with expertise in auto dealership operations to perform certain fraud deterrence procedures every month, the frauds would have been prevented entirely or uncovered in a much shorter period of time,” explained Anderson, a forensic accounting expert in Philadelphia who also is a Certified Fraud Examiner in Philadelphia.

The fraud deterrence measures that should have been enacted were:

  • A detailed review of certain monthly reports, such as the vehicle aging report, which indicates how long vehicles have been in inventory as well as their classification in the inventory system.
  • Surprise monthly audits/counts of selected parts in inventory, with different parts counted on a rotating basis each month.
  • Closer scrutiny of outside services/vendors to ensure that the contracted service was actually provided.

“With adequate fraud deterrence measures in place, the junior partner may never have been able to get away with a single fraud scheme, let alone three of them,” said Anderson, whose firm provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  “The opportunity simply would not have been there for him to do so.”

If your fraud deterrence measures have not been reviewed by a forensic accounting expert recently, it may be time to engage the services of a Certified Fraud Examiner in Philadelphia to analyze your company’s fraud controls and assure that they will adequately protect your company from fraudulent activity.

This Tale of Fraud article is part of an ongoing series of occasional posts that examine real cases of fraud against businesses, non-profits or government offices and the fraud investigations that revealed how the fraud was perpetrated.

If you require the services of a Certified Fraud Examiner in Philadelphia or any other forensic accounting services 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 Fraud Examiner and a Certified Valuation Analyst.