I have spoken to hundreds of people who have been convicted or pleaded to white-collar crimes. Most all of them come from decent backgrounds where they were taught right from wrong, yet somehow they took a wrong turn. I speak from experience.
That is why when I saw an article by Timothy Hedley, PhD and Sreedhar Potarazu in Fraud Magazine, a publication by the Association of Certified Fraud Examiners, I was immediately interested in their take that "rationalization isn’t always the focus of fraud examinations.” Their work, inspired by Potarazu’s personal experience as a former health care executive convicted of defrauding investors, provides a deeply human look at how ordinary people cross extraordinary lines.
This article introduces what they call the Telescope Model of Rationalization, a framework that helps fraud examiners, and indeed anyone in business, better understand how self-deception, pressure, and distorted beliefs can gradually erode ethics.
As an ophthalmic surgeon and MBA student, Potarazu envisioned a company that would “help self-insured employers operate more efficiently and hold insurance companies more accountable.” That vision became VitalSpring Technologies, a health analytics firm based in Virginia. For nearly a decade, VitalSpring attracted big clients — McDonald’s, Raytheon, Google, and Microsoft. It raised over $60 million from investors.
But by 2008, the financial crisis and later the Affordable Care Act created headwinds. Revenues fell, investors grew anxious, and Potarazu’s optimism grew into desperation. The article recounts that “instead of cutting his losses and dissolving the business, Potarazu vowed to keep VitalSpring open. But in his resolve to keep the business running, he lied to investors about the financial health of VitalSpring and ultimately defrauded them of more than $30 million.”
In 2016, he was arrested, pled guilty, and was sentenced to over ten years in prison — serving about half that time. Yet from this painful fall came reflection and insight into why it happened.
The authors explain that rationalization is one of the three elements in Dr. Donald Cressey’s Fraud Triangle, alongside opportunity and pressure. Yet it is “the least understood component of the Fraud Triangle.” Where opportunity and pressure are external, rationalization is internal, a “distortion of logic and a thinking error,” one that “enables wrongdoing through self-deception rather than malice.”
In Potarazu’s case, that self-deception grew gradually.
“When someone rationalizes a given situation,” the article notes, “it doesn’t necessarily mean that they lack ethics. In many cases, rationalization involves a gradual, subtle process by which individuals reconcile questionable actions with their self-image as fundamentally good people.” Many fraudsters, they write, “don’t view themselves as criminals but rather as problem-solvers under duress.”
That mindset of seeing oneself as a hero rather than a villain becomes the fuel for justification.
The crisis deepened as Potarazu juggled investor demands, unpaid taxes, and a shrinking client base. The article describes how “he rationalized partial payroll tax payments as a temporary measure to preserve jobs and operations.” He also “justified raising money without appropriate financial oversight” and portrayed potential acquisitions as “certain to keep investor confidence.”
Each justification compounded the last. As the authors put it, “Each rationalization served to justify VitalSpring’s inflated valuation and quell Potarazu’s fear of failure and financial loss.” His medical training reinforced this mentality and he concluded that failure was not an option. That belief, they note, became “a thinking error” that allowed him to rationalize increasingly unethical actions.
The story illustrates how rationalization evolves: what begins as a small self-deception can morph into large-scale fraud as reality and self-image drift further apart.
Dr. Hedley, an Executive in Residence at Fordham University and a retired partner at a Big Four accounting firm where he served as the global lead partner for fraud risk management services, and Potarazu make a critical distinction between rational thinking and rationalization.
“Rational thinking involves precise, deliberate analysis based on evidence, ethics and consequence evaluation,” they write. “Rationalization, by contrast, is built on emotional dysregulation, distorted beliefs and self-protective illusions.”
The rational thinker weighs risks to avoid harm; the rationalizer reimagines risk as benevolence.
Potarazu told himself that raising money without audited financials was “meant to protect employees and investors.” In reality, it was self-protection disguised as duty. As the authors warn, when investigators misinterpret rationalization as reasoned thinking rather than “a symptom of emotional impairment,” they can “miss red flags signaling fraud.”
To explain how these distortions occur, Hedley and Potarazu introduce the Telescope Model of Rationalization. The model identifies several “lenses” that filter rational thought before it becomes decision-making:
These filters distort perception, causing irrational decisions to appear justified. “Rationalization is not a standalone thinking error,” the authors emphasize; it’s “one among many contributing factors that lead to internal psychological reframing.”
In the VitalSpring story, Potarazu’s belief that “doctors don’t fail,” combined with shame and fear of losing investor confidence, filtered out rational thinking. His emotional and cognitive lenses turned self-deception into strategy.
Fraud rarely starts with evil intent. “In the VitalSpring case, fraud didn’t arise from malevolence but rather from a cascading interplay of internal and external forces.” Potarazu’s core beliefs and emotions overwhelmed rational thought, creating a numerous distortions that minimized the impact to victims, created a sense of entitlement and sense that the world would end if he did not act.
This insight is crucial for those investigating or managing organizations because fraud is often the end stage of emotional and cognitive erosion, not just a breach of rules.
The authors extend their model beyond one case. They argue that start-ups and fast-growing organizations are especially vulnerable. “Employees often juggle multiple financial duties, which weakens oversight and increases the risk of errors or fraud.” In such environments, optimism can easily become denial.
They recommend that investigators and auditors integrate psychological insights that shed light on underlying motives and causes of fraud. Screening for psychosocial factors — such as perfectionism, defensiveness, or identity fusion — can reveal red flags before numbers do.
As they write, “Optimistic narratives within organizations can create an environment where people underestimate risks and overlook potential problems.”
The article concludes with a message that extends beyond fraud examination: leaders must build psychologically aware organizations. “By embedding psychological awareness into governance and audit practices,” Hedley and Potarazu write, “organizations can encourage open dialogue about risks and failures.” Training leaders to recognize cognitive biases and structuring decisions to include dissenting views can help “detect irrational thinking and behavioral red flags.”
In an interview Dr. Hedley told me,
"We urge executives to foster psychologically aware organizations that may help provide an early warning of flawed thinking and misconduct.”
Ultimately, the Telescope Model of Rationalization reminds us that fraud prevention begins in the mind, not the ledger. Preventing fraud lies in early detection, not of the fraud itself, but of the internal erosion of thinking that makes it possible. By looking beyond financial symptoms to cognitive and emotional causes, organizations can spot trouble before it surfaces.
“To understand fraud, we must look beyond numbers and into the human mind,”
Dr. Hedley told me. His an Potarazu’s message is sobering but hopeful:
“Only by acknowledging the fragile boundary between reason and self-deception can management, auditors and anti-fraud professionals preserve organizational integrity and protect the trust on which businesses depend.”
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