FIN 470 Week 1 Fraud Types and the Fraud Triangle Example

How a Trusted Branch Manager Billed His Own Company for Two Years: Classifying the Scheme, Applying the Fraud Triangle and the Fraud Diamond and Measuring What It Cost an Ohio Distributor

[Student Name]

University of Phoenix

FIN/470: Fraud Examination and Forensic Accounting

Week 1 Assignment

[Instructor Name]

[Date]

Buckeye Comfort Supply, its employees and the scheme are composites written for a model paper; fraud statistics, theory and research come from the sources listed.

Buckeye Comfort Supply, a composite distributor of heating and air conditioning equipment with 14 branches in Ohio and annual revenue of $310 million, found the problem by accident. A new accounts payable clerk noticed that a vendor called Midstate Coil Services shared a post office box with the personal address on file for one branch's manager, a 19-year employee named Dale. Over 25 months, Buckeye had paid Midstate about $412,000 for coil cleaning and warehouse repairs at Dale's branch, work that the branch's own technicians said had never been done. The money was gone, but naming exactly what kind of fraud it was would decide how the company investigated, what records it gathered and how it would prevent the next one. This paper classifies the scheme and explains how it happened.

Classifying the Scheme

The Association of Certified Fraud Examiners (2024) groups occupational fraud into three categories. Asset misappropriation involves stealing or misusing an organization's resources. Corruption involves an employee misusing influence in a business transaction, such as accepting a bribe or hiding a conflict of interest. Financial statement fraud involves intentionally misstating results. Within asset misappropriation, fraudulent disbursements include billing schemes, payroll schemes, expense reimbursement schemes, check tampering and register disbursements. Dale's scheme was a billing scheme using a shell company: a fictitious vendor that billed for services never performed, with invoices approved by the person who controlled it.

Why Not Corruption?

A conflict of interest, an undisclosed financial interest in a vendor, is a corruption scheme. If Midstate had been a real company that did real work at inflated prices, with Dale secretly owning part of it, the case would fall under corruption. Because the services were never performed, the scheme is a billing fraud; the hidden ownership is how it was concealed, not what it was. The distinction matters, because a billing scheme calls for tracing payments and confirming whether work was done, while a conflict of interest calls for proving ownership and comparing prices with the market.

How It Compares

In the Association of Certified Fraud Examiners' 2024 report, asset misappropriation appeared in most cases but had a lower median loss than corruption or financial statement fraud, and a median scheme lasted roughly twelve months before anyone caught it. Dale's scheme lasted twice as long and cost more than the median, consistent with the finding that frauds committed by managers and long-tenured employees tend to cause larger losses. The same report placed tips first among the ways schemes came to light, while accidental discovery, as at Buckeye, accounted for a smaller share.

Pressure

Cressey (1953) interviewed imprisoned embezzlers and concluded that they had a financial problem they felt they could not share, a nonshareable pressure. Dale had cosigned a business loan for his son's landscaping company, which failed in 2022, leaving Dale responsible for about $180,000. He told no one at work, fearing it would cost him a promotion to regional manager.

Opportunity

Dale could approve invoices up to $10,000 for branch maintenance without a second signature, and Midstate's invoices ranged from $6,800 to $9,900, always just under the limit. Branch maintenance had no budget at the vendor level, and no one compared maintenance invoices with work orders. The accounts payable team set up new vendors on a branch manager's request with only a tax identification number and an address.

Rationalization

When interviewed later, Dale said he had worked unpaid overtime for years, that the company had denied him a bonus during the pandemic and that he intended to repay the money once his son's debts were settled. Cressey found these themes common: borrowing rather than stealing, and feeling owed by the organization.

The Fourth Element

Wolfe and Hermanson (2004) argued that the triangle leaves out capability: the traits and position needed to commit and conceal a fraud. Dale knew the approval limits, understood how vendors were set up, had the confidence to deceive colleagues he had worked with for years and occupied a position no one questioned. Many employees face pressure and see opportunity; few have the capability to turn both into a two-year scheme.

Red Flags That Were Missed

Coworkers later recalled that Dale had begun handling all vendor paperwork himself, resisted taking vacation and seemed under financial strain, selling his boat and talking about debt. Living beyond means and financial difficulties are among the behavioral red flags most often reported in fraud cases. No one connected these signs, and Buckeye had no anonymous reporting channel.

Who Commits Occupational Fraud

The survey data also describe who commits such schemes, and Dale fits the profile less as a villain than as a type. Most occupational fraudsters are first-time offenders with no criminal record, long tenure and the trust of their colleagues, which is exactly what gives them access. Losses tend to rise with the perpetrator's authority and length of service, because managers can override controls and long-serving employees know where controls are weak. That pattern is uncomfortable for organizations, since it means the people least likely to be suspected are often best placed to steal. It also explains why controls that rely on trust, such as unchecked approval authority for a respected manager, fail in precisely these cases.

What the Classification Means for the Investigation

Classifying the scheme as a shell company billing fraud directs the investigation: obtain Midstate's registration and bank records, compare every invoice with work orders and technician schedules, examine the endorsement and deposit of each payment, review other vendors Dale set up and check whether anyone else approved or benefited. The next weeks of the course follow those steps.

Conclusion

Buckeye's loss was an asset misappropriation through a billing scheme using a shell company, larger and longer than the median case. Dale's hidden debt, his approval authority, his sense of being owed and his capability to conceal the scheme fit the fraud triangle and the fraud diamond. Precise classification sets the course of the investigation that follows.

References

Association of Certified Fraud Examiners. (2024). Occupational fraud 2024: A report to the nations. https://legacy.acfe.com/report-to-the-nations/2024/

Cressey, D. R. (1953). Other people's money: A study in the social psychology of embezzlement. Free Press.

Wolfe, D. T., & Hermanson, D. R. (2004). The fraud diamond: Considering the four elements of fraud. The CPA Journal, 74(12), 38-42.