Viewing fraud through the Telescope Model of Rationalization

Rationalization — how someone justifies behavior — isn’t always the focus of fraud examinations, but the authors of this article say that understanding it can help make fraud examinations more effective. Through the lens of a former health care executive convicted of defrauding his investors, the authors explain the mechanics of rationalization and provide a framework for better understanding why some people ultimately commit fraud.

AUTHORS’ NOTE – The Telescope Model of Rationalization originated from Potarazu’s self-reflective examination of his case through the lens of cognitive behavioral theory. He later worked with Hedley to further develop the model and demonstrate how it could build on and enrich fraud examiners’ understanding of rationalization and the Fraud Triangle.  

In ophthalmic surgeon Sreedhar Potarazu’s business school thesis, he posited that if organizations responsible for paying their employees’ insurance claims (also known as self-insured employers) had access to the right data, they could operate much more efficiently and hold insurance companies more accountable. Potarazu’s thesis became the inspiration behind his firm, VitalSpring Technologies, which he founded in 2000 to provide data analysis about health care spending to self-insured companies. The firm operated out of McLean, Virginia, a suburb of Washington, D.C. Potarazu served as the company’s president and CEO had a seat on its board of directors. 

At first, the company did well, winning contracts, gaining recognition in the market and attracting investors. VitalSpring was initially financed by angel investors, who raised more than $60 million for the firm. Its only institutional investor was MicroStrategy, which provided a perpetual software license in exchange for equity in the firm. In its first nine years, VitalSpring software helped manage health-benefit costs for big-name employers, including McDonald’s, Raytheon, Google and Microsoft. To Potarazu, his company’s early success confirmed his founding vision — and the thesis he’d written for his Master of Business Administration degree. 

But in 2008, things started to change for the company. First, the worldwide financial market crash plunged the economy into turmoil, affecting most industries, including the health care sector. Then came another jolt to the U.S. health sector in 2010 with the Affordable Care Act (ACA), which the U.S. government enacted to reform and expand health insurance coverage to more U.S. citizens. With the landscape of the health care industry shifting, many self-insurers began to act with caution about new business ventures as many were unsure how the new law would affect them. Potarazu lost clients during this period, and it was challenging for the firm to attract new ones. 

With an industry facing an uncertain future, growing VitalSpring was elusive. The cost of running the company outpaced its revenue, and the firm had to contend with cash flow shortages, mounting investor expectations and intensifying competition. Instead of cutting his losses and dissolving the business, Potarazu vowed to keep VitalSpring open. But in his resolve to keep the business running, Potarazu lied to investors about the financial health of VitalSpring and ultimately defrauded them of more than $30 million.

According to prosecutors with the U.S. Department of Justice (DOJ), starting around 2009, Potarazu provided false and misleading information to VitalSpring’s shareholders to raise millions in investments. He told investors that the sale of VitalSpring was imminent and that they’d profit from it. VitalSpring also failed to account for and pay more than $7.5 million in employment taxes to the Internal Revenue System (IRS). In a DOJ press release about Potarazu’s case, prosecutors explained that to induce investments, Potarazu presented fake financial records to investors, including documentation showing VitalSpring’s revenues to be $12.9 million, when it only had about $1 million. 

In 2016, Potarazu was arrested and pleaded guilty to providing materially false and misleading information and to concealing from shareholders that he failed to pay employment taxes. He was sentenced to more than 10 years in prison in 2017 and served approximately five years of his sentence.

In carrying out the fraud scheme, Potarazu developed a pattern of irrational thinking (i.e., thoughts not supported by facts or logic) and rationalizing actions. Rationalization, how someone justifies behavior, is a component of the Fraud Triangle, Dr. Donald Cressey’s theory of the three conditions — opportunity, pressure and rationalization — that must be present for a person to commit fraud. When seeking ways to better prevent and detect fraud, we often focus on the pressures and opportunities involved, but we don’t always explore people’s rationalizations. We believe that rationalization is the least understood component of the Fraud Triangle and that understanding why and how it happens could help make fraud examinations more effective. Potarazu’s example demonstrates the role of rationalization in the commission of fraud and offers a model that may help fraud examiners detect the signs of irrational thinking that lead people to rationalize actions.

Rationalization is a distortion of logic and a thinking error, or cognitive distortion. When combined with a person’s core beliefs and emotions, rationalization can enable wrongdoing through self-deception rather than malice. When someone rationalizes a given situation, 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 people who’ve committed fraud don’t view themselves as criminals but rather as problem-solvers under duress. The psychological mechanism of rationalization allows many fraudsters to justify behavior that they’d otherwise find unthinkable. 

As pressures mount, ethical boundaries erode

Potarazu believed he could overcome the headwinds of the 2008 financial crisis and the ACA by turning to insurance companies (such as UnitedHealthcare that saw value in VitalSpring’s technology and capabilities) to assist with its data operations, despite the limited resources to support such a transition. This provided some financial relief but, nonetheless, cash was tight, and Potarazu only made partial payroll tax payments. He rationalized this as a temporary measure to preserve jobs and operations. Potarazu failed to file quarterly Form 941s for several periods and made only partial payments on estimated taxes for several quarters. IRS Form 941 is used to report federal income and taxes withheld from employees’ paychecks and report the employer’s share of those taxes. 

