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How Fraud Offenders Rationalize Financial Crime

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HOW FRAUD OFFENDERS RATIONALIZE
FINANCIAL CRIME
Iva Charlopova, Paul Andon, and Clinton Free
INTRODUCTION
Fraud and related nancial crime is a pervasive organizational problem,
placing a substantial impost on business activity. The Association of Certied
Fraud Examiners (ACFE) (2018) estimates that globally, organizations lose
about 5 percent of their revenue annually to fraud. Fraud also has serious
implications for employee morale, business relations, reputation and brand
strength, relations with regulators, and share price (Couch 2017;Pricewa-
terhouseCoopers 2018). Furthermore, fraud appears to be on the rise
(PricewaterhouseCoopers 2018), particularly in the area of cybercrime. Pol-
icymakers, legislators, and organizations continue to struggle to mitigate the
prevalence of nancial crime, highlighting the need for better access to
disparate extant knowledge to inform best practice in the ght against
nancial crime.
One area lacking consolidated knowledge is how offenders rationalize
their behavior. Of the three key factors prescribed for understanding nancial
crime opportunity, incentive/pressure, and rationalization (Cressey 1953),
commonly known as the fraud triangle2rationalization remains a
relative mystery(Murphy 2012, p. 242) to both scholars and practitioners.
The lack of coherent knowledge about rationalization is perhaps most starkly
reected in the absence of insight and direct guidance provided by auditing
and anti-fraud standards on how rationalization should be understood or
approached in preventing and detecting fraud. Synthesized knowledge about
rationalization from scholarly work is also lacking. The aim of this chapter is
39
to address such issues by reviewing extant research on rationalization. This
chapter also offers reections on the current state of this research agenda in
order to direct research effort to underdeveloped aspects of important ele-
ments in nancial crime.
The rest of this chapter has the following structure. The rst section
provides a brief background of the concept of rationalization. The next
section offers a review and synthesis of current rationalization research and
identies key themes, followed by a discussion of future research oppor-
tunities and discussion questions. The nal section offers concluding
remarks.
RATIONALIZATION: BACKGROUND AND
ACCEPTED DEFINITIONS
Rationalization is a complex phenomenon, invoked in various disciplines. For
example, within cognitive psychology, rationalization is often discussed in
terms of excuse-making and ego-defense mechanisms. Conceptions of
rationalization are also central to social psychological exploration of
impression management and decision-making heuristics, as well as in the
theory of neutralization (Hall and Holmes 2008). In criminology, a range of
theoretical approaches explore the concept. Despite straddling different
domains, common features of rationalization persist including:
self-serving explanations;
a focus on making behavior appear more justiable to self and others;
degrees of self-deception;
manifestation in both the conscious and unconscious mind;
reduced feelings of behavioral responsibility and/or anxiety; and
diminished salience of moral, legal, and/or ethical concerns.
These features highlight the connection between rationalization and self-
narrative in ones thought processes and/or decision-making. Narrative psy-
chology argues that narratives play an important role in making sense of
40 Iva Charlopova et al.
ones situation, experiences, and actions. When viewed from the perspective
of a narrative, rationalization is seen as a exible mode of thought, where
ideas and experiences can be ltered to produce an acceptable and coherent
connection between how people see themselves and what they do, lling gaps
and smoothing out contradictions to maintain a pro-social sense of self. This
broad characterization of rationalization is evident in the following review of
extant research on rationalization.
REVIEW APPROACH
Identifying the relevant literature involved a four-stepapproach.Therst
step was to identify broader theories in criminology and social psychology
relevant to a normative understanding of rationalization. The next step
involved identifying the rationalization research in accounting from a
search of the top 20 accounting journals between 2000 and 2018 with
each candidate individually reviewed for relevance. Using relevant pub-
lisher and other databases (e.g., Emerald Publishing, Elsevier, ENSCO
Publishing, and ProQuest), a search of these journals for the presence of
the word rationalizationin paper keywords and abstract text occurred.
Third, the bibliographies of identied papers were reviewed to identify
further work of potential relevance, including those published in other
disciplines (e.g., criminology, psychology, and sociology). A search of
journals outside the accounting literature identied through this approach
ensued to identify other relevant papers. A nal step involved identifying
the more frequent contributors on rationalization in nancial crime and
searching for any of their relevant papers that may have been otherwise
missed.
