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Rationalization

from class:

Financial Accounting I

Definition

Rationalization is the process of justifying unethical behavior with logical but false reasons. In accounting, it often allows individuals to commit fraud by convincing themselves that their actions are acceptable.

5 Must Know Facts For Your Next Test

  1. Rationalization is one of the three components of the Fraud Triangle.
  2. It involves self-justification to make fraudulent actions seem less harmful.
  3. Common rationalizations include believing the company 'owes' them or that they are just 'borrowing' money temporarily.
  4. Rationalization can lead to a culture of dishonesty if not addressed by strong ethical standards and internal controls.
  5. Auditors need to be aware of signs of rationalization when assessing the risk of fraud.

Review Questions

  • What role does rationalization play in the Fraud Triangle?
  • Can you give an example of how someone might rationalize committing fraud in an accounting workplace?
  • Why is it important for auditors to recognize rationalization?
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