Computer Fraud

Chapter 5
 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.
 Common Threats to AIS

 Natural Disasters and Terrorist Threats

 Software Errors and/or Equipment Malfunction

 Unintentional Acts (Human Error)

 Intentional Acts (Computer Crimes)

 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 (intentionally mislead)
 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 white-collar

criminals.
 Forms of Fraud

 Misappropriation (stealing) 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 Tread
way Commission).
 Reasons for Fraudulent Financial Statements

1. Deceive (mislead) investors or creditors

2. Increase a company’s stock price

3. Meet cash flow needs

4. Hide company losses or other problems

 Treadway Commission Actions to Reduce Fraud

1. Establish environment which supports the integrity (honesty)

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.
 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
 Incorporate a technological focus
The Fraud Triangle

Pressure

Opportunity

Rationalization
 Pressure Emp
loyee

• Motivation or incentive to commit Lifes

fraud tyle
•Types:
1. Employee
• Financial
• Emotional Emot Fina
Industry
• Lifestyle ional Conditio Mgmt ncial
ns Charact
2. Financial Financial
eristics
Reportin
• Industry conditions g

• Management
characteristics
 Opportunity

Opp
ortu
nity
• Condition or situation that
allows a person or organization
to: Con
vert
1. Commit the fraud
2. Conceal (hide) the
fraud
• Lapping (trial)
• Kiting (things) Con Com
3. Convert the theft or ceal mit
misrepresentation
to personal gain
 Rationalizations (good reason)

•Justification of illegal behavior Ration

1. Justification alizatio
n
• I am not being
dishonest.
2. Attitude Lack of
Peronal
• I don’t need to be Integrity
honest.
3. Lack of personal
integrity (honest)
• Theft is valued
higher than
honesty or Attitu Justifi
integrity. de cation
 Computer Fraud

 Any illegal act in which knowledge of computer technology is

necessary for:
 Perpetration
 Investigation
 Prosecution
 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

 Computer Fraud Classifications
 Input Fraud
 Alteration or falsifying input

 Processor Fraud
 Unauthorized system use

 Computer Instructions Fraud

 Modifying software, illegal copying of software, using software in an unauthorized
manner, creating software to undergo unauthorized activities

 Data Fraud
 Illegally using, copying, browsing, searching, or harming company data

 Output Fraud
 Stealing, copying, or misusing computer printouts or displayed information