To initially organize the collected literature, reading each papers
abstract took place to discern key themes that could sensibly organize the
review. Once categorized, papers were then read for deeper understanding
of their content, and to conrm their initial classication. This process
permitted multiple classications when warranted. This process resulted in
ve key themes: (1) theories of rationalization; (2) how rationalization
sustains nancial crime; (3) types of rationalization; (4) factors inuencing
rationalization; and (5) critical perspectives on rationalization.
How Fraud Offenders Rationalize Financial Crime 41
RATIONALIZATION: KEY THEMES
This section discusses various themes involving rationalization.
Theories of Rationalization
Four broad theories, variously grounded in social psychology and crimi-
nology, have been introduced over the past 75 years to characterize the
nexus between rationalization and a range of illegitimate behavior,
including nancial crime. The rst such theory was Sutherlandstheoryof
differential association (Sutherland 1949,Sutherland and Cressey 1970,
Donegan and Ganon 2008). Shifting the focus away from personal and
social pathologies (e.g., poverty, poor upbringing, or emotional distur-
bances), Sutherland asserted that criminal behavior is learned through
interactions with deviant groups. Through these associations, individuals
learn illegitimate motives and attitudes, and associated rationalizations.
Several studies support the relevance of this theory for understanding
rationalization in nancial crime (e.g., Piquero, Tibbetts, and Blankenship
2005;Lokanan, 2018a). For example, Lokanan reveals that individuals
involved in three major nancial crime events (Livent, WorldCom, and
Enron) were able to rationalize their misconduct through associations with
criminal colleagues, with their level of involvement depending on the fre-
quency and duration of the contact with the criminalindividuals
(Lokanan 2018a,p.87).
Almost a decade later, sociologists Gresham Sykes and David Matza
sought to build on Sutherlands work by focusing on the content of what was
learned through processes of differential association. Sykes and Matza pro-
posed that individuals learn neutralizations (techniques to self-justify), which
they use to validate acts otherwise perceived to be incongruent with their
moral beliefs and internalized norms (Sykes and Matza 1957;Minor 1981;
Thurman 1984;Hollinger 1991). Sykes and Matza initially identied ve
techniques of neutralization: denial of responsibility, denial of injury, denial
of victim, condemnation of the condemner, and appeal to higher loyalties.
Other studies conrm the applicability of neutralization to nancial crime
(Benson 1985;Hollinger 1991;Gottschalk and Smith 2011;Stadler and
Benson 2012;Dellaportas 2013). For example, Benson, who interviewed 30
42 Iva Charlopova et al.
white-collar offenders, reports that they used neutralization techniques that
varied according to the type of offense. For instance, fraud offenders were
more likely to deny their actions or shift blame, while embezzlers often
claimed to be subject to extraordinary circumstances that prompted
offending.
Developed around the same time as neutralization theory, cognitive
dissonance (Festinger 1957;Aronson 1968;Wicklund and Brehm 1976)
focuses on further theorizing the intention/purpose behind rationalization.
Cognitive dissonance theory explains this intention/purpose as a desire to
maintain consistency between ones actions and ones beliefs/attitudes.
When contradictions emerge, individuals feel dissonance/unease and seek
to reduce such feelings by changing their behavior, changing their relevant
belief/attitude, or rationalizing their behavior. In this context, ration-
alization is a powerful avenue for reconciling dissonant feelings, as changing
behaviors (particularly after the fact) and authentically altering beliefs can
be more difcult (Murphy and Dacin 2011). Although some observe that
research examining cognitive dissonance in nancial crime is scarce
(Trompeter, Carpenter, Jones, and Riley 2014), Hobson, Mayhew, and
Venkatachalam (2012) examine speech samples of CEOs during earnings
conference calls to analyze nonverbal vocal cues of cognitive dissonance
(e.g., tone of voice, facial expressions, body language, and gestures). Their
ndings suggest that vocal markers of dissonance relate to nancial state-
ment fraud, but those markers can be mollied when effective ration-
alizations are mobilized.
Finally, social psychologist Albert Bandura developed the cognitive
theory of moral disengagement (Bandura 1991,1999,Bandura, Barbar-
anelli, Caprara, and Pastorelli 1996). Like cognitive dissonance, this theory
focuses on disjunctures between actions and beliefs, but with an emphasis
on how morality mediates action. Bandura asserts that ones moral stan-
dards are upheld and regulated through internalized consequences,
primarily self-satisfaction and self-condemnation. However, these self-
regulatory mechanisms only operate if activated and can be disengaged
through certain psychosocial processes that allow individuals to reconcile
illegitimate behavior with their moral standards (Bandura 1991). Many of
these moral disengagement processes (moral justication, displacement
of responsibility, diffusion of responsibility, disregard or distortion of
consequences, and dehumanization) closely resemble the neutralization
How Fraud Offenders Rationalize Financial Crime 43
techniques mentioned earlier, although two additional techniques are
identied: euphemistic labeling and advantageous comparison (Ribeaud and
Eisner 2010). Few studies empirically explore aspects of moral disengage-
ment in the rationalization of nancial crime. An exception is Brown who
nds that managers involved in illegitimate earnings management practices
favorably compare/discount their own actions against others, afrming the
salience of advantageous comparison, and highlighting that public exposure
of egregious nancial reporting practices may actually allow others to
conclude that their own behavior is relatively appropriate by comparison
(Brown 2014,p.871).
