Attitude, Machiavellianism and the rationalization of misreporting

Audit standards around the world describe three factors, known together as the fraud triangle, that purportedly predict the likelihood of fraudulent financial reporting (IAASB, 2009 and PCAOB, 2005). The first two factors, opportunity and incentive/pressure, are largely accepted as being associated with fraud (Erickson et al., 2004, Graham et al., 2005 and Wells, 2001), whereas the third factor, attitude/rationalization, remains a relative mystery (Hogan et al., 2008 and Wells, 2004). I conducted an experiment in which participants were provided the opportunity and motivation to misreport, in order to explore attitude and rationalization in greater detail. As expected, I found that participants whose attitude favors misreporting and individuals who are higher in Machiavellianism are both more likely to misreport; and participants who misreport experience negative emotions (affect). Of concern, however, is that higher Machiavellians who misreport feel significantly less guilt than others who misreport. When I changed the experimental setting and asked participants to think about common rationalizations they may use, in an attempt to reduce rationalizing before they made their reporting decision, significantly fewer participants misreported; while those who still misreported rationalized to an even greater extent. Implications for future research and fraud detection and prevention are discussed.