Rationalization

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

Related terms

Fraud Triangle:

A model that explains the three factors contributing to fraudulent behavior: opportunity, pressure, and rationalization.

Internal Controls:

Procedures and policies put in place within an organization to safeguard assets, enhance financial reporting accuracy, and promote operational efficiency.

Ethical Standards: Guidelines that dictate what constitutes right and wrong behavior within a profession, encouraging integrity and accountability.