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File Number: 975137 Good and Bad - Inner Voices. Credit: Peggy De Meue / iStockphoto (Royalty-Free)

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Most of us like to consider ourselves upstanding citizens who, when faced with a choice between right and wrong, will do the honourable thing.

But research by Pamela Murphy, accounting professor at the Queen's School of Business in Kingston, Ont., suggests otherwise. Most of us, in the right circumstances, are capable of committing fraud and convincing ourselves that it is an acceptable thing to do, she says. The key, she argues, is our ability to rationalize.

According to Dr. Murphy, there are six categories of rationalization that enable people to commit fraud while still maintaining their ethical principles:

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1) Pleading ignorance - Ignore or misconstrue the consequences of the act.

- The fraudster's response: "I'm not hurting anyone"

2) Shifting the blame - Diffuse or displace responsibility elsewhere to not hold yourself responsible.

- Caught in the act: "Everybody does it"

3) Advantageous comparison - By comparing the wrongful act against a much more flagrant act, the original act looks better.

- Wrong doer's evaluation: "This is nothing compared to…"

4) Moral justification - Reprehensible acts are re-construed as socially worthy or having a moral purpose.

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- A non-guilty plea: "I'm protecting the company, employees, my family…"

5) Euphemistic labelling - Using convoluted verbiage to make a wrongful act sound better.

- Spin master's buzz words: "I'm trying to level the playing field"

6) Victim takes the fall - Finding faults with those impacted by the event or circumstance.

- Denial of guilt: "They had it coming"

"Rationalization is an incredibly powerful force," she says. "What rationalizing does for us is that it allows us to do something that is unethical and downright fraudulent and not feel bad about it," she explains. "The scary part for me, based on what I've seen so far in my research, is that most of us think of ourselves as ethical people but rationalization allows us to do something unethical, not feel bad about it and continue to think of ourselves as ethical people."

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Her findings could have implications for corporations trying to detect and prevent fraud and corruption. According to a 2009 report by PricewaterhouseCoopers, 56 per cent of Canadian companies surveyed reported being victims of economic crime during the previous year. Almost one-quarter of Canadian companies that were victims of fraud reported fraud-related losses of more than $500,000 (U.S.).

The question of why people commit fraud has been much studied, especially since the high-profile accounting scandals of the last decade that brought down Enron, WorldCom and other corporate giants. Researchers in this field often to refer to a "fraud triangle," or three conditions that must be in place in order to commit fraud: opportunity, motive and rationale. It is the third factor that is central to Dr. Murphy's work.

"When we hear about fraud [at companies]like Enron and WorldCom we immediately label these people as bad and some of them, I'm sure, are," Dr. Murphy says. "But many of them are not. It's just the situation they find themselves in and that situation is often what allows us to rationalize what we are doing."

In one lab experiment, Dr. Murphy asked a group of volunteer student subjects to take a quiz. The students were told they would receive a fee for every correct answer. Afterwards, a computer scored the tests and the students were asked to report the amount of money they were owed to Dr. Murphy for payment. Many of the participants lied and reported a higher score.

When asked why, most tried to justify their behaviour by offering explanations like: "I didn't think I was hurting anyone" or "I think everyone would do that in this situation." They did so, explains Dr. Murphy, to make themselves feel better rather than simply admit that their motive was to get more money.

In an effort to better understand and identify different types of rationalizations, Dr. Murphy and her colleague Clinton Free, also an accounting professor at Queen's, surveyed about 50 prisoners and former prisoners in U.S. jails who had been convicted of a broad range of white-collar crimes, from stealing to large-scale fraud.

Dr. Murphy says the ultimate goal of her research is to learn more about what kind of people commit fraud and the situations in which they are more likely to do so, in order to help corporations prevent and detect it.

One option may be to make people aware of how easy it is to rationalize our own unethical or fraudulent behaviour, she suggests. "I also think managers in an organization need to be much more aware of the environment that they are creating for their employees," she says. They should ensure that they are not inadvertently creating opportunities or motives that encourage workers to cheat. Another option may be to train auditors in rationalization so that they are better able to detect it in their investigations. She hopes to test some of these measures in the next phase of her research.

Dr. Murphy began studying what motivates people to commit fraud while she was doing her doctoral training. But her interest in the subject goes back to her own experience in the corporate world where she worked for many years as an auditor, controller and marketing manager. "In various organizations where I worked I noticed a number of people doing things that were unethical and they had absolutely no concern about it," she says. "I often wondered how people did that and didn't feel guilty or had no remorse."

Special to The Globe and Mail

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