Fraud Investigation Methods

Fraud-fighting activities can be grouped into three categories: prevention, detection, and investigation. Fraud prevention includes activities such as designing corporate fraud policies, creating internal audit departments, implementing internal controls, whistle-blower systems, and publicizing fraud occurrences. Investigation involves steps taken to answer the questions of whom, how, when, and why once fraud is suspected. Fraud detection involves identifying fraud as quickly as possible once it has been perpetrated. It comes into play once fraud prevention has failed.

Fraud detection can be done by nay of the following methods: In inductive fraud detection, fraud examiners typically do not have any specific fraud in mind; rather, a shotgun approach is used. The strategic process starts with an understanding of the business or unit being examined. Since each business environment is different, even within the same industry or firm fraud detection is largely an analytical process. The same fraud detection procedures cannot be applied generically to all businesses or even to different units of the same organization.

It is a traditional fraud detection method and is reactive in nature—that is, initiated by tips or complaints, control overrides, or other indicators that someone observes or hears. At times it becomes critical because the sizes of most frauds increase geometrically over time as perpetuators gain confidence that their schemes are not being detected. Moreover this method of fraud detection is a lengthy process and is a hit and trial method of fraud detection. It required the examiners to have a thorough knowledge of the situation. PROACTIVE FRAUD DETECTION METHOD:

This strategic method of fraud detection provides new power to fraud examiners that traditional methods cannot provide. It is a custom-tailored, full-population analysis directed at specific types of fraud. Using this method, fraud examiners and managements do not have to wait for “chance” indications or red flags of fraud to appear before investigative action is taken. The strategic method allows proactive detection of fraud before significant damage is done. This method mainly targets industry- and company-specific fraud anomalies and patterns and mines data for indicators of specific fraud types.

It is also known as strategic method of fraud detection. This method includes the following stages: 1. Understand the Situation (Business); 2. Identify Possible Frauds That Could Exist; 3. Catalog Possible Fraud Symptoms for Each Type of Fraud; 4. Use Technology to Gather Data about Symptoms; 5. Analyze and Refine Results; 6. Investigate Symptoms; 7. Follow Up and Iterate the Cycle; 8. Automate Detection Procedures . The end result is a mature, tested process for detecting fraud and other anomalies. The strategic method of fraud is an effective way to detect and describe both known and unknown frauds.

This method provides laser-like accuracy that allows much more efficient investigation than the traditional shotgun approaches that have been used in the past. Disadvantages of the strategic method are (1) that it is more expensive to implement than reactive and inductive fraud detection methods and (2) it requires significantly more effort and expertise from team members. With repeated applications, however, economies of scale can be gained and fraud detection approaches can be automated. It is most suited to entities that have large, digital data stores and the ability to support this larger effort.