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 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.
2. 3.

Deceive investors or creditors
Increase a company’s stock price 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
Three conditions that are present when Fraud occurs

Pressure Opportunity Rationalization

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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 misrepresentation to personal gain

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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 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
 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

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Computer Fraud Classifications
 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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