A Guide to Fraud Investigations

Fraud can pose a serious risk to your organization, often from the inside out. Fraudulent behavior can result in financial loss, reduced morale, and reputational harm to any company regardless of its industry or sector.

Almost half (47%) of over 5,000 companies surveyed in 2020 reported that they had experienced fraud in the last two years, costing them $42 billion in total. Yet 44% of those companies failed to conduct an investigation. By not investigating, those companies are forgoing the opportunity to learn more about how, where, and why fraud is being perpetrated—which can make it harder to prevent future incidents.

That’s why you should consider a fraud investigation as soon as you hear that there may be fraud occurring within your organization.

This blog post will give you the tools and information you need to start investigating fraud. In it, we’ll cover the basics of fraud investigations and their challenges before turning to four best practices for successfully investigating fraud allegations. We’ll wrap up with a discussion of how technology can simplify your role as an investigator.

Here's what we'll cover: 

• What is a fraud investigation?

• What are the most common types of fraud?

• Common challenges of fraud investigations

• What steps do you need to take during a fraud investigation?

• How long does a fraud investigation take to complete?

• The skills a fraud investigator needs to be successful

• 4 best practices for successfully investigating fraud

• How technology will simplify fraud investigations in 2023

What is a fraud investigation?

A fraud investigation is a process of gathering and analyzing evidence related to alleged or suspected wrongdoing to determine whether deception or theft has occurred. As part of a fraud investigation, an investigator will review and analyze data, conduct interviews, and prepare a final report.

Fraud investigations typically arise when an individual—either within or outside your organization—makes a complaint or otherwise reports fraud. This reporter may be an employee, auditor, or regulatory agent. An organization may also initiate an internal investigation for information-gathering purposes, such as general compliance or as part of a merger or acquisition.

Let’s look at the most common types of fraud and some common challenges that fraud investigators face.

What are the most common types of fraud?

Common types of corporate fraud include financial misconduct such as payroll, insurance, or accounting fraud; third-party misconduct such as vendor fraud; theft of assets through misappropriation, data theft, or intellectual property theft; and various bribery and corruption schemes.

Let’s take a closer look at some of these types of fraud.

• Payroll fraud: Payroll fraud is the most common type of employee fraud. An employee committing payroll fraud may fake the hours on their timesheet, create a fictitious scheme with the payroll department, or issue a fake advance.

• Vendor fraud: Vendor fraud occurs when an employee conspires with a vendor to overbill for a product or service and earn an extra profit. Vendor fraud can also include fictitious billing schemes or price-fixing.
  
  
• Asset misappropriation: Asset misappropriation consists of stealing inventory, using company assets inappropriately, or inflating expenses by falsifying checks and invoices.
  
  
• Data or intellectual property theft: In addition to stealing physical assets or money, an employee may steal corporate assets by stealing information. This could include data relating to payments or credit cards or proprietary information such as trade secrets.

• Bribery and corruption: Bribery and corruption can take many forms. As one example, an employee may demand payment from someone outside the company in exchange for a service, using the company’s status for personal advantage.

Common challenges of fraud investigations

Fraud investigations can be challenging for a variety of reasons. For example, you may be conducting an investigation based on a general suspicion that something isn’t adding up. This means you may not know who the bad actor is or what type of fraud they have committed. You also may be dealing with a situation in which multiple actors are involved, further muddying the investigative waters.

Fraud investigations often involve large volumes of data spread across multiple data sources. Furthermore, you should expect that the perpetrator will at least attempt to hide, modify, or delete data to avoid getting caught. These factors can make it hard to identify, retrieve, and analyze relevant information, especially if you don’t have the right technology to assist you with the process.

How do you start investigating fraud in the face of these challenges? Let’s go over the major steps involved in a fraud investigation.

What steps do you need to take during a fraud investigation?

To complete a fraud investigation, you must: (1) perform an initial evaluation; (2) make an investigation plan; (3) review and analyze data; (4) conduct interviews; and (5) prepare a final report. These steps typically unfold as follows.

1. Perform an initial evaluation.

When you have received a report or otherwise become aware that fraud may have occurred, you must first evaluate the situation to determine whether an investigation is warranted. Your initial evaluation should include an interview with anyone who has reported fraud. Your evaluation should also include a review of your organization’s policies regarding fraud, ethics, and anything else that may be relevant.

If the initial information you gather convinces you that there may be truth to the allegation, you must decide who will conduct the investigation. Generally speaking, managing the investigation in house can save your organization time and money and allow you to have more control over the situation.

