Substitution Schemes and How to Avoid Them

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

Although most fraudsters go after cash because it is easier to misappropriate, more and more organizations are being hit with misappropriation of inventory and fixed assets (equipment, furniture, computers, vehicles, etc.).

In this article, Anderson, a Certified Fraud Examiner in Philadelphia, focuses on one key type of such misappropriation – substitution schemes.  Simply put, he explains, the fraudster in these schemes substitutes a less expensive item of inventory or a less expensive fixed asset for the actual item, and then sells the misappropriated item for personal profit.

Here are some examples of substitution schemes:

  • The Parts Department manager of a large auto dealership purchased cheaper aftermarket auto parts and substituted them for the auto parts purchased from the manufacturer. He then sold the manufacturer’s parts to other auto dealers, pocketing the cost difference.
  • The Technology manager at an advertising agency was responsible for implementing a computer replacement program that required him to replace existing high-end Apple computers with new ones every two years. He was supposed to remove the advertising and design software from each replaced computer and sell it to a used computer dealer.  Instead, he purchased cheap, older-model used Apple Computers, substituted them for the replaced computers (which were then sold to the used computer dealer), and sold the replaced high-end computers (with the advertising and design software still on each computer) via a website he set up.
  • A trusted employee at a commodities broker was given access to the company’s precious metals safe, and over time replaced dozens of 10-ounce platinum bars (worth approximately $10,000 each) with 10-ounce silver bars (worth approximately $180 each). Part of the reason he could get away with this substitution scheme was that the bars were stacked, looked almost the same to the casual observer, and he made sure that the top several bars were platinum ones.
  • A Fortune 1000 company furnished its New York City sales office with over $500,000 worth of artwork. Although the company was audited, because there were no financial transactions handled by the New York City sales office, and because its total fixed assets (including the artwork) were low relative to the company’s total fixed assets, the auditors never even visited the New York City sales office.  Responding to a tip provided on the company’s fraud hotline, forensic accountants found that employees of the New York City sales office had substituted cheap artwork (including, in one case, a paint-by-numbers piece that had been painted by a child) for the more expensive artwork.  Most of the replaced artwork had been sold off by the employees, although several pieces were found in their homes.
  • The owners of a financially failing paper products company removed tens of thousands of dollars of paper products from their boxes, filled the boxes with trash and used paper, and resealed the boxes. After the bank took over the failed company, it hired an auctioneer to sell off the boxes of inventory.  Only after the auction did buyers discover that they (and the bank who had to reimburse them for their purchases) were the victims of a substitution scheme.

So, how can your business avoid becoming the victim of a substitution scheme?  Here are some basic steps:

  • For inventories, implement a scheme of classifying inventory items by their relative value and frequency of sale. High dollar and high volume medium dollar inventory should have the top classification, followed by medium dollar and high volume low dollar inventory, and at the bottom, low dollar inventory.  Employees from a separate department (usually the accounting department or, if it is not practical to use internal employees, from an outside company such as a forensic accounting firm) should conduct periodic physical checks of the inventories based upon the classification.  For example, checking the highest classification biweekly or monthly; checking the middle classification bimonthly or quarterly, and checking the lowest classification at least annually.
  • For fixed assets, institute a fixed asset tracking system. Under such a system, each fixed asset is tagged with a bar coded label.  The system will have a database that separately identifies each fixed asset with date purchased, description of the fixed asset, purchase price, location of the fixed asset and the bar code label number.  Then, as in the above inventory checking methodology, institute a periodic checking of fixed assets based upon dollar values (highest dollar value items most frequently, lowest dollar value item least frequently).  This regular checking should include retired or replaced fixed assets that are still on the books.
  • For fixed assets that are being disposed/sold, again have employees from a separate department or third party company inspect the assets prior to sale to ensure that the assets being sold are the correct ones, and are in the condition the company expects.

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 Valuation Analyst and a Certified Fraud Examiner in Philadelphia.