Chapter 5

Computer Fraud
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Learning Objectives
Explain the threats faced by modern information
systems.
Define fraud and describe the process one follows to
perpetuate a fraud.
Discuss who perpetrates fraud and why it occurs,
including:
the pressures, opportunities, and rationalizations that
are present in most frauds.
Define computer fraud and discuss the different
computer fraud classifications.
Explain how to prevent and detect computer fraud and
abuse.
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Common Threats to AIS

Natural Disasters and Terrorist Threats
Software Errors and/or Equipment Malfunction
Unintentional Acts (Human Error)
Intentional Acts (Computer Crimes)

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What Is Fraud?
Gaining an unfair advantage over another person

A false statement, representation, or disclosure

A material fact that induces a person to act

An intent to deceive

A justifiable reliance on the fraudulent fact in which a

person takes action

An injury or loss suffered by the victim

Individuals who commit fraud are referred to as whitecollar criminals.

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Forms of Fraud
Misappropriation of assets

Theft of a companies assets.

Largest factors for theft of assets:

Absence of internal control system

Failure to enforce internal control system

Fraudulent financial reporting

intentional or reckless conduct, whether by act or

omission, that results in materially misleading financial
statements (The Treadway Commission).

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Reasons for Fraudulent Financial

Statements
1.

Deceive investors or creditors

2.

Increase a companys stock price

3.

Meet cash flow needs

4.

Hide company losses or other problems

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Treadway Commission Actions to Reduce

Fraud
1.

Establish environment which supports the integrity of

the financial reporting process.

2.

Identification of factors that lead to fraud.

3.

Assess the risk of fraud within the company.

4.

Design and implement internal controls to provide

assurance that fraud is being prevented.

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SAS #99
Auditors responsibility to detect fraud

Understand fraud

Discuss risks of material fraudulent statements

Among members of audit team

Obtain information
Look for fraud risk factors

Identify, assess, and respond to risk

Evaluate the results of audit tests

Determine impact of fraud on financial statements

Document and communicate findings

See Chapter 3

Incorporate a technological focus

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The Fraud Triangle

Pressure

Three conditions that are

present when Fraud occurs.

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Pressure
Motivation or incentive to
commit fraud
Types:

1.Employee
Financial
Emotional
Lifestyle

2.Financial
Industry conditions
Management
characteristics

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Opportunity

Condition or situation that

allows a person or
organization to:

1.Commit the
fraud
2.Conceal the
fraud
Lapping
Kiting

3.Convert the
theft or
misrepresentatio
n to personal
gain
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Rationalizations

Justification of illegal behavior

1.Justification
I am not being
dishonest.

2.Attitude
I dont need to
be honest.

3.Lack of personal
integrity
Theft is valued
higher than
honesty or
integrity.

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Computer Fraud
Any illegal act in which knowledge of computer
technology is necessary for:

Perpetration

Investigation

Prosecution

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Rise of Computer Fraud

1.

Definition is not agreed on

2.

Many go undetected

3.

High percentage is not reported

4.

Lack of network security

5.

Step-by-step guides are easily available

6.

Law enforcement is overburdened

7.

Difficulty calculating loss

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Computer Fraud Classifications

Input Fraud

Processor Fraud

Modifying software, illegal copying of software, using software in an

unauthorized manner, creating software to undergo unauthorized
activities

Data Fraud

Unauthorized system use

Computer Instructions Fraud

Alteration or falsifying input

Illegally using, copying, browsing, searching, or harming company

data

Output Fraud

Stealing, copying, or misusing computer printouts or displayed

information

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