In summary, these theories generally support the argument that nancial
crime should not be limited to understanding criminogenic tendencies.
Otherwise law-abiding individuals can engage in nancial crime where they
can maintain their pro-social self-image or deect feelings of guilt through
rationalization. However, interesting connections between these theories and
the rationalization of nancial crime remain underspecied. For example, the
literature contains differing views about the connection between neutraliza-
tion and rationalization. A comprehensive review of neutralization research
by Fritsche (2005) suggests that neutralization (occurring before an illegiti-
mate act) and rationalization (developed after an act has been committed) are
distinguishable through their timing. However, whether this distinction is
meaningful in the context of nancial crime is debatable (Trompeter, Car-
penter, Desai, Jones and Riley 2013;Trompeter et al. 2014), with other
research asserting that rationalizations can occur prospectively (to anticipate
guilty feelings) and retrospectively (to reduce negative feelings after the fact)
(Anand, Ashforth, and Joshi 2004;Budiman, Roan, and Callan 2013).
Similarly, the relation between attitudes and rationalization is relatively
opaque. Although attitudes/beliefs (as generalized perspectives on illegitimate
conduct) and rationalization (as a situated perception that can override
generalized attitudes) are distinguishable (Murphy and Dacin 2011), this
distinction requires further unpacking to determine how they interact and
inuence each other over time. For example, if attitude and rationalization
are correlated, fraud prevention methods would be even more important
because once an individual commits fraud, rationalization could serve to
strengthen an attitude favoring crime and enable the offender to continue to
offend (Murphy 2012).
44 Iva Charlopova et al.
How Rationalization Operates
Another important research perspective has been to develop more specic
knowledge on how rationalizations take effect. The two areas of focus are
articulating pathways through which rationalizations arise, and how
rationalizations can escalate offending.
On pathways to offending, Murphy and Dacin (2011) develop a tripartite
framework to describe psychological avenues through which otherwise law-
abiding individuals may engage in fraud. These pathways lack of awareness
(situational factors, such as authority gures or organizational climate, that
overwhelm ones moral sensibilities), intuition (gut decisionson the
acceptability of offending in the circumstances), and reasoning (cognitive
evaluation of offending risks and benets) variously highlight ration-
alization as an important conduit to sustaining fraud without violating ones
moral values. Similarly, Andon, Free, and Scard (2015) identify four path-
ways to fraud crisis responders, opportunity takers, opportunity seekers,
and deviance seekers differentiated by an individuals general and situa-
tional attitude toward legitimate/illegitimate means of achieving nancial
goals. These pathways illustrate that ethical individuals can become entan-
gled in nancial crime based on situational circumstances, and highlight the
complex conuence of contextual, situational, and attitudinal elements that
impact rationalization.
The second point of focus is how rationalization connects to escalated
offending. Ashforth and Anand (2003) describe a progression of events that
enables corruption to spread throughout an organization and become
embedded into everyday practices. For them, organizational responses to
corrupt acts (i.e., whether they are condemned, ignored, or valorized) affect
the cognitive dissonance experienced from the initial offense. Anand et al.
(2004) suggest that more permissive responses permit offenders to more
easily rationalize both retrospectively (easing guilt) and prospectively (fore-
stalling dissonance related to repeated corrupt acts). Zyglidopoulos and
Fleming (2008, p. 267) explain the movement from innocent bystander to
guilty perpetrator through a staged framework described as a continuum of
destructiveness.Initial offenders assume rationalizations they observe
around them or accept illegitimate acts that are either routine or unques-
tioned (Ashforth and Anand 2003). Unabated, such inuences have the
potential to create a vicious loop of escalating nancial crime and
How Fraud Offenders Rationalize Financial Crime 45
rationalization, introducing individuals to environments where increasingly
questionable behavior are seen as acceptable (Tenbrunsel and Messick 2004;
Zyglidopoulos and Fleming 2008;Reinstein and Taylor 2017). Similarly,
Suh, Sweeney, Linke, and Wall (2018) report how convicted nancial exec-
utives consistently described how their offending emerged incrementally such
that the exact point of legal transgression was unclear to them. Further,
rationalizations that overwhelm a sense of moral culpability can open
opportunity spaces for escalated offending over time (Zyglidopoulos,
Fleming, and Rothenberg 2009).
