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.

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.

Post-Fraud Justifications

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.

Rationalization: Justifying Unethical Behavior

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.

Opportunity

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.

• The “opportunity” element of the fraud triangle refers to the circumstances that allow fraud to occur.
• Patrick Kuhse, who stole millions of dollars from the state of Oklahoma through fraudulent commissions in the early 1990s, rationalized that no one would be hurt much since Oklahoma has millions of taxpayers.
• But financial pressure and rationalization closely involve individuals’ ethical framework and organizational culture, and those are much more difficult to influence overtly and directly.
• Fraud remains a significant concern for businesses and organizations worldwide, costing billions annually.
• Individuals under significant pressure are more likely to rationalize unethical actions.

Why Is Fraud Committed?

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 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.

Money Laundering in Environmental Crimes: The Relation of Money Laundering in Environmental Crimes Trade and Examples

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.

• Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes.
• By imposing stronger internal controls and processes, companies can take specific, visible action to reduce the risk of opportunity.
• Next, to address the rationalization aspect, it is important for companies to create a corporate culture that truly values employees, sets proper ethical codes of conduct, and insists on accountability.
• The Financial Industry Regulatory Authority (FINRA) stresses the need for strong cybersecurity protocols, including multi-factor authentication and encryption, to safeguard data integrity.

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.

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.

Control Activities

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 organization finds themselves in a situation of serious ethical and legal consequences.

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 rationalizing fraud fraudster, who explains how he ended up in a West Virginia prison.

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.