Business fraud is an expensive problem. The Association of Certified Fraud Examiners (ACFE) estimates that annually, as much as 5% of revenue is lost to fraud. That may seem like a small amount, but it adds up: business fraud worldwide costs $3.7 trillion in losses. And nearly one-quarter of all cases examined by the ACFE concerned losses of $1 million or more.
Business fraud encompasses a range of nefarious activities, from payroll fraud to invoice fraud to tax fraud. One of the few ways to mitigate the risk of business fraud in all its forms is to conduct regular fraud investigations.
What is a fraud investigation?
A fraud investigation is the process of gathering and analyzing evidence related to alleged or suspected wrongdoing, to determine whether the company has been the victim of fraud. Most fraud is detected in the workplace from a tip within the organization — a whistleblower, an alert from your fraud monitoring tools, or a question from a vendor.
However, companies are starting to conduct investigations whether or not there’s concrete evidence of fraud. Regularly conducting an investigation can help prevent the financial and reputational risks of undiscovered business fraud.
In this guide, we’ll break down some of the fraud detection and prevention strategies that make up the process, as well as steps and best practices for conducting a fraud investigation at your organization.
How do fraud investigations work?
The process can vary depending on the situation. For instance, it’s wise to act quickly if you receive a credible threat that fraud is almost certainly taking place. If you receive a somewhat vague tip, it might take more digging to discover what’s going on.
According to the ACFE, fraudulent activities last an average of 18 months before being detected. With this in mind, the fraud investigation process should start with a threat assessment to establish what’s potentially going on under the surface.
Follow these steps to carry out an investigation and learn if fraud is impacting your business.
1. Assess the signs of fraud
The first step in the process is determining if the tip, red flag, or reporting discrepancy is worth investigating. You can choose whether to launch a full fraud investigation by answering a few key questions:
- What law or policy was allegedly violated?
- How many people are accused?
- Do any of the accused have a history of similar behavior?
- Do any of the accused exhibit behavior that might signify fraud is happening (e.g., living above their means, working unusual hours, etc.)?
If the answers to these questions convince you that there may be business fraud taking place, you must decide who will conduct the investigation.
2. Establish an investigative team
Hire external experts to come and assess the situation or bring together an internal team to see if fraud has been committed. On one hand, external investigators are more impartial and may be able to be objective about the situation. These people are skilled in their field and may bring expertise you won’t have in-house. However, external investigators are likely to be more expensive than an internal group of stakeholders.
Internal investigators not only cost less but also give you more control over the timing and scope of the investigation.
Whether you choose to work with external experts, internal employees, or a combination, you’ll want a team that includes the following expertise:
- General Counsel
- Internal auditors and compliance
- Forensic accountants
- Technology specialists
- Public relations
Depending on what your investigation uncovers, you may also need to get law enforcement involved.
3. Create a fraud investigation roadmap
Plan out your investigation carefully and consider the legal ramifications of the results of this process. As the ACFE notes, “The value of a fraud examination rests on the credibility of the evidence obtained.”
As such, your investigation plan should document the steps the investigative team will take to determine whether or not fraud occurred and how to preserve any existing electronic or physical evidence.
A fraud investigation plan should also include the goals, deadlines, a clearly defined scope of the issues you will investigate, and the data you will analyze: documents, emails, email archives, invoices, company financial records, personnel files, photos, and videos.
4. Analyze digital and physical evidence
Fraud.net’s customizable tools can automate and expedite your fraud investigations using AI and machine learning, comprehensive analytics and reporting, and preset filters that reduce the manual effort involved in an investigation.
An investigation team can quickly gain insight into what’s been going on by using Fraud.net’s platform. These tools will filter transactions through customized workflows, rules & risk profiles to automate rejections, approvals, or escalations for further review, all on a single screen. Users can customize and create thousands of rules for any event without the need for IT assistance. And, with 600+ preset filters, investigation teams can create thousands of customized rules that can automate the bulk of all fraud case reviews, freeing users up to focus on high-stakes investigations.
Deploying Fraud.net’s investigation capabilities helps expedite the process, uncover information quickly, and free up the investigative team for interviews. Ultimately, Fraud.net’s tools can lead to a 60%+ reduction in fraud investigation costs.
5. Conduct interviews
The final step in this process before making a determination is to conduct interviews with those who may be able to shed firsthand light on the potential business fraud. The people you interview should be those who have a direct relationship with those involved, including the whistleblower, the employee’s manager, colleagues, friends, and any other business associates.
Tell every interviewee what to expect before the conversation. Assure each person that they will not face retaliation. Sometimes it helps to have a second, impartial person in the room. These are interviews, not interrogations!
How to avoid the fraud investigation process
The best fraud investigation is one that never has to take place. Fraud investigations are often time-consuming and costly, and can negatively impact company morale. Therefore, protect your business from the risk of fraud with a comprehensive end-to-end fraud and risk management tool.
[Learn more in our Panel Discussion: Stopping Identity Fraud Before It Occurs: Advanced Authentication]
Fraud.net’s suite of AI-powered tools can help your business stop 600+ types of fraud, including those related to business fraud—such as insurance fraud, bank fraud, and credit card fraud. Fraud.net products and services offer:
- Real-time, actionable alerts to proactively detect business fraud.
- Risk scores associated with individual transactions.
- Thousands of customizable risk-based rules and workflows specific to an organization’s industry.
- Fraud trend visualization and interpretation to optimize the risk management process
Request a demo today to learn how AI can help you stop fraudsters in their tracks.