In summary, the psychological pathways to fraud describe situational
factors that inuence an offenders ability to rationalize criminal behavior as
moral and ethical. Rationalizations can also encourage the escalation and
organizational spread of fraud through exposing newcomers to situationally
accepted illegitimate activities. The frameworks presented also underscore
that rationalization is not only limited to individual and conscious choice but
can also be inuenced by shared circumstances and narratives that normalize
nancial crime. In short, incrementalism and normalization are important
elements to understanding rationalization, and raise major implications for
further understanding how to prevent the spread of fraud throughout an
organization.
Identified Rationalization Techniques
The literature contains a range of closely corresponding typologies and
classications of rationalization techniques (Cromwell and Thurman 2003;
Ashforth and Anand 2003;Anand et al. 2004;Geva 2006;Murphy and
Dacin 2011;Murphy 2012;Azarian and Alalehto 2014;Free 2015). These
classications build upon the earlier mentioned techniques of neutralization
(Sykes and Matza 1957) and moral disengagement (Bandura 1991). The most
commonly discussed rationalizations can be split into four categories: (1) shift
of responsibility (by referring to demands, pressures, or impositions
imposed), (2) impact of social interaction (reecting the impact of actions or
attitudes of other parties), (3) denial of consequences (negating or trivializing
offending impacts), and (4) a catch-all othercategory. Table 3.1 describes
these categories, which is not exhaustive.
46 Iva Charlopova et al.
Table 3.1. Explanation and Examples of the Major Techniques of Rationalization.
Category Rationalization Explanation Example
Shift of
responsibility
Displacement of responsibility Blame someone else or the effect of peer pressure, such as
when a subordinate obediently follows the requests of a
superior or acts as part of an offending team.
I was told to do it.”“I was just
part of a team that was doing it.
Denial of responsibility Perceive oneself as a victim of ones environment. The offender
feels that he or she has no other choice than to commit a crime,
due to circumstances outside of that persons control such as
gambling, addictions, or a family necessity.
I had no choice.
Impact of social
interaction
Advantageous comparison Compare otherwise reprehensible behavior to more severe
crimes, making the offenders act seem not so bad.
This is nothing compared to
Appeal to higher loyalties, moral
justication
Claim that the behavior has a higher social or moral purpose and
is not for ones own benet. This situation can include a
perception of acting to benet a group, ones family, the
company, or society as a whole.
Im protecting the company.
Condemning the condemners Blame the system for ones offending and shift the blame from
oneself to those who disapprove of their actions.
The system is corrupt.
Diffusion of responsibility Maintain that everybody does it, thereby denouncing ones
responsibility. This claim is common when a division of labor
exists with team members performing different parts of a task but
can also occur with group decision-making when each member
of the group contends that the group, as a collective, is
responsible for a poor decision (Tsang 2002).
Everyone else was doing it.
How Fraud Offenders Rationalize Financial Crime 47
Table 3.1. (Continued)
Category Rationalization Explanation Example
Denial of
consequences
Denial of injury Claim that the victim did not actually suffer any substantial harm. Im not hurting anyone.”“The
business can afford it.”“Ill pay
it back.
Denial of victim Argue that the victim deserves the consequences afforded to
them or that the offender is acting in retaliation to punish the
victim.
They had it coming.
Other Metaphor of the ledger (Anand
et al. 2004),
claim of entitlement (Benson
1985)
Claim a feeling of entitlement to engage in deviant acts because
of the time and effort one has dedicated in the job.
I deserved more money.
Postponement Delay the consideration of ones actions for the time being
(Cromwell and Thurman 2003).
Ill worry about it later.
Euphemistic labeling (Bandura
1991)
Describe an offense in favorable terms to disguise it as accept-
able or even respectable.
Earnings managementinstead
of manipulation(Geva 2006)or
aggressiveinstead of illegal
accounting practices (Ten-
brunsel and Messick 2004).
Note: This table describes and exemplies the most common rationalizations used by
offenders to justify immoral behavior.
Source: Adapted from Murphy (2012) and Free (2015).