VitalSpring ran into difficulty when it sought contracts with insurance companies because it lacked the capital to improve its infrastructure, including the ability to upgrade software and hire more employees to support its needs. But instead of pursuing institutional financing, Potarazu continued to rely on angel investor funding. Compounding the situation was VitalSpring’s organizational structure, which didn’t provide any system of supervision over management’s decisions. Potarazu attempted to raise money without appropriate financial oversight of his activities; he justified this by thinking that internal controls were formalities to address once he was able to stabilize VitalSpring’s finances. Indeed, Potarazu solicited investments through informal conference calls without adequate monitoring, guidance and accountability, often highlighting lofty valuations to secure more clients. He stretched revenue forecasts to align with expected success and presented overstated financials, thinking that eventual performance would justify them. When acquisition talks occurred, Potarazu portrayed imminent deals as certain to keep investor confidence, despite knowing those negotiations were tentative.

Each rationalization served to justify VitalSpring’s inflated valuation and quell Potarazu’s fear of failure and financial loss. However, as pressures mounted, these justifications became increasingly complex. One of Potarazu’s thinking errors stemming from his training as a surgeon was that failure was not an option; he believed he had to be invincible. Tactical decisions evolved into entrenched distortions, paving the way for him to rationalize fraud. Potarazu’s progression of bad decisions and thinking errors illustrates the escalating nature of rationalization. Potarazu might not have set out to commit fraud, but his justifications for doing so accumulated as the financial pressures built, and his ethical boundaries eroded as he tried to protect his vision of success by bending the truth. 

Rationalization as a thinking error

Cressey’s Fraud Triangle theory is the most widely accepted explanation for why people commit fraud. According to Cressey, if an opportunity, an unshareable financial need (aka incentive or pressure) and rationalization are all present, a person is more likely to commit fraud. However, opportunity and incentive are external conditions; rationalization is an internal, cognitive distortion masquerading as logic. Instead of deliberate strategizing, rationalization often functions as a form of motivated reasoning; it’s a mechanism of self-deception that allows individuals to commit unethical acts while preserving a positive self-image. 

Rationalization enables unethical behavior to appear morally acceptable to the person who commits it and is often prompted by emotional stress, shame or fear of failure. In the VitalSpring case, Potarazu’s unethical behavior, including making partial tax payments, overstating projections and overstretching valuations, wasn’t driven by strategy, but rather his cognitive distortions and thinking errors. 

Rational thinking versus rationalization

Rational thinking involves precise, deliberate analysis based on evidence, ethics and consequence evaluation. It’s the cognitive foundation of sound decision-making. Rationalization, by contrast, is built on emotional dysregulation, distorted beliefs and self-protective illusions. A rational thinker weighs risks to avoid harm. A person who is rationalizing a decision recasts the risk in their mind as necessity or benevolence. 

In the VitalSpring case, Potarazu internally reframed his decisions to represent acquisition talks as imminent and raise money without audited financials as well-meaning necessities meant to protect employees and investors. Yet these were distortions in thinking, not deliberations. Understanding this distinction is crucial for investigators and fraud examiners. When anti-fraud professionals interpret rationalization as a reasoned process rather than a symptom of emotional impairment, they may misread behavioral cues and miss red flags signaling fraud.

The Telescope Model of Rationalization

To illustrate how internal filters distort rational thinking, we developed a behavioral framework known as the Telescope Model of Rationalization. Humans are naturally rational, but that rationality must be viewed through a series of lenses before someone can make decisions. 

These lenses include:

• Core beliefs: Deep-seated assumptions about success, failure and personal worth, as in one’s sense of self-worth as used in cognitive behavioral therapy (CBT). CBT is a type of psychological treatment used in therapy to help people identify and change negative thought patterns and behaviors.
• Emotions: Anxiety, shame, fear or resentment that cloud objective evaluation.
• Thinking errors: Cognitive distortions such as minimization, entitlement, externalization of blame and rationalization.

Each lens alters perception. Like curved glass in a telescope that bends light, these lenses bend the truth. The distorted lenses cause irrational thinking. In this model, rationalization is not a standalone thinking error; it’s one among many contributing factors that lead to internal psychological reframing. Elements of the traditional Fraud Triangle, such as opportunities and incentives, remain relevant in this model and are characterized as triggers that further accelerate core beliefs, emotions and thinking errors that lead to irrational behavior and fraud.

VitalSpring’s history reflects this sequence. Potarazu’s core beliefs about equating success with survival, his emotions of fear and shame in the wake of mounting losses, and his thinking errors, including minimization (saying “these numbers will catch up eventually”), filtered out rationality until rationalization became the dominant mode of thought. Incentives and opportunities, such as the prospect of new clients or acquisition deals, served as triggers, but the distortions had already reframed those opportunities as justifications for unethical behavior. Figure 1 below represents the Telescope Model of Rationalization and the lenses through which people may view their decisions and actions.  

