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)
5-3
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 white-
collar 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 company’s 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.
5-7
Statement on Auditing Standards -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
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The Fraud Triangle
Pressure
Opportunity
Rationalization
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Pressure
• Motivation or incentive to commit fraud
Emotional Lifestyle
Pressure
Pressure in this case is another way of saying
Financial
motivation. What is it in one’s life that drives one to
commit fraud? Pressure sometimes involves personal
situations that create a demand for more money; such
Employee
situations might include vices like drug use or
gambling or merely life events like a spouse losing a
job. At other times, pressure arises from problems on
the job; unrealistic performance targets may provide
the motive to perpetrate fraud. Mgmt
Characteristics
Industry
•Types: Conditions
1. Employee
• Financial
• Emotional Financial
Reporting
• Lifestyle
2. Financial
• Industry conditions
• Management characteristics 5-10
Opportunity
•If one is talking about theft, there must be something to
steal and a way to steal it. Anything of value is something
to steal. Any weakness in a system—for example, lack of
oversight—is a way to steal. Of the three elements of the
Fraud Triangle, opportunity is often hard to spot, but fairly Conceal
easy to control through organizational or procedural
changes. Convert
Commit
•Condition or situation that allows a person or organization
to:
Opportunity
1. Commit the fraud
2. Conceal the fraud
• Lapping - A lapping scheme is a fraudulent practice that
involves altering accounts receivables to hide stolen cash. The
method involves taking a subsequent receivables payment from a
transaction (for exampl e, a sale) and using that to cover the theft.
• Kiting- Kiting is the fraudulent use of a financial
instrument such as a check to obtain additional credit that
is not authorized.
3. Convert the theft or misrepresentation to 5-11
personal gain
Rationalizations
•Justification of illegal behavior
1. Justification
• I am not being dishonest.
2. Attitude
• I don’t need to be honest.
3. Lack of personal integrity
• Theft is valued higher than honesty Attitude
or integrity.
Lack of
Peronal
Justification Integrity
Rationalization
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Computer Fraud
Computer fraud is the use of computers, the
Internet, Internet devices, and Internet services to
defraud people or organizations of resources.
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
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
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