Every fraud starts as a ‘necessary adjustment.’ Then it becomes a habit. Then it becomes the business model.

Carter’s, a beloved name in children’s apparel, wasn’t supposed to be in the fraud spotlight. No serious company loves their brand with the word fraud. Yet, from 2004 to 2009, a scheme so simple yet effective played out under the noses of auditors, investors, and executives. The lesson? Fraud isn’t about genius it’s about exploiting systemic blind spots. Those with more knowledge of how the company operates, and the process flow weaknesses, always identify gaps that they exploit to their advantage.

How it happened

Carter’s fraudulent scheme revolved around something seemingly innocent sales accommodations. These are price reductions, often in the form of discounts or rebates, given to retailers to maintain a good business relationship. Nothing wrong there. But what happens when a company starts manipulating the timing of these accommodations and reductions in prices?

Enter Joe Elles, the senior sales executive at Carter’s, who had a cozy relationship with the company’s largest customer Kohl’s. Every year, Kohl’s received significant discounts. But instead of immediately recording these discounts as expenses, Elles convinced Kohl’s to delay taking them in the company’s books. This did two things:

1. It inflated Carter’s revenues – Discounts that should have been subtracted from revenue in the current period were pushed into the next period. On paper, Carter’s looked more profitable than it was.
2. It created a time bomb – The problem with deferred fraud is that it has to keep escalating. As old discounts were finally recorded, new ones had to be hidden to maintain the illusion of profitability.

This wasn’t an accident. It was a structured scheme designed to inflate financial performance, mislead investors, and sustain stock value without actually improving the business.

Why it happened

Fraud doesn’t happen in a vacuum. It thrives in a culture that prioritizes short-term wins over long-term integrity.

1. Pressure to maintain growth – Carter’s, like any publicly traded company, was under immense pressure to meet earnings expectations. Every quarter had to be better than the last.
2. Bonuses tied to performance – Executives at Carter’s, including Elles, had financial incentives linked to revenue and profit growth. When your salary depends on ‘beating the numbers,’ reality becomes optional.
3. Trust and unchecked authority – Elles was a senior executive who had built strong relationships with Kohl’s. His decisions were rarely questioned. Sales teams trusted him. The accounting team? Kept in the dark.

It wasn’t just a rogue employee. It was a system designed to reward manipulation as long as the numbers looked good.

How it was investigated

Like most frauds, Carter’s scheme didn’t unravel because of an auditor’s brilliance it fell apart when the lies could no longer be sustained.

1. The SEC steps in – The U.S. Securities and Exchange Commission (SEC) launched an investigation after whistleblowers and discrepancies in the financials raised red flags.
2. Elles cracks under pressure – In 2010, Elles pleaded guilty to fraud. He admitted to the scheme, revealing how he structured the deal with Kohl’s to hide discounts.
3. The stock tanks – Once the fraud was exposed, Carter’s stock price dropped, and investor confidence evaporated. The market had been betting on a lie.
4. Weak internal controls were exposed – The investigation revealed that Carter’s financial reporting process lacked oversight. The sales department dictated financial treatment without scrutiny from finance or compliance teams.

Fraud is a Business Strategy Until It’s Not

Carter’s didn’t fail because of one bad apple. It failed because it allowed a culture where deception was more valuable than discipline.

• Investors didn’t ask the right questions.
• Auditors focused on compliance instead of substance.
• Executives prioritized financial optics over business fundamentals.

Elles went to prison, but the real lesson here isn’t about one individual—it’s about how fraud isn’t caught, it’s revealed when the walls close in.

So, ask yourself: How many companies are still running versions of Carter’s scheme today? The ones that get caught aren’t necessarily the worst offenders they’re just the ones whose luck runs out first.

Carter’s fraud was clever, but it was small-scale one executive, one scheme, one company. But what happens when fraud isn’t just an internal scandal? What if it’s woven into the DNA of the entire business?

Next time, we dive into a case where deception wasn’t a strategy it was the business model. A company that made billions, not by bending the rules, but by rewriting them altogether. The fraud was so massive that even regulators played along until the walls caved in.

It was too big to fail until it did.

Stay tuned. You won’t believe how deep this rabbit hole goes.