48 Iva Charlopova et al.
Although some criticize the lack of a completemodel of all available
rationalization techniques (e.g., Kaptein and Van Helvoort 2018), Fritsche
(2002, p. 375) contends that variations in rationalization techniques are
theoretically unlimited because rationalizing is a exible cognitive and lin-
guistic device that can be adapted to a broad range of different situations.
Maruna and Copes (2005) further maintain that concentrating on under-
standing the purpose and function of rationalization is more important.
Factors Influencing Rationalization
Researchers have identied many individual differences and societal inu-
ences that affect an individuals capacity to rationalize. The following dis-
cussion involves the extant literature on each of these.
Individual Differences
Personality traits commonly connected to an individuals sense of culpability
in nancial crime include positive extroversion, disagreeableness, and
neuroticism (Alalehto 2003); overcondence (Schrand and Zechman 2012);
lack of self-control (Davidson, Dey, and Smith 2015); narcissism (Domino,
Wingreen, and Blanton 2015;Harrison, Summers, and Mennecke 2018;
Vousinas 2019); Machiavellianism (Murphy 2012;Harrison et al. 2018); and
psychopathy (Bailey 2015;Harrison et al. 2018). Perceived status can also
play a role in rationalization. Stadler and Benson (2012) nd that white-collar
offenders are generally less willing to accept a criminal label and express less
guilt than other criminals due to self-perceived status and professional
respectability. Willott, Grifn, and Torrance (2001) further show that
working-class white-collar offenders tend to blame themselves and use
excuses, whereas middle-class offenders use linguistic euphemisms to make
their offenses appear acceptable. In interviews with Swedish entrepreneurs,
Azarian and Alalehto (2014) nd that those negatively disposed to regulation
tend to perceive unfair treatment and rationalize entitlement to illegitimate
nancial gain, while those more positively disposed to regulation accept the
immorality of their offending but rationalize to deny responsibility. Klenowsi,
Copes, and Mullins (2011) nd that gender constrains the rationalizations
available to white-collar offenders, based on cultural expectations of
How Fraud Offenders Rationalize Financial Crime 49
masculinity and femininity. Men were more likely to claim that their behavior
was normal and the result of competition in the corporate environment.
Women, on the other hand, were more likely to deny responsibility or claim
that the offense was done out of necessity, due to their perceived role as
caregivers.
Social Influences
Some criticize an emphasis on personality and individual factors as insuf-
cient in understanding fraudulent behavior and how it is rationalized
(Peterson 2002;Morales, Gendron, and Guenin-Paracini 2014;Andon et al.
2015;Lokanan 2018b). Fraud is a socialized act, involving individuals,
organizations, and their environment (Ramamoorti 2008;Murphy and Free
2016;Lokanan 2018b). Thus, research also considers social inuences on
rationalization.
The nexus between corporate culture and rationalization has drawn some
research interest. A corporate culture open to unethical behavior increases the
likelihood of nancial crime by enabling employees to rationalize their
actions through the belief that no one cares (Cohen, Ding, Lesage, and Sto-
lowy 2010;Kumar, Bhattacharya, and Hicks 2018). Choo and Tan (2007)
nd that corporate cultures preoccupied with monetary success encourage
employees to rationalize through an implied expectation that they must do
whatever is necessary to achieve nancial goals (Campbell and G ¨
oritz 2014).
Through a wide-ranging survey, Murphy and Free (2016) similarly nd that
an instrumental climate, which promotes decision-making in the individuals/
organizations best interests without regard for ethical concerns, is most
conducive to rationalizing fraud. Further, social inuence strategies in orga-
nizational settings may assimilate employees into unethical corporate values,
beliefs, and norms (Ashforth and Anand 2003,Prabowo and Cooper 2016).
Social cues from the organization and coworkers may also strongly condition
individual employeesconception of appropriate behavior (Suh et al. 2018).
Another social dynamic drawing research interest is the manager
subordinate relationship. In an experiment to study reporting choices and
rationalizations, Mayhew and Murphy (2014) nd that participants are
signicantly more likely to misreport when instructed to do so by an
authority gure, and thus rationalize their offense by displacing responsibil-
ity. Managers can similarly seek to displace responsibility onto subordinates
50 Iva Charlopova et al.
actually carrying out fraudulent activity (De Klerk 2017). Both studies show
this social dynamic has implications in a corporate environment where
employees are loyal to their superiors and willing to behave in the best
interest of the company at all costs.
Research also examines the inuence of prolonged exposure to behavior
patterns of coworkers. In line with social identity theory, research examines
the effect that group norms and identications have on rationalizing and
offending (Anand et al. 2004;Gino, Ayal, and Ariely 2009;Suh et al. 2018).
