
Look at the process of exposing deceit, identifying the perpetrators, and minimizing losses to organizational integrity and security.
How Could This Have Happened?
That is what many organizations, both private and public, have questioned themselves when they realize they have been victims of fraud. The element of surprise and shock is just one of the many ways a “fraud event” can disrupt and even damage any organization.
Being vigilant about recognizing potential fraud is critical to an organization’s efficient functioning. Fraud can affect any type or size of organization. And dangers are likely to continue and probably increase. To get an idea of how scams and tactics are expanding, review the following digital fraud statistics from a 2023 study released by credit agency TransUnion:
- From 2019 to 2022, fraudulent digital transactions in the US surged by 122%, while identity theft increased by 81% during the same period.
- financial service firms experienced a 44% increase in fraud attempts.
An organization uses the fraud investigation process and digital tools to determine whether fraud occurred and, if so, who committed it and how it was committed. This can assist the organization in managing and mitigating the impact of fraud and developing strategies and practices to prevent future fraud.
What Exactly Is Fraud Investigation?
Fraud investigation entails conducting extensive inquiries and examinations into suspected fraudulent activities in order to acquire evidence, identify perpetrators, assess the magnitude of losses, and support potential legal action or disciplinary penalties.
Investigation refers to the activities that an organization undertakes after detecting suspicious behavior. Fraud investigations often demand a thorough, targeted review of financial records and databases and an examination of personal and outside company records.
Fraud detection is the third of the three key components of fraud risk management – prevention, detection, and investigation. Fraud risk refers to the probability of financial or other losses (such as business and customer data) due to fraud committed by an individual or group within or outside the organization.
Why Is Fraud Investigation Important?
Fraud schemes can damage almost any type of business, and financial losses can be particularly devastating for small businesses. Furthermore, fraudulent conduct can cause some types of enterprises (such as law enforcement with criminal investigations) to be out of compliance with industry regulations, resulting in financial penalties. Then there are the less quantitative but possibly significant costs of damage to a company’s reputation.
All of this requires firms to be able to manage fraud risk. Risk management is the process of detecting, assessing, and controlling possible risks or uncertainties that may have a detrimental influence on the organization’s objectives or finances. Fraud risk assessments aim to prevent fraud before it occurs.
Again, not all fraud is preventable. This is where fraud detection and investigation come into play.
Benefits of Fraud Investigation
Investigating different types of fraud can help organizations avoid future financial losses and other negative consequences of fraudulent activity. Furthermore, it can aid in preventing future fraud by highlighting where it might be vulnerable to fraudulent activity.
Challenges of Fraud Investigation
Fraud investigation is not a straightforward process. Some primary reasons why:
- The need to be cautious and judicious. When business leaders find that a fraud may have taken place, they are understandably tempted to take rapid action. That would be the wrong approach. It is critical to take some time to conduct a thorough investigation to ensure that the apparent perpetrator—whether an employee or a trusted outsider, such as a vendor—is genuinely guilty. Conducting a thorough, discreet, and well-documented investigation can uncover weaknesses in the company’s risk management that it needs to fix.
- This process requires time and resources. Given the painstaking efforts a fraud investigation requires, there’s no way to do so cheaply.
- Fraud is continually growing. While some types of fraud are relatively easy to detect, fraudsters are constantly devising new techniques to circumvent an organization’s defenses. his makes the investigation more complicated—and even more crucial.
Understanding How to Investigate Fraud

Before launching a full-fledged fraud investigation, the organization should assess whether there is sufficient evidence to prove that fraud happened. Are there enough records and other data to establish a “trail” of fraudulent activity? This data may include emails, transaction logs, bookkeeping journal entries, text messages, and other digital or paper-copy documentation that may shed light on potential fraud. Data may also include interviews with employees who may have been involved in or were aware of the suspected fraud.
Identity verification may be required as part of a fraud investigation. Many fraudsters use fictitious or stolen identities to cover up their actions and activities. This is especially concerning for government agencies, insurers, and healthcare providers who may be targeted by benefits fraud.
