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C HAPTER 5

Computer Fraud and Security

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INTRODUCTION
Questions to be addressed in this chapter:
What is fraud, and how are frauds perpetrated? Who perpetrates fraud and why? What is computer fraud, and what forms does it take? What approaches and techniques are used to commit computer fraud?

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INTRODUCTION
Information systems are becoming increasingly more complex and society is becoming increasingly more dependent on these systems.
Companies also face a growing risk of these systems being compromised. Recent surveys indicate 67% of companies suffered a security breach in the last year with almost 60% reporting financial losses.
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INTRODUCTION

Companies face four types of threats to their information systems:


Natural and political

Include: Fire or excessive heat Floods Earthquakes High winds disasters War and terrorist attack When a natural or political disaster strikes, many companies can be affected at the same time. Example: Bombing of the World Trade Center in NYC. The Defense Science Board has predicted that attacks on information systems by foreign countries, espionage agents, and terrorists will soon be widespread.
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INTRODUCTION
Companies face four types of threats to their information systems: Include:
Natural and political disasters Software errors and equipment malfunction

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Hardware or soft failures Software errors o Operating system Power outages a fluctuations Undetected data transmission erro Estimated annual ec losses due to softwa $60 billion. 60% of companies s
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INTRODUCTION
Companies face four types of threats to their information systems:

Include Accidents caused by: Human carelessness Failure to follow established procedures Natural and political disasters Poorly trained or supervised Software errors and equipment malfunction personnel Unintentional acts Innocent errors or omissions Lost, destroyed, or misplaced data Logic errors Systems that do not meet needs or are incapable of performing intended tasks Information Systems Security Assn. estimates 65% of security problems are caused by human error.
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2006 Prentice Hall Business Publishing

Include: INTRODUCTION

Companies face four types of threats to their information systems:


Unintentional acts Intentional acts (computer crime)

Sabotage Computer fraud Misrepresentation, false use, or unauthorized disclosure of data Misappropriation of assets Natural and political Financial statement fraud disasters Information systems are increasingly Software errors and equipment malfunction vulnerable to these malicious attacks.

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INTRODUCTION
In this chapter well discuss:
The fraud process Why fraud occurs Approaches to computer fraud Specific techniques used to commit computer fraud Ways companies can deter and detect computer fraud

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INTRODUCTION
In this chapter well discuss:
The fraud process Why fraud occurs Approaches to computer fraud Specific techniques used to commit computer fraud Ways companies can deter and detect computer fraud

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The definition is the same whether it is a criminal or civil fraud case. The only difference is the burden of proof required. Criminal case: Beyond a reasonable Fraud is any and all means a person uses to doubt. gain an unfair advantage over another person. Civil case: Preponderance of the evidence OR clear and convincing In most cases, to be considered fraudulent, an evidence.

THE FRAUD PROCESS

act must involve:

A false statement (oral or in writing) About a material fact Knowledge that the statement was false when it was uttered (which implies an intent to deceive) A victim relies on the statement And suffers injury or loss as a result
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THE FRAUD PROCESS


Since fraudsters dont make journal entries to record their frauds, we can only estimate the amount of losses caused by fraudulent acts:
The Association of Certified Fraud Examiners (ACFE) estimates that total fraud losses in the U.S. run around 6% of annual revenues or approximately $660 billion in 2004.
More than we spend on education and roads in a year. 6 times what we pay for the criminal justice system.

Income tax fraud (the difference between what taxpayers owe and what they pay to the government) is estimated to be over $200 billion per year. Fraud in the healthcare industry is estimated to exceed $100 billion a year.
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THE FRAUD PROCESS


Fraud against companies may be committed by an employee or an external party.
Former and current employees (called knowledgeable insiders) are much more likely than non-employees to perpetrate frauds (and big ones) against companies.
Largely owing to their understanding of the companys systems and its weaknesses, which enables them to commit the fraud and cover their tracks.

