Colossum Kraljevo

According to the ACFE’s 2020 Report to the Nations, 35% of reported fraud cases arise in organizations that lack internal controls. A corporate culture prioritizing short-term gains over ethical practices can create an environment where employees feel compelled to achieve results at any cost. Performance metrics focused solely on revenue growth, without regard for ethical considerations, exacerbate the issue. In such settings, the fear of job loss can lead individuals to rationalize fraudulent actions as necessary for survival.

Fraud rationalization is a psychological process that individuals go through to justify their dishonest actions. It’s a critical component in the fraud triangle, alongside pressure and opportunity, which explains why individuals commit fraud. Rationalization allows individuals to reconcile their behavior with their personal code of ethics, often viewing the fraudulent act as justifiable within certain circumstances. This mental gymnastics can be complex, as it involves self-deception and moral disengagement from the act of fraud itself. Fraud remains a significant concern for businesses and organizations worldwide, costing billions annually. Understanding the factors that lead individuals to commit fraud is essential for developing effective prevention strategies.

This narrative construction under duress is not merely a conscious effort to justify the unjustifiable; it is a subconscious survival mechanism that kicks in when one’s ethical boundaries are threatened by external pressures. By addressing the underlying causes of rationalization, such as unfair compensation or unrealistic expectations, we can mitigate the occurrence of fraud and encourage a culture of honesty and integrity. Individuals under significant pressure are more likely to rationalize unethical actions.

Rationalization: Justifying the Means: The Psychology Behind Fraud Rationalization

Enables people to maintain their code of ethics and avoid guilt or self-condemnation. Regulatory frameworks, such as the Foreign Corrupt Practices Act (FCPA), play a role in deterring fraud by imposing anti-bribery and accounting provisions. However, loopholes in compliance can be exploited, especially by multinational corporations operating across jurisdictions with varying regulatory standards. These disparities highlight the need for a harmonized global compliance approach to ensure consistent enforcement of anti-fraud measures. External audits are another line of defense against fraud, but their effectiveness can be compromised if auditors fail to maintain independence or exercise due diligence.

The Roles Of Internal And External Audit

This pressure can expose weaknesses in internal controls, creating opportunities for fraud that might not have been apparent in more stable circumstances. Poor accounting policies may provide an opportunity for employees to manipulate numbers. 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.

Outsourcing of functions and processes will likely decrease the sense of employee ownership over these processes and related controls. COSO recognizes the unique risks created when organizational activities are outsourced to a service provider and explicitly discusses potential responses to such risks throughout the framework. COSO also points out under Principle 3 the importance of the board of directors to consider OSPs when establishing authority structures and reviewing potential conflicts of interest. These and other measures discussed in COSO with respect to OSPs should reduce the risk of invoking responsibility-driven rationalizations.

• According to a recent report by PricewaterhouseCoopers, one in three organizations is a victim of fraud within a one-year period.
• Rationalization is known to be the wild card of the Fraud Triangle because it factors in emotional challenges, as well as the ability to manipulate others while operating in a false reality.
• Schneider Downs Business Consulting delivers sophisticated consulting services to meet the complex needs of today’s business environment.
• Insufficient or Inadequate training; • Lack knowledge of fraud schemes; and • Undue trust in management.
• There are some legal protections for whistleblowers in some states and some industries.

Control Activities

Individuals may convince themselves their actions are justified due to perceived inequities, such as feeling undervalued compared to peers. For example, an employee might rationalize embezzlement by arguing that they deserve more for their contributions, especially if they view executive compensation as disproportionately high. The Anti-Fraud Collaboration reported in 2014 that many employees are hesitant to report wrongdoing internally using their organization’s reporting process.

Why you feel stuck — and how to get motivated

This descent is akin to a slippery slope, where each step may appear harmless or justifiable when viewed in isolation, yet collectively, they form a trajectory towards major fraud. The journey along this slope is typically marked by a series of rationalizations, where individuals convince themselves that their actions are acceptable under the circumstances. This rationalization process is a psychological defense mechanism that allows individuals to maintain a self-image of integrity while engaging in unethical behavior. In the intricate dance of the human psyche, stress often leads the way, guiding our justifications and influencing our moral compass.