Fraud investigation will most likely require outside expertise. An organization may need to consult an attorney specializing in HR or labor relations to ensure that it is appropriately “handling” suspicious employees. Outside forensic accountants can go through complex masses of financial data (bank fraud, credit card fraud, and other financial crimes) and conduct employee interviews.
Fraud investigation also necessitates extensive documentation of the data and other evidence at each stage in the investigation process. All prospective evidence should be gathered and protected, and any relevant electronic data must be secured and stored. Digital technologies and tools designed particularly for these purposes can help investigators identify hard-to-find evidence about fraud and fraudsters, adding a greater level of rigor and comprehensiveness. These tasks help uncover patterns and connections that may indicate fraudulent activity over time. Such tools can help verify the accuracy of data. An organization must be completely specific, not just in that fraud has occurred but also in that the individual or people responsible have been appropriately identified.
Why Does Fraud Happen?
The answer might seem simple: People commit fraud out of greed or desperation. However, this does not explain why many avaricious or financially strapped individuals do not commit fraud.
The fraud triangle offers a more in-depth explanation. The fraud triangle is a model that describes the three elements that, when combined, are most likely to lead to fraud. Understanding the fraudster’s perception is necessary for effective fraud risk management.
Side 1 – Pressure or Motive
A lot of fraud is driven by greed or financial difficulties, such as gambling debts or overspending. However, sometimes, motivation is not so simple. People have committed fraud under pressure from a love partner (who they may never have met) or a family member. Others may be blackmailed or otherwise pushed into committing fraud.
Side 2 – Opportunity
The fraudster requires access to money. As an accountant or bookkeeper, they are often in charge of an organization’s finances, writing checks and maintaining financial records. Such a person may not be closely monitored and may also have an outstanding job record.
Side 3 – Rationalization
Individuals who commit fraud are unlikely to consider themselves “bad people.” Perhaps they assure themselves they will pay it back as soon as possible. Or they might justify it by telling themselves that other organization members dip into the till occasionally. They justify it in different ways: A Colorado pastor recently admitted to defrauding his church community of more than $1 million, claiming that some of the money was used for “a home remodel the Lord told us to do.”
Understanding why fraud occurs can help a company focus its fraud investigation efforts. It can also help prevent and detect fraud by alerting it to potential red flags that may signal fraudulent activity, such as employees who appear to be living beyond their means (can they afford that Miata?) or executives who are less than transparent about certain expenses.
Finishing The Process
Once a fraud investigation is completed and its findings are shared with appropriate stakeholders, the organization should analyze the impact on its operations, financial well-being, and reputation. It will thereafter be responsible for repairing any harm caused by fraudulent activities.
An investigation should also disclose ways in which the organization might improve its fraud prevention strategies. For example, it may review any internal controls it has in place and determine where they should be reinforced. For example, it may also need to perform more frequent audits or upgrade its cybersecurity policies.
In any event, any organization must continually improve its fraud risk management, especially given new or emerging fraud threats, such as:
- Synthetic identity fraud. Individuals and fraud gangs can use digital technologies to establish fake identities by exploiting real Social Security numbers or other stolen personal information. This can make fraud investigation more difficult.
- Use of artificial intelligence. AI could enable fraudsters to complicate fraud by convincingly disguising themselves as colleagues, managers, customers, clients, or C-suite executives on digital platforms. They can convince trustworthy personnel to provide crucial information or grant access to firm bank accounts. AI and machine learning may also help firms protect themselves by spotting and investigating fraudulent activities.
- Fraud is global—and organized. Fraudsters worldwide are increasingly taking advantage of the internet’s borderless nature to work with global gangs to steal dollars, data, and identities.
In short, fraud will always pose a serious risk. As it evolves into dangerous new forms, organizations must conduct thorough fraud investigations using the right digital technology. Begin the risk-management process to address fraud risk.