AI’s role in detecting fraud as markets stumble

Tod McDonald is co-founder of Valid8 Financial and has spent decades tackling complex financial cases, including uncovering a $200 million real estate Ponzi scheme.

When the economy slows, fraud surfaces fast — and AI is now central to catching it. Downturns strip away the cover that lets schemes run, as history has shown from Madoff to the mortgage crisis. Today, forensic teams are using advanced tools to sift massive datasets, spot red flags in hours, and prepare for the surge in cases a slowdown brings.

Forensic accounting is countercyclical. When the economy sinks, demand for these services surges. Economic downturns prompt companies to scrutinize their financial records, exposing fraud that festered under the cover of prosperity. The findings can trigger audits, investigations or even legal action.

After a long stretch of growth and stability, businesses are now facing volatility from trade policies, rising costs and market uncertainty. In this economic climate, forensic accountants must be prepared for an increase in case volume. 

A strong economy supports the fraud triangle

A strong economy breeds comfort and amplifies three elements of the fraud triangle: opportunity, pressure and rationalization. When money is flowing freely, the high volume of transactions can obscure anomalies, and companies are less inclined to ask hard questions about their financial activities. This creates opportunity. 

Economic booms also pressure companies to achieve quick returns and meet aggressive growth targets. Fraudsters may find it easier to rationalize their actions, convincing themselves that unethical accounting practices serve the company’s interests or that minor misappropriations will go unnoticed amid the strong performance. 

When individuals possessing the requisite capabilities encounter this blend of opportunity, pressure and rationalization, the environment becomes highly conducive to fraudulent activity.

However, tightening economic conditions spur closer scrutiny, exposing many of these schemes. 

Financial pressure increases financial scrutiny and fraud discovery

When financing grows more expensive and new investment slows, the margin for error shrinks. Companies must account for every dollar to maintain operations and reassure stakeholders. Organizations review their financial records more closely and investigate unusual transactions that might have gone unquestioned before. Fraudsters also lose the ability to cover up discrepancies with new revenue or funding.

The Great Recession proved this dynamic. Bernie Madoff ran a massive Ponzi scheme using money from new investors to pay returns to existing investors. As the financial crisis unfolded, interest rates rose and capital markets tightened. Investors sought safer, more stable assets, making it increasingly difficult for schemes like Madoff’s to attract new capital. When funding dried up, his ruse fell apart. Madoff made headlines, but he was far from the only bad actor exposed by the downturn. In 2009, more than 150 Ponzi schemes imploded, nearly four times the number of cases in 2008. 

Another proof point: No one questioned the booming housing market until it collapsed. As interest rates rose, adjustable-rate mortgage payments spiked, defaults surged and overleveraged financial institutions began to falter. The downturn prompted a wave of scrutiny from investors, regulators and the public. Internal and government investigations uncovered the widespread mortgage fraud hidden by prosperity. 

Financial downturns can also spawn more internal fraud as employees experience greater financial pressure and potentially less oversight due to layoffs or budget cuts. 

Economic pressure is mounting right now. Morgan Stanley forecasts weakened global growth through 2026, as companies contend with tariffs and geopolitical tensions. Many businesses face increasing operational costs on top of worries about weakening consumer demand and unpredictable supply chains. Forensic accountants could soon be facing an influx of audits and investigations.

Meeting demand without adding headcount

Many firms lack the resources to efficiently manage a surge in demand. Investing in force multipliers now will prepare accountants for the inevitable ups and downs of the economic cycle. 

Artificial intelligence removes much of the manual burden associated with financial investigations. Verified financial intelligence (VFI) software accelerates data preparation by extracting information from the wide variety of financial document types, then consolidating and reconciling it. These tools enable financial analysts to prepare a complete financial history in a fraction of the time required for manual processes that rely on sampling. 

While sampling carries the risk of missing critical evidence, full population analysis reveals insights that might otherwise be overlooked and provides greater confidence in the findings. AI-powered platforms flag inconsistencies, missing information, anomalous activity and suspicious transaction patterns. Teams can spend their time on investigation rather than discovery.

VFI platforms do not determine intent or make judgments about criminal behavior. These tools surface objective, comprehensive financial data so forensic accountants can make informed, evidence-based assessments.

With automated tools, accounting teams can expand service capacity, improve investigation quality and enhance credibility without adding headcount. The expedited delivery of concrete evidence empowers clients to act quickly to stem losses and pursue resolutions. 

Preparing for an economic downturn

Economic downturns don’t just expose fraud. They also prompt bankruptcies, litigation and contract disputes, creating additional demand for forensic accounting services. AI and automation can also support these use cases.  

Even if a downturn doesn’t happen in the next year, the science of economics indicates a slump is inevitable. Forensic accounting firms must be ready to manage a flood of requests. Now is the time to augment the workforce with new tools.