Organizations must utilize controls to make it difficult for both insiders and outsiders to steal from the company.

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THE FRAUD PROCESS


Fraud perpetrators are often referred to as white-collar criminals.
Distinguishes them from violent criminals, although some white-collar crime can ultimately have violent outcomes, such as:
Perpetrators or their victims committing suicide. Healthcare patients killed because of alteration of information, etc., that can result in their deaths.

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Types of Frauds
OCCUPATIONAL Fraudulent Statements
Financial Non-financial

OTHER
Intellectual property theft Financial institution fraud Check and credit card fraud Insurance fraud Healthcare fraud Bankruptcy fraud Tax fraud Securities fraud Money laundering Consumer fraud Computer and Internet fraud

Asset Misappropriation
Theft of Cash Fraudulent disbursements Inventory and other assets

Bribery and Corruption


Bribery Illegal gratuities Economic extortion Conflict of interest

Information is from the ACFEs 2004 Report to the Nation on Occupational Fraud and Abuse and from the Fraud Examiners Manual, also published by the ACFE.
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THE FRAUD PROCESS


Three types of occupational fraud:
Misappropriation of assets
Involves theft, embezzlement, or misuse of company assets for personal gain. Examples include billing schemes, check tampering, skimming, and theft of inventory. In the 2004 Report to the Nation on Occupational Fraud and Abuse, 92.7% of occupational frauds involved asset misappropriation at a median cost of $93,000.

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THE FRAUD PROCESS


Three types of occupational fraud:
Misappropriation of assets Corruption
Corruption involves the wrongful use of a position, contrary to the responsibilities of that position, to procure a benefit. Examples include kickback schemes and conflict of interest schemes. About 30.1% of occupational frauds include corruption schemes at a median cost of $250,000.

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THE FRAUD PROCESS


Three types of occupational fraud:
Misappropriation of assets Corruption Fraudulent statements
Financial statement fraud involves misstating the financial condition of an entity by intentionally misstating amounts or disclosures in order to deceive users. Financial statements can be misstated as a result of intentional efforts to deceive or as a result of undetected asset misappropriations that are so large that they cause misstatement. About 7.9% of occupational frauds involve fraudulent statements at a median cost of $1 million. (The median pales in comparison to the maximum cost.) 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 17 of 175

THE FRAUD PROCESS


A typical employee fraud has a number of important elements or characteristics: The fraud perpetrator must gain the trust or confidence of the person or company being defrauded in order to commit and conceal the fraud. Instead of using a gun, knife, or physical force, fraudsters use weapons of deceit and misinformation. Frauds tend to start as the result of a perceived need on the part of the employee and then escalate from need to greed. Most fraudsters cant stop once they get started, and their frauds grow in size. The fraudsters often grow careless or overconfident over time. Fraudsters tend to spend what they steal. Very few save it. In time, the sheer magnitude of the frauds may lead to detection. The most significant contributing factor in most employee frauds is the absence of internal controls and/or the failure to enforce existing controls.
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THE FRAUD PROCESS


The National Commission on Fraudulent Financial Reporting (aka, the Treadway Commission) defined fraudulent financial reporting as intentional or reckless conduct, whether by act or omission, that results in materially misleading financial statements. Financial statements can be falsified to:
Deceive investors and creditors Cause a companys stock price to rise Meet cash flow needs Hide company losses and problems

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THE FRAUD PROCESS


Fraudulent financial reporting is of great concern to independent auditors, because undetected frauds lead to half of the lawsuits against auditors. In the case of Enron, a financial statement fraud led to the total elimination of Arthur Andersen, a premiere international public accounting firm.
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THE FRAUD PROCESS


Common approaches to cooking the books include:
Recording fictitious revenues Recording revenues prematurely Recording expenses in later periods Overstating inventories or fixed assets (WorldCom) Concealing losses and liabilities

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THE FRAUD PROCESS


The Treadway Commission recommended four actions to reduce the possibility of fraudulent financial reporting:
Establish an organizational environment that contributes to the integrity of the financial reporting process. Identify and understand the factors that lead to fraudulent financial reporting. Assess the risk of fraudulent financial reporting within the company. Design and implement internal controls to provide reasonable assurance that fraudulent financial reporting is prevented.
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THE FRAUD PROCESS


SAS 99: The Auditors Responsibility to Detect Fraud
In 1997, SAS-82, Consideration of Fraud in a Financial Statement Audit, was issued to clarify the auditors responsibility to detect fraud.

