The concept of “Rationalisation” is familiar to students of fraud. According to Donald Cressey’s famous “Fraud Triangle”, people are able to commit fraud when three factors are present; a perceived need for money or personal advantage, a perceived fraudulent opportunity to obtain it, and an ability to rationalize the fraudulent actions. Traditionally we spend most effort designing controls that reduce fraud opportunities. We also pay some attention to the need factor, by designing incentive systems that align employees interests with those of the organization, and by screening employees before hiring. But what about the third side? Perhaps we do not do enough to counter the human tendency to rationalize inappropriate or unethical behavior.

A question of perception

Our decision to commit fraud, or to refrain, is determined by our perceptions. The opportunity we see may be real or illusory, and the probability of detection and punishment may be higher or lower than we imagine. The need we feel may stem from a real crisis, financial or otherwise, or from an unsatisfactory comparison of our situation relative to those around us. And finally rationalizations are pure perception. We create a convenient perception, even distort reality, in order to fit our requirements!

The concept of “Rationalisation” is familiar to students of fraud. According to Donald Cressey’s famous “Fraud Triangle”, people are able to commit fraud when three factors are present; a perceived need for money or personal advantage, a perceived fraudulent opportunity to obtain it, and an ability to rationalize the fraudulent actions. Traditionally we spend most effort designing controls that reduce fraud opportunities. We also pay some attention to the need factor, by designing incentive systems that align employees interests with those of the organization, and by screening employees before hiring. But what about the third side? Perhaps we do not do enough to counter the human tendency to rationalize inappropriate or unethical behavior.

Analyzing Rationalizations

The third side of the triangle has received the least amount of attention. Can an organization take proactive measures that reduce employees’ tendency to rationalize inappropriate behavior? To answer the question, we attempted to categorize common rationalizations used by fraudsters. In the figure below, the vertical line represents the individual dimension. To what extent is the individual consciously breaking the rules? The horizontal line represents the perpetrator’s perception of his social environment. Is the organization lenient towards rule-breakers, or are the rules strictly enforced?

Four Categories of Rationalization – Taken from the book “The Anatomy of Fraud and Corruption” (Brytting, Minogue, Morino). Reprinted with the permission of Gower Publishing.

Detatched

In the first quadrant, ‘Detached‘, the subject deliberately violates the rules in an environment where rule breaking is not tolerated. The rule-breaker perceives the situation as so exceptional either due to force majeure, or implying a right of self-defence, or saving oneself or one’s employer from a financial crisis, that they can ‘detach’ themselves from the norm altogether. A person with insurmountable debts to pay, for example, might find fraud justifiable. Similar is the situation in which an individual regards himself as so important, or so special that he is above the moral standards that apply to others. They are detached from the official norms by virtue of their own perceived superiority. We also find it in the career criminal who has no intention of following the rules.

Decadent

The second quadrant, ‘Decadent’, describes a situation in which the fraudster see rules being broken all around them, and are able to use that as an excuse for doing the same. They know what the rules are, and realize that they are about to do something in violation but doubt whether anyone will care, or stop them; they perceive the environment as corrupt.

Devoid

In the third quadrant the perpetrator of a fraudulent or corrupt act does not perceive that their act is a violation of valid rules. Similar to the second quadrant, the fraudster sees rules being broken by others, but they also perceive that these others seem to be devoid of any guilt or shame at all, and the rule book devoid of relevance. The fraudster in this category is just going along with the crowd; it seems to be the normal thing to do. “I just do what they tell me to do”.

Denial

Finally, the fourth quadrant describes a situation in which the perpetrators are in a state of ‘Denial’: they conceal their actions and know that others will not approve of their actions if they are detected, but they have created rationalizations that trivialize their fraud. The employee borrows from the cash box, telling himself he will make good later. He is not fully aware that the rationalization is a lie, that he will not return the money for instance.

Changing Names

This suggests an approach to fraud prevention. Rationalization is about changing names. As long as the tempting opportunity comes with a label attached calling it ‘fraud’ or ‘corruption’, it will be condemned. Fraudsters change the label to something more acceptable or trivial. If we can raise employee awareness about what constitutes fraud, we can reduce the availability of the unconscious or subconscious rationalizations in the “Devoid” and “Denial” quadrants. And, if we can eliminate the misperception that the organization tolerates misbehaviour, we can reduce the availability of “Decadent” and again the “Devoid” rationalizations. Through employee training and other forms of internal communication we can expose rationalizations for what they are and render them ineffective. And most people, no longer able to rationalize fraudulent actions, will instead refrain.

The remaining hard cases

Of course we are left with the quadrant where fraudsters have detached themselves from the need to follow the rules. The narcissists, career criminals and desperate cases are perhaps beyond the reach of awareness training. But if we raise awareness throughout the organization, these few individuals may be easier to isolate and address through other means.

Conclusion

The persistence of fraud as a significant cost for organizations of every kind and around the world suggests both that fraud is a common occurrence and that prevention efforts are inadequate. While it may be impossible to prevent fraud completely, we believe that organizations could greatly improve their success by concentrating on all three sides of the fraud triangle. The importance of effective controls to reduce fraud opportunities is already well understood. Management and incentive systems should be designed with care, to avoid creating unreasonable pressure. And fraud awareness programs are required to deflate rationalizations by increasing employees’ understanding of appropriate behaviour and ensuring that they maintain an accurate perception of the organization’s lack of tolerance for fraud.

A longer version of this article features in the Feb/Mar 2011 issue of Fraud Intelligence (www.informaprofessional.com/fi).