Rationalization: Justifying the Means: The Psychology Behind Fraud Rationalization

Breaking the Cycle reiterates the widely described importance of a positive tone at the top of the organization in mitigating financial pressure. The report describes numerous historical examples where a pressured corporate culture brought ruin. In these cases, achieving short-term financial performance targets for bonus purposes was given far higher priority by senior executives than was acting ethically and considering the sustainability of the enterprise.

At other times, pressure arises from problems on the job; unrealistic performance targets may provide the motive to perpetrate fraud. For example, Sullivan defended the capitalization of line expenses to the WorldCom board with the matching principle. Executives should be mindful about such doublespeak, and board members should follow up with probing questions if they spot it in senior management’s presentations. This rationalization technique—and the next—is more intuitive and more familiar to CPAs.

International Fraud Awareness Week, or Fraud Week, was established by the Association of Certified Fraud Examiners (ACFE) in 2000 as a dedicated time to raise awareness about fraud. The week-long campaign encourages business leaders and employees to proactively take steps to minimize the impact of fraud by promoting anti-fraud awareness and education. Pamela also holds out hope that more awareness of the “fraud triangle” will help organizations and auditors—and, ultimately, the general public—detect fraud.

• It shapes the way individuals perceive and rationalize their actions, including those that fall into the gray area of ethics.
• There may be also the possibility that good people may fall into the bad company of the criminals who make them commit the frauds in the working places or the companies where these good people are employed.
• These disparities highlight the need for a harmonized global compliance approach to ensure consistent enforcement of anti-fraud measures.
• “Pressure” refers to the motivation of the employee – that is, what is driving him or her to commit fraud.
• For example, economic downturns increase pressure on organizations, heightening the temptation to manipulate financial results.

Opportunity

This mental gymnastics is not just about alleviating guilt; it’s a complex interplay of cognitive dissonance, self-concept, and social pressures. The fraudster, having crossed the Rubicon, seeks to align their actions with an acceptable self-image, often reconstructing the narrative of events to paint themselves in a more favorable light. This rationalization can take many forms, from denial of the harm caused to the outright belief that the fraudulent act was a form of justice. Even if the company operates exclusively in the United States, culture outside an entity matters as much as culture inside. While many organizations focus their attention on developing an appropriate code of conduct, this is only one measure needed for an effective control environment.

This rationalization process is not merely a personal cognitive dissonance resolution but is deeply rooted in the societal framework that one operates within. A culture that implicitly condones unethical behavior, through either tacit approval or lack of consequences, fosters an environment where rationalization thrives. Companies with strong ethical guidelines, such as a well-defined code of conduct and regular ethics training, can mitigate this risk by reinforcing the importance of integrity and transparency.

Rationalizing $140,000 – Fraudsters Don’t Consider Bad Outcomes

The executive director of the organization stated that the fraud prevented the organization from assisting nearly 100 families from going homeless. Accounting professionals view the slippery slope through the lens of incrementalism, where small deviations from ethical standards can become normalized within an organization. This normalization can create an environment where fraud becomes more likely to occur. Compliance with laws such as the Sarbanes-Oxley Act demands significant resources, which can strain smaller firms. The pressure to comply without adequate support may lead some to cut corners, increasing the risk of fraudulent reporting.

He was hired into a high-level management position with an organizational culture different from his previous experience. A person may be liable for significant liabilities, such as the cost of supporting sick relatives, college loans, car loans, and so forth. However, there may only be a perceived level of pressure, such as earning comparatively less than one’s friends.

Rationalization: Justifying the Means: The Psychology Behind Fraud Rationalization

The stress of potential job loss and public humiliation may drive them to rationalize that “everyone does it” or that it’s a temporary measure to “keep the company afloat.” Understanding the psychology behind fraud rationalization is crucial for both preventing and detecting fraudulent activities. By recognizing the signs and thought patterns that precede such behavior, organizations can implement stronger controls and foster an ethical culture that discourages rationalization and, by extension, fraud itself. The interplay between pressure, opportunity, and rationalization creates a complex web leading to fraud. These components do not operate in isolation but influence and amplify one another, often resulting in financial misconduct. For example, economic downturns increase pressure on organizations, heightening the temptation to manipulate financial results.

FINANCIAL PRESSURE

There is no perfect answer here because there will always be people who justify fraud under any conditions. Fraud usually occurs in companies, where there is a weak system of internal controls and poor security measures are implemented. Fraudsters exploit the weak internal control system and commit the activities to gain benefits.

Each of these profiles demonstrates that the path to rationalizing fraud is complex and personal. It’s a psychological journey where the destination is the same—fraud—but the routes taken are diverse and nuanced. By examining these profiles, we can better understand the motivations behind fraudulent behavior and develop more effective preventative measures. The slippery slope to major fraud is paved with small steps, each justified and rationalized away until the individual or rationalizing fraud organization finds themselves in a situation of serious ethical and legal consequences.

The most widely accepted explanation of why some people commit fraud involves what is known as the Fraud Triangle. Multi-award-winning investigative journalist Dan McCrum overcame many roadblocks while investigating the Wirecard fraud scandal for the Financial Times. One of the creators of the venerable Fraud Triangle describes its history, rationale and uses for preventing, deterring, detecting and investigating fraud . Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Therefore, this information should not be relied upon when coordinated with individual professional advice. If you have questions or concerns about fraud in your organization, contact Tom Pratt at email protected or Brian Webster at email protected.

• Gaining an understanding of the Fraud Triangle can help management, accountants and counsel develop proper internal controls to help combat fraud in the workplace.
• These and other measures discussed in COSO with respect to OSPs should reduce the risk of invoking responsibility-driven rationalizations.
• Executives should be mindful about such doublespeak, and board members should follow up with probing questions if they spot it in senior management’s presentations.
• To learn how people rationalize unethical behaviour, Pamela runs experiments with students in networked computer labs.

Employees accounted for nearly half of all tips that led to the discovery of fraud,” according to the report. By understanding the psychology behind rationalization and implementing these strategies, organizations can work towards breaking the cycle of rationalization and promoting a culture of honesty and integrity. It’s a multifaceted approach that requires commitment from all levels of an organization and a willingness to look beyond short-term gains for the long-term health of the company and society at large. In the context of fraud, these biases can lead individuals to overlook or dismiss the ethical implications of their actions. For instance, an employee who embezzles funds from their company may experience cognitive dissonance because their action conflicts with their self-image as a loyal and honest person. To alleviate the discomfort, they might rationalize the dishonest behavior by thinking they are underpaid and deserve more, or that the company makes enough profit and won’t suffer from the loss.

It is influenced by a variety of psychological factors and social pressures, and its manifestations can range from minor ethical breaches to major fraudulent activities. Understanding these dynamics is crucial for both preventing fraud and fostering an ethical culture within organizations. Establishing robust internal controls is the responsibility of the Board of Directors and Senior Management of the company.

Management’s actual behavior and its reactions to deviations from the code of conduct send a much stronger message to employees than the content of the code itself. Recall that Enron produced a 64-page code of ethics, signed by every employee, as well as a training video on integrity. That code was no more than a piece of paper; management’s behavior—greed, corruption, and extreme hubris—created a toxic tone at the top and a culture tailor-made for fraud.