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. This article’s use of external links may not follow Wikipedia’s policies or guidelines. You may improve this article, discuss the issue on the talk page, or create a new article, as appropriate. The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. If you are on a personal connection, like at home, you can run an anti-virus scan on your device to make sure it is not infected with malware. Moral flexibility is a multifaceted concept that plays a significant role in the rationalization of fraud.

• The 2014 biannual survey by the Association of Certified Fraud Examiners (ACFE) reports that the most common method through which occupational fraud and abuse is revealed (40%) is tips.
• Because of my early fraud research in business, many have asked me if I was the person who first developed this triangle.
• However, there may also be work-related pressures, such as high demands by supervisors regarding meeting financial targets or performance-related bonuses.
• Surprisingly, none of the examples of potential fraud rationalizations in COSO’s Integrated Framework include anything related to the first two items above.
• The fraud triangle represents the factors that go into a person’s decision to commit fraud in the workplace.
• However, as the pressure to perform continues, the alterations become more significant, leading to outright financial statement fraud.

For example, a maintenance worker may realize that there are no controls over checking out and returning tools; this is an opportunity for theft. Generally, the opportunity for fraud increases when a business has poor internal controls. While understanding potential rationalizations is important, it is just a first step in designing effective antifraud programs. The FERF report lists a number of important aspects of an effective ethical culture that strengthen efforts to avoid rationalization of improper behavior. These include useful ethics training tailored to the organization, annual surveys of rationalizing fraud employee attitudes, and effective whistleblowing programs. It should contain real-world examples of the negative consequences of unethical behavior, be based on the organization’s code of ethics, and include true-to-life applications.

It is a process that underscores the importance of vigilance and integrity at every step, highlighting the need for strong ethical guidelines and a culture that promotes accountability. Once a minor fraud is committed without consequence, it sets a precedent for future behavior, potentially leading to more significant fraudulent activities. Explore how pressure, opportunity, and rationalization interact to influence fraudulent behavior and strategies to mitigate these risks. If administered properly, whistleblower or helpline programs are extremely important in detecting and deterring unethical behavior in an organization. The 2014 biannual survey by the Association of Certified Fraud Examiners (ACFE) reports that the most common method through which occupational fraud and abuse is revealed (40%) is tips.

Schneider Downs is a Top 60 independent Certified Public Accounting (CPA) firm providing accounting, tax, audit and consulting services to public and private companies, not-for-profit organizations and global companies. We also offer risk advisory, transaction advisory, digital consulting, wealth management, retirement plan solutions and investment banking services. For instance, in some cultures, the concept of ‘guanxi’ in China or ‘wasta’ in the Middle East plays a pivotal role in business dealings. These terms refer to the use of connections and relationships to facilitate business transactions. While this practice is considered a norm and even a necessity in these regions, it might be viewed as nepotism or corruption in Western societies.

Addressing the Fraud Triangle: Pressure, Opportunity, Rationalization

Stress acts as a powerful force in the rationalization process, shaping our justifications and blurring the lines between right and wrong. It is a silent puppeteer, pulling strings in the shadows, often unnoticed, yet profoundly influential in the theater of human decision-making. Understanding the role of stress in rationalization is crucial for developing strategies to mitigate its impact and foster a culture of ethical integrity. An individual may be spiteful towards their manager or employer and believe that committing fraud is a way of getting payback. Personal incentives may include wanting to earn more money, the need to pay personal bills, a gambling addiction, etc.

If you ask people whether they think stealing is wrong, most of them would answer yes. And yet, in 2013, organizations all over the world lost an estimated total of $3.7 trillion to fraud. Kelly Richmond Pope explains how the fraud triangle, (developed by criminologist Donald Cressey) can help us understand how seemingly good people can make unethical decisions in their daily lives.