Table 1: Lenses, indicators and manifestations along the path of rationalization

Internal dynamics: How distortions lead to fraud

In the VitalSpring case, fraud didn’t arise from malevolence but rather from a cascading interplay of internal and external forces. Potarazu’s deeply rooted core beliefs created a psychological foundation ripe for distortion. When his company faced performance pressures and unmet expectations, these beliefs were triggered.

Emotions such as fear, shame and anxiety overwhelm rational thought. Under these conditions, Potarazu experienced emotional dysregulation (inability to manage and control emotions effectively), which led to cognitive distortions such as minimization (“This isn’t hurting anyone.”), entitlement (“After all I’ve sacrificed, I deserve a break.”) and catastrophizing (“If this fails, my world collapses.”). 

These internal vulnerabilities converged with external pressures, including investor demands, cash flow shortfalls and an environment of lofty expectations. For Potarazu, manipulating reports and delaying disclosures became psychologically justifiable — perceived not as deceit, but as a strategic solution to a pressing problem. Rationalization served as the final cognitive step, or thinking error, allowing him to believe his actions were protective, rather than criminal. 

Implications for anti-fraud professionals

VitalSpring operated for many years as a start-up. Start-ups frequently struggle with internal controls because they have limited resources and informal procedures that can’t accommodate rapid growth. Employees often juggle multiple financial duties, which weakens oversight and increases the risk of errors or fraud. Small teams that are often working quickly to keep up with demands often fail to complete documentation, and many start-ups may rely on manual processes without conducting thorough risk assessments or investing in robust technology controls. This start-up environment allowed VitalSpring’s fraud to go unchecked for nearly a decade. 

The details of a fraud are generally found in accounting irregularities and governance failures, but how the human mind responds when exposed to situations that ignite core beliefs, emotions and thinking errors can’t be seen in financial documents. Anti-fraud professionals can strengthen their examinations by integrating psychological insights that shed light on the underlying motives and causes of fraud during interviews or process walk-throughs. Specific screening techniques may enhance fraud examiners’ audit frameworks and help identify red flags that signify rationalization in a scheme. Table 2 below provides sample behavioral red flags and screens that could be used to identify them during an audit. 

Table 2: Sample behavioral indicators, red flags and audit screens 

Those charged with governance or mitigating fraud risk may consider expanding procedures to include screening for psychosocial factors such as financial stress, identity fusion (i.e., when an individual’s sense of self is entwined with their professional role), and high-performance cultures that punish vulnerability. In the case of VitalSpring, investor pressure combined with Potarazu’s identity-driven fear of failure played a role in accelerating his rationalizations.

Optimistic narratives within organizations can create an environment where people underestimate risks and overlook potential problems, leading to overconfidence in decision-making and reluctance to address uncomfortable realities. When there’s a cultural silence around failure, mistakes are covered up or rationalized away instead of being openly discussed, which closes off opportunities for learning and improvement. Expectations from investors further compound this issue, as they pressure executives and employees to deliver results that aren’t always feasible, which can lead individuals to focus on short-term thinking and information distortions to maintain a positive image for investors.

By embedding psychological awareness into governance and audit practices, such as training leaders to recognize cognitive biases — errors in thinking that affect how people process information, perceive others and make decisions — organizations can encourage open dialogue about risks and failures. By structuring decision-making to include dissenting views, organizations may create systems that detect irrational thinking and behavioral red flags. This proactive approach increases the likelihood of timely intervention before minor issues escalate into significant crises, fostering a healthier decision-making culture and supporting organizational resilience.

Management should be fostering organizational environments that actively encourage employees to report ethical conflicts without retaliation. Ethics hotlines, mentorship programs and mental wellness support are essential tools for preventing fraud in environments like VitalSpring in which optimism and survivalism mask reality. These measures might have interrupted the rationalization cycle before it hardened into fraud.

The final distortion

By understanding rationalization as a thinking error filtered through distorted beliefs and emotions, fraud examiners can recognize behavioral red flags of fraud sooner. Preventing fraud lies in early detection, not of the fraud itself, but of the internal erosion of thinking that makes it possible. Connecting psychological filters to actual business behaviors, such as inflated forecasts, makes potential warning signs of organizational trouble more visible and easier to detect.

To understand fraud, we must look beyond numbers and into the human mind. The VitalSpring case shows how confident, principled leaders can lose perspective when pressure and opportunity collide with distorted beliefs and emotions. For anti-fraud professionals, this perspective matters. Fraud prevention requires vigilance at the psychological level. Organizations must create cultures where ethical conflicts are discussed openly, oversight is proactive and early warning signs are taken seriously. By shifting the focus from rationalization as a symptom to a signal, anti-fraud professionals can better safeguard their organizations against fraud’s distortions. 

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.

Timothy Hedley, Ph.D., CFE, CPA/CFF, is an executive in residence at Fordham University. Contact him at thedley@fordham.edu.

Sreedhar Potarazu, M.D., is the clinical director at American Eye Care. Contact him at drsvp001@gmail.com.