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.
2. 3.

Deceive investors or creditors

Increase a companys stock price Meet cash flow needs

4.

Hide company losses or other problems

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Treadway Commission Actions to Reduce Fraud

1.
2. 3. 4.

Establish environment which supports the integrity of the financial reporting process.
Identification of factors that lead to fraud. Assess the risk of fraud within the company. 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 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 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.
2. 3.

Definition is not agreed on

Many go undetected High percentage is not reported

4.
5. 6. 7.

Lack of network security

Step-by-step guides are easily available Law enforcement is overburdened 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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