Interestingly, Anand et al. (2004) nd that people can sustain more than one
group identity (e.g., professional and workplace) and can rationalize away
cognitive dissonance from offending by denying one of the identities (e.g.,
that of a professional accountant, with its ethical obligations) and over-
emphasizing the second identity (e.g., that of Mr. Fix-Itor right-hand-man
to the CEO) (Dellaportas, Perera, Gopalan, and Richardson 2018).
In summary, research highlights the important role played by social and
situational factors in motivating and rationalizing fraud. Corporate culture,
peer behavior, identity and belonging, and pressure from authority all
potentially inuence ones capacity to rationalize offending as acceptable.
However, opportunities exist to add further knowledge of what makes people
susceptible to criminogenic practices, including studying the relationship and
interaction between individual and social factors, and wider societal, politi-
cal, and cultural inuences.
Critical Perspectives on Rationalization
Despite the fraud triangles prevalence as a conceptual model in professional
auditing standards and forensic accounting education, critics contend that the
model on its own is inadequate for deterring and detecting fraud (Dorminey,
Fleming, Kranacher, and Riley 2010). Corporate fraud schemes are only
growing in complexity, yet the fraud triangles concept of rationalization and
other antecedents to fraud has remained largely static since Cresseys original
theory. This section explores the key areas of criticism that need to be
addressed to enhance understanding of the fraudsters rationalizations.
The prevailing concept of rationalization in nancial crime is based on
Cresseys research on embezzlement (Cressey 1953), which positions
How Fraud Offenders Rationalize Financial Crime 51
rationalization as a precursor to offending, but he empirically studied the
phenomenon using interviews with convicted offenders, after the offending
occurred. This difference in timing, which is subject to the criticism that
recollections may be skewed by postevent processes (Hollinger 1991;Fritsche
2005;Schuchter and Levi 2015), presents one of the most important chal-
lenges for researchers studying rationalization (Benson 1985;Fritsche 2002).
Considerable debate exists about whether rationalization is really a
universal precondition to fraud. Some claim that it is not relevant for repeat
offenders or those predisposed to fraud (Murphy and Dacin 2011). Dor-
miney, Fleming, Kranacher, and Riley (2012) and Lokanan (2015) maintain
that repeat offenders or predatorsonly need the opportunity as they do
not view their behavior as being immoral. Others further contend that
rationalization is not a necessary antecedent at all. Through interviews with
a small sample of white-collar offenders, Schuchter and Levi (2015, p. 184)
note that none of their offenders directly rationalized their behavior, but
they did note feeling dissonance or a fraud-inhibiting inner voicein
offender accounts.
Emerging from the criticism and debate surrounding the fraud triangle are
several revised models that seek to extend fraud theory. Many of these
alternative models exclude rationalization from their framework. For
example, in Albrechts Fraud Scale (Albrecht, Howe, and Romney 1984),
rationalization is replaced with integrity. Similarly, Free, Macintosh, and
Steins (2007) organization-level fraud triangle (charismatic leadership,
management controls, and organizational culture), Ramamoorti, Morrison,
Koletar, and Popes (2013) ABCs of fraud (the bad apple, bad bushel, and
bad crop), and Kranacher, Riley, and Wells(2011) M.I.C.E. framework
(Money, Ideology, Coercion, and Ego) also exclude rationalization. This
omission perhaps reects challenges that remain in understanding and acting
to mitigate rationalization in nancial crime.
SUMMARY AND CONCLUSIONS
This chapter has provided a systematic overview of rationalization. The
concept emerges as contested and fractured across a range of theoretical
approaches and literatures. Researchers have investigated many inuences on
52 Iva Charlopova et al.
offender rationalization as well as derived a taxonomy of rationalizations,
primarily drawing on work in moral disengagement and social psychology.
This work has begun to open the cognitive black box underlying fraudulent
offending.
To date, research in the area of rationalization has been overwhelmingly
theoretical with little empirical work seeking to validate or further investi-
gate these categories. This situation prompted Murphy and Dacin (2011)
and Free (2015) to call for eld-based research into the theoretical cate-
gories, a call that remains largely unanswered. Interviews with offenders
and the use of direct offender accounts hold great potential in helping to
rene the complex notion of rationalization. Without dealing with the
myriad of epistemological and methodological issues faced by relying on
offender accounts, research on fraud is ever challenged by the question of
the validity of data. All data sources about fraud 2surveys, data from the
state, victim accounts, and police statistics 2present problems of veracity
and interest (Presser 2009). What this review highlights is that ration-
alization research largely ignores the here-and-now of crime, especially
serious fraud, which is typically prosecuted over an extended period. Direct
offender accounts have the potential to open up the offenders lived expe-
rience, including its affective dimensions. Although theoretical classica-
tions have furnished intuitively appealing taxonomies, empirical research is
required to validate the major modes of rationalization as well as the
offending patterns associated with these modes.
