Fraud and Deception: Signs and Prevention
Rationalization may be defined as self-deception by reasoning
-Karen Horney, German born U.S. Psychoanalyst
Fraud in the workplace can have significant impacts, not only in a financial way, but also impact the organization’s culture and possibly the reputation of the company as well. The financial impact, however, is not the main reason for cultural and reputational impact; the main driver that affects both culture and reputational impact is trust…or in the case of fraud, a loss of trust.
When fraud is committed, it is a result of misrepresentation by someone in order for that person to gain a benefit of some sort. Misrepresentation has many synonyms: distortion, falsification, slanting, and of course, lying. When an individual knowingly misrepresents (lies) a matter and it is discovered, the level of trust in that person will go down. If the misrepresentation is significant enough, the level of trust for an organization can be impacted as well. Think about Volkswagen or Theranos.
Whenever we speak about fraud, we are pretty much required to speak about the Fraud Triangle. It is a good framework to understand what circumstances are required for fraud to take place. The three aspects of the fraud triangle are:
- Opportunity: Will the person have an occasion to commit fraud? (“No one locks the safe”)
- Pressure: Is the person compelled with a reason to commit fraud? (“I lost my rent money gambling”)
- Rationalization: Can I justify/excuse my actions to myself? (“The company can afford the loss better than I can”)
It is generally agreed that the only aspect of the fraud triangle that an organization has the ability to affect is opportunity. Pressure is an unknown circumstance and is relative to the individual. Rationalization is the part of the fraud triangle that relates to employee integrity…or lack thereof. Organizations should first focus on limiting opportunities for fraud, but they also need to consider how they can influence employee rationalization.
Deception: Signs
When we speak about deception, we usually talk about deception between people. “That person misled me!” or “She didn’t tell me that.” Rationalization is a bit different because it is about a person deceiving him or herself. In the case of a bad actor, they are experiencing conflicting ideas (cognitive dissonance) and trying to reconcile them. Example: “I think I will steal from the company because I need extra money for my gambling habit, but I am a good person (one who does not steal)…BUT the company is very large and can afford it. Therefore, I will steal because the company not having the money will hurt the company less than me not having the money for my bills.”
Now, to be clear, we don’t think exactly in these terms, but this is generally how rationalizing works. If a person finds an idea frightening and there is a remedy for their pain, and if that remedy is less frightening, that individual will justify their choice to do something less painful…even if, at times, the remedy is wrong.
Whether the deception is internal or external, there are three types of lies that people tell:
- Lies of Commission: this is a lie that occurs when someone tells you something that is not true.
- The person is twisting the truth for their own benefit; and
- They know the truth and are choosing to tell you something different.
- Lies of Omission: this is a lie that occurs when someone leaves out information that is relevant or useful to you.
- The person has excluded information for their own benefit; and
- They know that the information would change your perspective on the situation.
- Lie of Influence: this is a statement that may be true that is designed to help cover up a lie.
- The statement is meant to make you think the person should not be suspected of lying.
- By improving your view of their character, you may look elsewhere to find the truth.
Deception: Prevention
When it comes to preventing or limiting deception, an organization has some key tools that can be leveraged to encourage good behavior.
Transparency
A culture of transparency invariably keeps things out of the dark. Asking good questions, encouraging clear answers, and following up on activities is the one best way to avoid deception. In a culture of transparency, with all the lights on in the organization, it becomes difficult to hide in the shadows when things are checked and discussed openly.
Skepticism
Trusting our colleagues is important to successful relationships and keeping stress down. However, verifying what we are told and confirming it to be true is another matter. The one lie of influence we face frequently is “Don’t you trust me?” which implies that if you trust the person, you don’t need to check their work. There are two fallacies here: the first trap is that trust may not be a factor; if the process is very important, having another person check the work to verify it is accurate is just a good idea. The second trap is that a trusting relationship does not exclude one from verification; we can’t rely on trust to evaluate a process.
Diligence
Checking on people’s assertions is usually pretty straightforward; but checking on the missing information requires a bit more investigation. Asking good questions and thinking about the information you need to get comfortable with an area takes additional effort beyond checking the veracity of statements, but if it important, the extra work is almost always worth the effort.
Wrap Up
Being aware of how deception works and the types of lies that are told by other people (sometimes to others, sometimes to themselves) can help us to uncover deception and shine light on what is actually going on. This can help you to better solve problems, identify issues, and prevent or detect fraud in your work place. By creating better transparency, skepticism, and diligence in your company, your risk of fraud will go down, and your company culture will improve.
Please contact David Hammarberg, Principal, at dhammarberg@macpas.com or Samuel BowerCraft, Senior Manager, at sbowercraft@macpas.com if you would like to continue the conversation.
References and Additional Reading
https://en.wikiquote.org/wiki/Karen_Horney
https://www.psychologytoday.com/us/blog/hide-and-seek/201203/self-deception-i-rationalization
https://en.wikipedia.org/wiki/Rationalization_(psychology)
https://www.scienceofpeople.com/different-types-lies/