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THE FRAUD PROCESS


A revision to SAS-82, SAS-99, was issued in December 2002. SAS-99 requires auditors to:
Understand fraud
Auditors cant effectively audit something they dont understand. SAS-99 also indicated that auditors are not lawyers and do not make legal determinations of whether fraud has occurred. The external auditors interest specifically relates to acts that result in a material misstatement of the financial statements. Note that SAS-99 relates to external auditors. Internal auditors will have a more extensive interest in fraud than just those that impact financial statements.

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THE FRAUD PROCESS


A revision to SAS-82, SAS-99, was issued in December 2002. SAS-99 requires auditors to:
Understand fraud Discuss the risks of material fraudulent misstatements
While planning the audit, members of the audit team should discuss how and where the companys financial statements might be susceptible to fraud.

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The audit team must gather evidence about the existence of fraud by: Looking for fraud risk factors Testing company records management, committee, A Askingpast orSAS-82, auditof fraud wastheothers ifin faces. revision to current the SAS-99, risksand organization know issued they of any fraud or 2002. SAS-99 in examining revenue accounts, Decemberneeds to be exercised requires auditors to: Special care Understand fraud popular fraud targets. since they are particularly

THE FRAUD PROCESS

Discuss the risks of material fraudulent misstatements Obtain information

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THE FRAUD PROCESS


A revision to SAS-82, SAS-99, was issued in December 2002. SAS-99 requires auditors to:
Understand fraud Discuss the risks of material fraudulent misstatements Obtain information Identify, assess, and respond to risks

Use the gathered information to identify, assess, and respond to risks. Auditors can respond by varying the nature, timing, and extent of auditing procedures they perform. They should also carefully evaluate risks related to management override of controls.
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THE FRAUD PROCESS


A revision to SAS-82, SAS-99, was issued in Auditors must assess the risk of fraud throughout the audit. December the audit isSAS-99 they must evaluate whether any 2002. complete, requires auditors to: When
Understand misstatements indicate the presence of fraud. identified fraud If so, the should determine the impact on the financial Discuss they risks of material fraudulent misstatements statements and the Obtain information audit. Identify, assess, and respond to risks Evaluate the results of their audit tests

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THE FRAUD PROCESS


A revision to SAS-82, SAS-99, was issued in December 2002. SAS-99 requires auditors to:
Understand fraud Discuss the risks of material fraudulent misstatements Obtain information Identify, assess, and respond to risks Evaluate the results of their audit tests Communicate findings
Auditors communicate their fraud findings to management, the audit committee, and others.
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2006 Prentice Hall Business Publishing

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THE FRAUD PROCESS


A revision to SAS-82, SAS-99, was issued in December 2002. SAS-99 requires auditors to:
Understand fraud Discuss the risks of material fraudulent misstatements Obtain information Identify, assess, and respond to risks Evaluate the results of their audit tests Communicate findings Document their audit work
Auditors must document their compliance with SAS-99 requirements.
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2006 Prentice Hall Business Publishing

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THE FRAUD PROCESS


A revision to SAS-82, SAS-99, was issued in December 2002. SAS-99 requires auditors to:
Understand fraud Discuss the risks of material fraudulent misstatements Obtain information Identify, assess, and respond to risks Evaluate the results of their audit tests impacts fraud SAS-99 recognizes that technology risks findings Communicate and notes opportunities that auditors have to use technology-oriented tools and techniques to Document their fraud auditing procedures. audit work design Incorporate a technology focus

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INTRODUCTION
In this chapter well discuss:
The fraud process Why fraud occurs Approaches to computer fraud Specific techniques used to commit computer fraud Ways companies can deter and detect computer fraud

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WHO COMMITS FRAUD AND WHY


Researchers have compared the psychological and demographic characteristics of three groups of people:
White-collar criminals Violent criminals The general public

They found:
Significant differences between violent and white-collar criminals. Few differences between white-collar criminals and the general public.