Before the investigation begins, it is important to take protective steps to limit any damage that may be occurring. These steps could include changing passwords or locks, suspending accounts, or even temporarily suspending employees until the situation is resolved.

2. Make an investigation plan.

Once you have decided that an investigation is necessary, you will need to create a plan for that investigation. Your plan should include goals, deadlines, a clearly defined scope of the issues you will be investigating, and lists of data to gather and people to interview.

3. Gather, review, and analyze data.

With a clear plan in place, you will gather and review any relevant data, including documents, emails, personnel files, photos, and videos. Once you have reviewed this data and made any copies necessary, you can analyze all the evidence you have retrieved and determine your next steps.

4. Conduct interviews.

Next, you can begin to interview people who may have relevant information. When conducting interviews, be sure to tell each interviewee what to expect, thank them for their time and candidness beforehand, assure them that they will not face retaliation, and practice sound interview techniques.

Note that you should use whatever information you gained from your initial data review in your interviews. However, you may discover additional data sources as you talk with people, so you may have to cycle through these two steps more than once to uncover all of the information you need.

5. Prepare a final report.

Finally, you will create a final report. This report should summarize the evidence you have uncovered (including direct quotes from interviewees), explain your analysis of that evidence, and state your conclusion. Your report should also set out any specific recommendations to rectify the situation or prevent future occurrences of the same type of misconduct. The report should not include inflammatory language or excessive jargon.

How long does a fraud investigation take to complete?

Fraud investigations can take anywhere from a few days to a few months—or longer—to complete. The duration of a fraud investigation depends on the amount and types of data involved, the availability of interviewees, and the complexity of both the misconduct and the company’s operations.

You can complete a fraud investigation much more quickly if you use the right technology to assist with the process. We’ll circle back to this in a moment—but first, let’s consider what it takes to be a good investigator.

The skills a fraud investigator needs to be successful

In general, fraud investigators—like all corporate investigators—should be impartial, discreet, curious, skeptical, diligent, and communicative. Investigators who specialize in fraud may also have in-depth financial training or experience. They also need to demonstrate considerable attention to detail (especially when it comes to looking at numbers), creativity when searching for evidence, and an understanding of eDiscovery technology.

4 best practices for successfully investigating fraud

Even the best investigators can improve the way they perform fraud investigations. Here are four best practices for investigating fraud.

1. Preserve all relevant information.

You need data to conduct a comprehensive fraud investigation. You may also need this information during any resulting regulatory proceeding or litigation.

To ensure that you preserve all the data you’ll need to get to the bottom of suspected fraud, be sure to identify custodians and data sources early on. You may distribute a legal hold notice to preserve all the evidence that may be relevant to your investigation; alternatively, you may have your IT department quietly restrict access to data and suspend the ability to delete or modify data to ensure that bad actors cannot destroy data while you investigate them. Your organization may already have the necessary eDiscovery tools and experience to facilitate the legal hold process. If not, investing in dedicated legal hold tools will assist you with preservation.

2. Perform an early case assessment (ECA).

Much like during the early stages of litigation, performing ECA at the beginning of a fraud investigation can give you valuable insights into how the investigation is likely to play out. By using eDiscovery technology to complete ECA, you can quickly determine what evidence will be most important to your investigation and use that information to help you decide whether and how to proceed.

3. Work from copies of important documents rather than originals.

When working with data, it is important to preserve original documents and work on copies only. You can also include copies of crucial documents in your final report and highlight relevant portions for easy reference.

4. Leverage technology to streamline and simplify data analysis.

As corporate data grows more voluminous, investigators cannot evaluate all of it manually. That’s why technology plays an increasingly central role in fraud investigations. Technology can help investigators quickly eliminate irrelevant data and home in on the important documents and data sources—saving time and money while resolving suspected fraud much more rapidly.

Speaking of technology, let’s look toward what the future holds for fraud investigations.

How technology will simplify fraud investigations in 2023

Organizations are likely to face many of the same challenges in 2023 that they have faced so far in 2022. These include increasing data volumes, greater data complexity, and evolving cybersecurity risks—not to mention shrinking budgets.

Thankfully, technology can help mitigate these challenges by making data more manageable.

For example, ZyLAB ONE is an eDiscovery platform that automates the legal hold process and enables investigators to search, review, and analyze data in place. The platform can handle large volumes of data and different types of data with ease and efficiency, saving investigation teams time and money.

To learn more about ZyLAB and ZyLAB ONE, contact us or schedule a demonstration.