Chapter 5

Computer Fraud
5-1
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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. 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.

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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
•Opportunity
•Rationalization

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 Pressure

• Motivation or incentive to commit •Employee

fraud •Financial

•Emotional
•Types:
1. Employee •Lifestyle
• Financial
• Emotional
• Lifestyle
2. Financial
• Industry conditions
• Management
characteristics

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 Opportunity

• Condition or situation that allows

a person or organization to: •Opportunity
1. Commit the fraud •Commit
2. Conceal the fraud •Conceal
• Lapping
•Convert
• 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 •Rationalization
• I don’t need to be •Justification
honest.
•Attitude
3. Lack of personal
integrity •Lack of Peronal 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

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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