An in-depth examination of records and enquiry into the situation of the business or for a particular cause is termed as investigation in an audit. A fraud investigation audit is conducted to find out the fraudulent activity (if any) and the exact depth of committed fraud along with the areas affected by it. The investigator also identifies the loopholes or gaps that acted as a gateway for the perpetrator to commit the fraud. It is necessary to figure out the weaknesses in the system that tempt the wrongdoers to get involved in negative activities and fix them right away to suppress such instances from reoccurring in the future.

Both the processes involve reviewing the book of accounts of the auditee and reporting on it. However, there is a huge difference between the two. Allow us to explain how auditing is different from the investigation:

Nature: While an audit is a general investigation, a fraud investigation is a detailed examination conducted to uncover a specific truth or fact about the auditee.

Scope: An auditor is tasked to form an opinion on the financial report, an investigator conversely seeks to respond to the questions in the engagement letter.

Frequency: Unlike audit which is conducted annually, fraud investigation is conducted ONLY when the need arises.

Evidence: The evidence for an audit is of persuasive character, on the other hand, the same in the case of a fraud investigation is unambiguous.

Auditor: Audit can be conducted by professional financial auditors (Chartered Accountants) but to perform a fraud investigation one needs to hire an expert.

Benefits: Audits can advantage businesses by verifying that their records are accurate and ensuring they are on the right track to accomplishing their goals. An audit also can point out red flags where fraud may have been committed but is not designed to root out every instance of fraud. Auditors aid companies to spot material misstatements in the company’s financial statements caused by either fraud or error. Fraud investigation, on the contrary, helps companies to identify fraud, fraudster, motive, reasons, loopholes in the system, potential harms in its wake and finally ways to prevent similar frauds from happening again in the company.

Obligation: Annual audits are mandatory; fraud investigations are not. The latter comes into the picture as a need of the hour.

Appointment: An auditor is appointed by shareholders of the auditee company to conduct a routine check on financial transactions while an investigator is hired by either management, investor or a third party to analyse potential fraud indicators and the impact of current fraud trends and make recommendations as to appropriate mitigation.

Investigative auditors utilize their skills and experience to gather evidence regarding fraudulent or abusive activity affecting governmental entities. Their audits are structured to discover and discourage the misappropriation of public assets and mitigate future fraud risks.

A 6-step, structured approach to an incident investigation is used to ensure that everything in connection with the fraud has been taken care of.

1. Take immediate action: Sooner the better! Take perishable evidence in custody as soon as possible. These can be CCTV footage, samples. Also do not delay in making the area safe, preserving the scene and notifying relevant parties.
2. Formulate the investigation plan: This step revolves around the details about the resources and people involved, the duration of the investigation, the degree of the crime and the size of the team of investigators required to handle it systematically and completely.
3. Gather the data: This step focuses on collecting as much information as possible from numerous sources such as various equipment, documents and the scene of the incident and people engaged in the event including the witnesses.
4. Conduct root & cause analysis: Failures and mistakes don’t just happen by themselves; organisations allow error-enforcing environments that promote direct causes to develop and persist. The current incident could be the result of a chain of events. Therefore, understanding the sequence of events becomes crucial to solving the riddle. At this step the investigator zeros on finding out the root and underlying causes, as well as the direct causes before identifying why the incident happened.
5. Initiate corrective measures only: The corrective actions should not be taken looking at the direct causes only aiming for a quick fix, putting last-lines-of-defence back in place. Rather the root and underlying causes must be considered while designing the defence mechanism. This practice will not only help the organisation lower down the risk of recurrence of the incident but also reduce the possibility of occurrence of other dissimilar incidents springing from the same, common root cause.
6. Prepare a report: The investigation draws to a close when all outstanding issues have been shut and the discoveries have been intimated so that lessons can be shared. The results can be communicated by means of formal incident investigation reports, alerts, presentations and meeting topics.

Fraud investigation today is no less than finding the needle in the haystack. Thanks to various tools and techniques that help investigators to deliver substantial analysis and insights quickly and cost-effectively! Checklists, proformas and posters are amongst the popular ones, particularly when setting terms of reference, collecting and structuring information, analysing causes, etc. Artificial intelligence (AI)-driven data processing technology, document review technology, automated online data research and extraction applications, analytic libraries, data visualization are some of the other wonderful techniques often used to advance investigations while minimizing cost.