Professional fraud, which can be defined as an intricate form of crime, has a significant impact on both developed and transition economies. It encompasses a wide range of deceptive activities committed with the intention of personal gain.
This article focuses on understanding the variation and categories of professional fraud, especially in the context of transition economies, where peculiar circumstances provide additional opportunities for fraudsters. It delves into the risks associated with professional fraud, emphasizing the need for comprehensive definitions and categories to combat this problem, while also shedding light on the unique challenges faced by transition economies.
Professional fraud is a type of fraud which is highly adaptable to technological advancements, thus constantly challenging authorities and businesses to stay vigilant. It can be classified in several ways: based on the victim, according to the perpetrator, or the scheme employed. Financial fraud against business entities is common, with financial statements often resulting in substantial financial losses. The evolution of technology and the business environment add fuel to the fire of its growing complexity, making companies more vaunrable to this internal fraud category. Transition economies, in particular, face heightened vulnerability due to their unique circumstances, which include normative, institutional, economic, and social changes. The prolonged transition period allows for great abuse of undefined functions and responsibilities.
Defining Professional Fraud
There are many definitions of financial fraud and numerous attempts at it, characterizing the term criminal act in the sense of economic crime in the economy. The term “fraud” is a broad term that covers a large number of crimes. Generally, it can be defined as various ways of human ingenuity used for the gain of some personal benefit. In the sense of professional financial fraud, it includes various deceptive practices, such as falsification or alteration of records, concealment or omission of transactions, fraudulent recording, theft, incorrect application of accounting procedures, and more. To systematically analyze professional fraud, this article relies on the Fraud Tree Model developed by the Association of Certified Fraud Examiners (ACFE), a widely accepted framework in academic and business circles.
The selection of the Fraud Tree Model is driven by two key reasons. Firstly, when it comes to defining categories and sub-categories embedded in financial fraud, the Fraud Tree Model has been proven to be the most referenced framework. Secondly, the model continues to be competent in adapting new categories and sub-categories of professional fraud, making it suitable for the ever-evolving landscape and complexity of this crime. The Fraud Tree Model classifies professional fraud into three main categories: corruption, misuse of funds, and fraud with financial reports. To effectively combat professional fraud, investigators must consider the distinct characteristics that differentiate each of these major categories from one another.
Transition economies refers to countries in the process of moving from a socialist or centrally planned economic system towards a market-oriented one. The transition from a socialist political system to a system with a market economy and dominance of private property cannot be achieved in a short period of time. This transition involves shifts in ownership structures, legal frameworks, economic policies, and more.
The challenges faced by these economies are diverse, ranging from political reforms to adapting to new market dynamics. Transition economies are particularly susceptible to professional fraud for several reasons such as: Legal and Institutional Transition; Economic Restructuring; Lack of Expertise; Political and Social Instability; etc. A way in which transition economies reduce their vulnerability to professional financial fraud is through the help of international aid and support. They often rely on international organizations and donor countries in order to ease the complexity of their transition from socialist to market oriented. International aid and support organizations provide these transition economies with much needed capacity building, financial aid, and technical assistance.
Consequences of Professional Fraud
Professional fraud is a complex and widespread phenomenon that requires strict accounting policies to be applied, monitoring, and audits for resolution. Its occurrence in business entities often results in significant economic losses. Statistics from the Association of Certified Fraud Examiners show that, on average, businesses suffer economic losses equal to five percent of their total revenue each year due to professional fraud.
These huge economic losses distort the value that businesses aim to deliver to investors, employees, consumers, and suppliers. Additionally, financial fraud disrupts supply chain relationships, giving some vendors an unfair comparative advantage, simultaneously causing potential layoffs due to economic hardship. It is also important to highlight the fact that, transition economies face higher losses from professional fraud compared to developed countries. The unique circumstances surrounding transition periods create an enabling environment for professional fraud, making it necessary to adopt drastic measures to mitigate the risks associated with this widespread type of crime.
The Impact on Investors, Employees and Suppliers
Investors are one of the key players in the economic growth of businesses and countries. Thus, the occurrence of professional financial fraud can significantly affect investors’ confidence in the entities they invest in, potentially leading to decreased investment and decreased economic growth. Understanding the effects of professional fraud on investors is important for economic stability in transition and developed economies alike.
Moreover, the occurrence of professional financial fraud can undermine the job security of employees. Economic losses due to fraud may lead to budgetary constraints, which commonly result layoffs or reduced compensation. The impact on employees could broaden to their overall well-being and job satisfaction, making it a concern for workforce stability in transition economies.
In the context of supply chains, financial fraud creates an uneven playing field, giving certain vendors an unfair competitive advantage. This not only hurts the subject-victim but also damages the entire supply chain, affecting the supplier’s revenue and relationships. Transition economies must address this issue to ensure the integrity of their business environment.
Professional financial fraud is a multifaced challenge that affects businesses, the economy as well as individuals. It requires detailed definitions, classifications, and preventative measures to deal with its ever-growing complexity and adaptability. Transition economies, with their