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.
- It may not be possible to address all pressures on employees, especially if the pressure is from external sources.
- We also offer risk advisory, transaction advisory, digital consulting, wealth management, retirement plan solutions and investment banking services.
- Without appropriate and robust processes and controls, the operations of the company or organizations may not be run, causing various losses to the company such as operational, reputational, and financial losses.
- However, loopholes in compliance can be exploited, especially by multinational corporations operating across jurisdictions with varying regulatory standards.
- The executive director of the organization stated that the fraud prevented the organization from assisting nearly 100 families from going homeless.
- Getting caught committing fraud to cover up their financial problems is just as bad as the financial problems themselves, so their method must be foolproof.
A Rationalization is a Secret
Credit is the ability to borrow money or access goods or services with the understanding that you… So she returned to school in 2002 to earn a PhD in accounting from the University of Wisconsin-Madison, previously having completed a Master of Management in Marketing from J.L. On this day, the Queen’s School of Business accounting professor is on the telephone with a fraudster, who explains how he ended up in a West Virginia prison.
This disparity in perception shows how cultural context can blur the lines of ethical conduct. They may be motivated to commit fraud at the workplace to fulfill their financial needs and desires or they may be provided with an opportunity which they avail themselves and gain personal benefits. Ethics training should include motivation for everyone in the organization, as well as suppliers, to utilize the helpline when warranted. It was then revealed that Mr. McManus had embezzled around $108,000 over 18 months by padding his paychecks and used the organization’s credit card for personal expenses. He rationalized carrying out the fraudulent acts by convincing himself that he deserved the extra money due to working seven days a week and never taking vacation days.
- But this rule will only reinforce the existing focus on short-term financial goals and targets.
- At other times, pressure arises from problems on the job; unrealistic performance targets may provide the motive to perpetrate fraud.
- And yet, in 2013, organizations all over the world lost an estimated total of $3.7 trillion to fraud.
- Pressure sometimes involves personal situations that create a demand for more money; such situations might include vices like drug use or gambling or merely life events like a spouse losing a job.
- Refers to upper management and the board of directors’ commitment to being ethical, showing integrity, and being honest – a poor tone at the top results in a company that is more susceptible to fraud.
Ethical Nudging
Ethical boundaries are often perceived as universal, steadfast principles that guide moral conduct. However, the reality is that these boundaries are significantly influenced by cultural norms and values. In the context of fraud rationalization, individuals may justify their unethical actions by aligning them with culturally accepted practices or beliefs.
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.
The opportunity and motivation sides of the fraud triangle are a little more objective than rationalization. We have a decent chance to observe the circumstances that might lead someone to commit a fraud, such as weak internal financial controls (opportunity) or knowing that an employee is having rationalizing fraud intense money problems (motivation). We can improve our knowledge of opportunity through better auditing procedures, and we can learn more about our employee by regular internal reviews.
The Role of Stress in 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.
This latter situation can trigger expectations for a better lifestyle, perhaps involving a sports car, foreign travel, or a larger house. Todd is a Principal at SVA Certified Public Accountants and works with closely-held businesses in the manufacturing, distribution, and construction industries. His specialties include offering assurance services (audits, reviews, compilations, forecasts, and projections), mergers and acquisition services, fraud and litigation support services, and outsourced CFO services. Schneider Downs Business Consulting delivers sophisticated consulting services to meet the complex needs of today’s business environment.
FINANCIAL PRESSURE
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.
The reasons for hesitating are because they have a significant fear of retaliation or because they believe that senior management is involved or won’t take any action to stop unethical behavior. There are some legal protections for whistleblowers in some states and some industries. Understanding the psychological profiles of individuals who rationalize fraud is crucial in the realm of forensic psychology and criminology. These profiles are not monolithic; they vary widely, encompassing a range of personalities from the seemingly honest to the overtly corrupt. The common thread among them is the cognitive dissonance they experience when their actions do not align with their self-perception or societal norms. These tactics are not justifications in the traditional sense but are psychological mechanisms that allow individuals to commit fraud without viewing themselves as “fraudsters.”
The Fraud Triangle, a concept used by auditors and investigators, identifies three elements—pressure, opportunity, and rationalization—that contribute to fraudulent behavior. By examining each component and their interactions, stakeholders can better anticipate risks and implement measures to mitigate them. Weak internal controls such as poor separation of duties, lack of supervision, and poor documentation of processes give rise to opportunities for fraud. When the preceding pressures are present, a person must also see an opportunity to commit fraud.
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.
Sharing it with others would risk exposing the perceptions underlying the rationalization and make it impossible to keep them. By the same token, the rationalization side of fraud is very difficult to detect and prevent. We recently received a call from a small business owner who had just discovered that a long time employee had been stealing from his business. The crafty scheme involved fictitious vendors and false invoices that resulted in checks being written to accounts belonging to the employee and his girlfriend. The thief (or thieves, as it turned out) was a trusted employee, of course, but rationalized taking the money so he could “support his family.” That is, support the family with luxury items, vacations, gadgets, and goodies.
She saw numerous rationalizations during her 20 years in the business world, where she worked as an auditor, controller, marketing manager and management consultant in Minneapolis, Chicago and the U.S. upper Midwest. Reviewing internal marketing reports, for example, she noticed huge bumps in sales figures towards year end, a tip-off that fat bonuses were being paid out. An additional issue that is needed for fraud to continue over a period of time is the ability of the perpetrator to rationalize the situation as being acceptable. For example, a person stealing from a company’s petty cash box might rationalize it as merely borrowing, with the intent of paying back the funds at a later date.
The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. In the evolving landscape of digital business, the empowerment of individuals over their personal… Her experiments show how people rationalize behaviour when they have opportunity and motive to act unethically.
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.
Rationalization can also arise from a belief that fraudulent acts are temporary or harmless. An accountant might justify manipulating financial statements as a short-term measure to improve the company’s financial position. This mindset is dangerous, as small infractions can escalate into significant fraud over time. Cognitive dissonance theory suggests individuals align their actions with their self-image, making it easier to rationalize unethical behavior when they perceive themselves as fundamentally honest or loyal to their organization. Finally, when rationalizing with a focus on the victim, the perpetrator shifts the blame to the victim and claims unjust treatment as an excuse, presenting his own actions as rightful retaliation or fair punishment. The goal of this article is to help gain better insight into the minds of fraudsters in order to fight fraud more effectively.
