Rationalization and the Fraud Triangle: How “Small” Frauds Snowball into Big Frauds

Posted on Feb 24, 2014

By Pete Miller, CPA, CFE

This Seattle Times article presents a fine example of the slippery slope that most frauds head down. The article was about how a state audit revealed a Department of Social and Health Services worker spent more than 75 hours browsing the Internet on the job during a four-month stretch. The article also stated that his boss was engaged in the same behavior.

For context, state workers are allowed brief and infrequent use of state resources for personal use.

At first you might look this over and think “big deal; everyone is entitled to look around the internet a little for a quick mind break.” Within certain cultures and corporate guidelines that may be perfectly acceptable; however, in this case that act was in direct violation of an established policy. In this case, the idea that “everyone is doing it” is just the kind of rationalization that is a cornerstone of the Fraud Triangle that you will hear fraud experts talk about.

The Fraud Triangle is the theory that three elements are necessary for a fraud to be perpetrated and they are (1) motivation, usually financial in nature and usually private, (2) opportunity, quite often taking the shape of inadequate internal controls by quality or quantity, and (3) rationalization, the internal dialogue that comforts perpetrators and lets them know it is OK to do this for whatever reason.

This kind of rationalization, particularly on something small, is just the sort of thing that can get the snowball of inappropriate behavior rolling. This is a case of a non-financial fraud – misuse of property and equipment – but most financial frauds start out with something small like this too.

Often they start out with the perpetrator observing what their boss is doing and then patterning that behavior. This article notes that the boss was spending time looking around on the internet for things he/she wanted to buy and so the employee started doing it too. If the boss was stealing money from the company, I would suspect that this particular employee might use that as a signal that it was acceptable for him to steal as well. This is a fine example of why Tone at the Top is a value of utmost importance and consequence.

Again, regardless of your organization’s belief on this use of equipment; this individual violated a policy. From reading the article you can see that disciplinary measures are soon to follow. If you worked there and heard about the consequence for these folks, would you think even for a second that you could get away with something even more egregious like an embezzlement? No way! The door to the opportunity leg of the Fraud Triangle is quickly closing for this organization, and for that they are more secure.

© Clark Nuber PS and Focus on Fraud, 2014. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Focus on Fraud with appropriate and specific direction to the original content.

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