The Rationalization Leg of The Fraud Triangle

The most widely accepted explanation of why some people commit fraud involves what is known as the Fraud Triangle.

Coined by accounting sage Steve Albrecht, the Fraud Triangle consists of three legs -- financial pressure, rationalization, and opportunity – and hypothesizes that if all three legs are present, a person is more likely to pursue fraudulent activities.

The Rationalization leg can vary based on the individual(s) involved. Some perpetrators have personal or family issues that provide them with reason to justify their actions, while others convince themselves that they’ve found a valid or deserving reason to carry out a fraudulent act, such as “everyone else is doing it.”

In one of the most widely known acts of fraud in recent history, Bernie Madoff rationalized his illegal actions by stating that the stock market was rigged anyway, so there was no other way to get ahead of others. He also later shamed his clients for trusting him in the first place, claiming that they’d be wealthy regardless, stating, “None of my clients, even if they’d lost every penny they put in there, can plead poverty.” 

Another example: in 2015, a board member of the Somerville Homeless Coalition, located in Somerville, Mass., reviewed the organization’s annual financial statements and noticed that Chief Operating Officer Warren McManus had earned $12,000 more in compensation than the organization's top executive.

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. The executive director of the organization stated that the fraud prevented the organization from assisting nearly 100 families from going homeless.

Other ways an individual could rationalize why they committed fraud include:

• Potentially losing a job unless the fraud is successfully committed
• Being spiteful toward upper management and committing fraud to get payback
• Needing extra money for a personal matter and “I have no other choice”

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. Understanding why people commit fraud can help in preventing fraud at your organization.

We may only focus on Fraud Week once per year in this way, but our professionals educate, assist and prepare clients throughout the year with their unique fraud concerns.

If you have questions or concerns about fraud in your organization, contact Tom Pratt at [email protected] or Brian Webster at [email protected].

Related Articles

• International Fraud Awareness Week 2022
• Perceived Opportunity: The Insider Threat
• Fraud at Wells Fargo: The Pressure to Perform

About International Fraud Awareness Week

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.

Learn more at https://www.fraudweek.com.

About Schneider Downs Business Consulting 

Schneider Downs Business Consulting delivers sophisticated consulting services to meet the complex needs of today’s business environment. Our team features experienced professionals across a diverse array of specialties that allows us to help our clients make more informed business decisions across every facet of their operations.  

To learn more, visit our dedicated Business Consulting page.   

Sources:

• https://www.cnbc.com/2021/04/14/bernie-madoff-dies-mastermind-of-the-nations-biggest-investment-fraud-was-82.html#:~:text=He%20pleaded%20guilty%20in%202009,two%20sons%20turned%20him%20in.
• https://www3.bostonglobe.com/metro/2018/01/27/taking-from-charity-employee-theft-shockingly-common-nonprofit-groups/aGzL6qg5JnhkAsAbj7tMkO/story.html?arc404=true