How rms can seize upon rationalization to take away excuses from
would-be offenders is also an area ripe for further investigation. The notion of
anti-rationalization has potential to build more fraud resilient organizations.
Hirschi (1969, p. 208) contends that rationalization offers cues for effective
crime prevention initiatives that seek to dissuade people from contemplating
crime by neutralizing rationalizations before the event (Nettler 1974;Cressey
1986). The implication is that organizationsantirationalization programs
will operate on offenders that need to address internal moral dissonance
before offending. Although researchers have exerted great effort into identi-
fying major modes of rationalization, what can be done about it remains
underspecied. The notion of anti-rationalization is likely to be especially
important in organizational settings because hierarchical structures and
organizational silos can lead to more moral disengagementmechanisms
(Bandura 1986).
How Fraud Offenders Rationalize Financial Crime 53
DISCUSSION QUESTIONS
1. Identify the three major drivers of fraud according to the fraud triangle.
2. Explain how normalizationoperates in the context of fraud.
3. Name the major types of rationalization identied in accounting research.
4. Describe the major personality characteristics associated with fraud
offending.
5. Explain several ways to enhance the fraud triangle.
6. Discuss what organizations can do to try to negate common ration-
alizations of fraud.
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How Fraud Offenders Rationalize Financial Crime 59
... According to the fraud triangle theory, the opportunities for an individual to commit fraud are based on opportunities, abilities, pressures, needs, and lifestyle. The impact is enormous, at a time when this fraudulent opportunity can take place (Suh et al. 2019;Charlopova et al. 2020). Investors and others have an impact on labor and company performance in the market (Karpoff 2020). ...
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This article uses behavioral theories to develop an ethical decision-making model that describes how psychological factors affect the development of unethical intentions to commit fraud. We evaluate the effects of the dark triad of personality traits (i.e., psychopathy, Machiavellianism, and narcissism) on fraud intentions and behaviors. We use a combination of survey results, an experiment, and structural equation modeling to empirically test our model. The theoretical insights demonstrate that psychopathy, Machiavellianism, and narcissism affect different parts of the unethical decision-making process. Narcissism motivates individuals to act unethically for their personal benefit and changes their perceptions of their abilities to successfully commit fraud. Machiavellianism motivates individuals not only to act unethically, but also alters perceptions about the opportunities that exist to deceive others. Psychopathy has a prominent effect on how individuals rationalize their fraudulent behaviors. Accordingly, we find that the dark triad elements act in concert as powerful psychological antecedents to fraud behaviors.
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This study explores identity-related issues ensuing from the behavioral choices of a professional accountant who was convicted for defrauding clients of money entrusted to him. It is grounded in data collected from semi-structured interviews with the offender and his companion (partner in life), supplemented with transcripts derived from court hearings. Our findings suggest that the offender was an accidental fraudster whose crime was committed because of his personal traits and because he abandoned an apparently fragile professional identity for a dominant alternative identity. This led the offender to violate professional norms and self-rationalise illegal activity as both temporary and beneficial to his client. Our data illustrate the perils of the professional accountant identity not being firmly established, maintained or regarded as dominant; it enables behavior inconsistent with the professional ‘accountant’ identity, including criminal activity. This study extends understanding of fraudulent accounting practice by illustrating the role of professional identity in preventing illegal practice in the context of a qualitative forensic case study. It highlights the centrality of professional identity formation, maintenance and reinforcement, particularly in the context of identity conflicts.
