Every fraud starts as a “necessary adjustment” then it becomes a business model

In the world of business, fraud rarely begins with an elaborate scheme. Sometimes, it starts with a simple decision to delay an expense, conceal a discount, manipulate a financial report, or bypass an internal control to meet a performance target.

The Carter’s accounting fraud case offers a powerful lesson: fraud does not always require sophisticated techniques. Sometimes, all it takes is knowledge of the system, an opportunity to exploit its weaknesses, and a culture that rewards results without questioning how they are achieved.

Between 2004 and 2009, Carter’s, the American children’s apparel company, became the setting for a scheme involving the improper timing of sales allowances granted to Kohl’s, one of its major retail customers. Senior sales executive Joseph Elles helped arrange the deferral of certain discounts, allowing Carter’s to overstate revenue and profitability in its financial reporting. The scheme eventually came under regulatory scrutiny, exposing weaknesses in financial reporting oversight.

The lesson extends far beyond one company: when commercial pressure overrides financial discipline, ordinary business transactions can become instruments of fraud.

How does a simple adjustment become fraud?

Sales discounts, rebates, and other customer allowances are legitimate commercial tools. Companies use them to attract customers, maintain relationships, and remain competitive. The danger emerges when these transactions are deliberately manipulated to achieve misleading financial results.

Consider what happens when a company postpones recognising discounts that should reduce current-period revenue. Its reported financial performance may appear stronger than reality. Investors may believe the business is growing, executives may appear to be meeting their targets, and performance-based bonuses may be earned on numbers that do not reflect the true economic position.

But the underlying obligation does not disappear. It simply moves into the future.

As the deferred adjustments accumulate, the pressure to sustain the illusion grows. What began as an attempt to improve one reporting period can become a recurring scheme requiring further manipulation.

This is how fraud can evolve: from an exception, to a habit, and eventually into an organised pattern of deception.

Why do such schemes happen?

Fraud is rarely explained by individual dishonesty alone. Organisational conditions can create opportunities for misconduct to thrive.

1. Pressure to meet targets. When management focuses excessively on quarterly earnings, revenue growth, and market expectations, employees may feel compelled to manipulate results rather than report disappointing performance honestly.

2. Incentives that reward the numbers, not the process. Bonuses and promotions tied narrowly to financial outcomes can encourage unethical behaviour when integrity and accountability are overlooked.

3. Weak internal controls. When sales executives can negotiate commercial arrangements without independent review of their financial implications, the organisation creates opportunities for abuse.

4. Excessive trust in influential employees. Seniority, strong customer relationships, and a history of good performance should never exempt anyone from oversight.

5. Poor communication between departments. Sales, finance, internal audit, and compliance must work together. When important commercial arrangements remain hidden from the people responsible for financial reporting, material misstatements can go undetected.

Five fraud warning signs every organisation should watch

Fraud prevention requires more than policies and procedures. It requires the ability to recognise when ordinary transactions conceal unusual behaviour.

Watch for these red flags:

• Unusual timing of discounts and rebates: Customer allowances are repeatedly postponed, reclassified, or recorded in unexpected reporting periods.
• Unexplained differences between sales and cash flows: Reported growth does not translate into corresponding cash generation or other expected business outcomes.
• Frequent end-of-period adjustments: Large or unusual journal entries appear just before quarterly or annual reporting deadlines.
• Concentrated decision-making authority: One individual controls customer negotiations, approvals, and the information provided to finance.
• Resistance to independent review: Employees discourage questions, withhold supporting documents, or treat routine control procedures as unnecessary obstacles.

None of these signs automatically proves fraud. However, each warrants appropriate investigation, documentation, and independent scrutiny.

What can organisations do differently?

Preventing fraud begins with designing systems that do not depend solely on individual integrity. Organisations should ensure that customer discounts and rebates are properly documented, approved, and recorded in the correct accounting period. Finance teams must independently assess the accounting treatment of commercial agreements rather than simply accept decisions made by sales teams.

Internal auditors should examine the substance of transactions, investigate unusual trends, and test whether controls work in practice. Boards and audit committees should scrutinise aggressive earnings targets, significant adjustments, and compensation arrangements that may encourage misconduct.

Most importantly, employees must be able to raise concerns without fear of retaliation.

A strong control environment does not assume that everyone will act dishonestly. It recognises that even trusted people operate within systems that must make misconduct difficult to commit and easier to detect.

FRAUD AWARENESS WEEK 2026 IS COMING!

The Carter’s case reminds us that fraud often hides behind transactions that appear routine. The difference between a legitimate commercial decision and deliberate manipulation may lie in the timing, intention, documentation, and oversight surrounding that transaction.

As businesses become more complex and financial pressures increase, organisations need professionals who can identify red flags, investigate suspicious activity, strengthen controls, and protect organisational value.

That is why fraud awareness must move beyond annual reminders. It must become part of everyday decision-making, leadership, governance, and organisational culture.

Join the Institute of Forensics & ICT Security (IFIS) from 15–21 November 2026 for #FRAUDAWARENESSWEEK.

Make fraud prevention everyone’s responsibility. Strengthen your ability to recognise warning signs, question suspicious transactions, and stay ahead of emerging fraud risks.

Register today: https://forensicsinstitute.org

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