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Purpose Recent research has confirmed an underlying economic logic that connects each of the three vertices of the “fraud triangle” – a fundamental criminological model of factors driving occupational fraud. It is postulated that in the presence of economic motivation and opportunity (the first two vertices of the fraud triangle), the likelihood of an occupational fraud happening in an organization increases substantially if the overall organization culture is perceived as being slack towards fraud as it helps potential fraudsters in rationalizing their actions (rationalization being the third vertex of the fraud triangle).This paper offers a viable approach for collecting and processing of data in order to identify and operationalize the key factors underlying employee perception of organization culture towards occupational frauds. Design/methodology/approach This paper reports and analyses the results of a pilot study conducted using a convenience sampling approach to identify and operationalize the key factors underlying employee perception of organization culture with respect to occupational frauds. Given a very small sample size, a numerical testing technique based on the binomial distribution has been applied to test for significance of the proportion of respondents who agree that a lenient organizational culture towards fraud can create a rationalization for fraud. Findings The null hypothesis assumed no difference in the population proportions between those who agree and those who disagree with the view that a lenient organizational culture towards fraud can create a rationalization for fraud. Based on the results of the numerical test, the null hypothesis is rejected in favour of the alternative that the population proportion of those who agree with the stated view in fact exceeded the proportion of those who disagreed. Research limitations/implications The obvious limitation is the very small size of the sample obtained due to an extremely low rate of response to the survey questionnaires. However, while of course a much bigger data set needs to be collected in order to develop a generalizable prediction model, the small sample was enough for the purpose of a pilot study. Practical implications This paper makes two distinct practical contributions. Firstly, it posits a viable empirical research plan for identifying, collecting and processing the right data to identify and operationalize the key underlying factors that capture an employee’s perception of organizational culture towards fraud as a basis for rationalizing an act of fraud. Secondly, it demonstrates via a small-scale pilot study, that a more broad-based survey can indeed prove to be extremely useful in collating the sort of data that is needed to develop a computational model for predicting the likelihood of occupational fraud in any organization. Originality/value This paper provides a viable framework which empirical researchers can follow in order to test some of the latest advances in the “fraud triangle” theory. It outlines a systematic and focused data collection method via a well-designed questionnaire that is effectively applicable to future surveys that are scaled up to collect data at a nationwide level.
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Individuals involved in corruption often offer rationalizations to convince themselves and others that they are not corrupt, and that their acts are justified and acceptable. However, to confine the dynamic process of mobilizing rationalizations to this purpose is too restrictive. Drawing on psychoanalytic theory, it is argued that an unconscious urge for rationalizations develops from a need to find psychological restitution and atonement, achieved only through self-convincing beliefs of acquittal. Six unconscious motives are identified as explanations how offenders believe that rationalizations acquit them from guilt, indemnify them, or redeem the corruption. These motives represent metaphorical devils that can spawn corruption in otherwise law-abiding citizens with moral intentions. Conceptualizations bring the unconscious dynamics or rationalized corruption into consciousness, where it can be studied and worked with. This makes an important contribution toward enabling managers to be more in control of rationalized corruption, both in themselves and elsewhere in the organization.
Article
Purpose Based on the authors’ study, the purpose of this paper is to better understand why corruption in the Indonesian public sector is so resilient from three behavioral perspectives: the Schemata Theory, the Corruption Normalization Theory and the Moral Development Theory. Design/methodology/approach This paper examines corruption trends and patterns in the Indonesian public sector in the past decade through examination of reports from various institutions as well as other relevant documents regarding corruption-related issues to gain a better understanding of the behavioral mechanisms underlying the adoption of corruption into organizational and individual schemata. This paper also uses expert interviews and focus group discussions with relevant experts in Indonesia and Australia on various corruption-related issues. Findings The authors establish that the rampaging corruption in the Indonesian public sector is an outcome of cumulative decision-making processes by the participants. Such a process is influenced by individual and organizational schemata to interpret problems and situations based on past knowledge and experience. The discussion in this paper highlights the mechanisms of corruption normalization used to sustain corruption networks especially in the Indonesian public sector which will be very difficult to break with conventional means such as detection and prosecution. Essentially, the entire process of normalization will cause moral degradation among public servants to the point where their actions are driven solely by the fear of punishment and expectation of personal benefits. The three pillars of institutionalization, rationalization and socialization strengthen one another to make the entire normalization structure so trivially resilient that short-term-oriented anti-corruption measures may not even put a dent in it. The normalization structure can be brought down only when it is continuously struck with sufficient force on its pillars. Corruption will truly perish from Indonesia only when the societal, organizational and individual schemata have been re-engineered to interpret it as an aberration and not as a norm. Research limitations/implications Due to the limited time and resources, the discussion on the normalization of corruption in Indonesia is focused on corruption within the Indonesian public institutions by interviewing anti-fraud professionals and scholars. A more complete picture of corruption normalization in Indonesia can be drawn from interviews with incarcerated corruption offenders from Indonesian public institutions. Practical implications This paper contributes to the development of corruption eradication strategy by deconstructing corruption normalization processes so that the existing resources can be allocated effectively and efficiently into areas that will result in long-term benefits. Originality/value This paper demonstrates how the seemingly small and insignificant behavioral factors may constitute “regenerative healing factor” for corruption in Indonesia.