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WHO COMMITS FRAUD AND WHY


White-collar criminals tend to mirror the general public in:
Education Age Religion Marriage Length of employment Psychological makeup

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WHO COMMITS FRAUD AND WHY


Perpetrators of computer fraud tend to be younger and possess more computer knowledge, experience, and skills. Hackers and computer fraud perps tend to be more motivated by:
Curiosity A quest for knowledge The desire to learn how things work The challenge of beating the system

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WHO COMMITS FRAUD AND WHY


They may view their actions as a game rather than dishonest behavior. Another motivation may be to gain stature in the hacking community. Some see themselves as revolutionaries spreading a message of anarchy and freedom. But a growing number want to profit financially. To do so, they may sell data to:
Spammers Organized crime Other hackers The intelligence community
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WHO COMMITS FRAUD AND WHY


Some fraud perpetrators are disgruntled and unhappy with their jobs and are seeking revenge against their employers. Others are regarded as ideal, hard-working employees in positions of trust. Most have no prior criminal record. So why are they willing to risk everything?

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WHO COMMITS FRAUD AND WHY


Criminologist Donald Cressey, interviewed 200+ convicted white-collar criminals in an attempt to determine the common threads in their crimes. As a result of his research, he determined that three factors were present in the commission of each crime. These three factors have come to be known as the fraud triangle.
Pressure Opportunity Rationalization
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The Fraud Triangle


Donald Cressey

Op

su

re

po

Pr es

rt u y n it

Rationalization
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The Fraud Triangle


Donald Cressey

Op

Pr es su re

po rt u y n it

Rationalization
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WHO COMMITS FRAUD AND WHY Pressure


Cressey referred to this pressure as a perceived non-shareable need. The pressure could be related to finances, emotions, lifestyle, or some combination.

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WHO COMMITS FRAUD AND WHY


The most common pressures were:
- Not being able to pay ones debts, nor admit it to ones employer, family, or friends (which makes in non-shareable)
May be associated with vices, such as drugs, gambling, mistresses, etc.

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WHO COMMITS FRAUD AND WHY


The most common pressures were:
- Not being able to pay ones debts, nor admit it to ones employer, family, or friends (which makes in non-shareable) - Fear of loss of status because of a personal failure Example would be mismanagement of a
personal investment or retirement fund.

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WHO COMMITS FRAUD AND WHY


The most common pressures were:
- Not being able to pay ones debts, nor admit it to ones employer, family, or friends (which makes in non-shareable) - Fear of loss of status because of a personal failure - Business reversals
Not many people can walk away from a failing business.

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WHO COMMITS FRAUD AND WHY


The most common pressures were:
- Not being able to pay ones debts, nor admit it to ones employer, family, or friends (which makes in non-shareable) - Fear of loss of status because of a personal failure - Business reversals - Physical isolation
When an individual is isolated, physically or psychologically, almost any pressure becomes non-shareable.

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WHO COMMITS FRAUD AND WHY


The most common pressures were:
- Not being able to pay ones debts, nor admit it to ones employer, family, or friends (which makes in non-shareable) - Fear of loss of status because of a personal failure Many frauds are motivated by nothing - Business reversals more than a perceived need to keep up with the Joneses. - Physical isolation The problem is that there is always a - Status gaining richer Jones down the street and the
pressure continues to mount, as do the resulting thefts.

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WHO COMMITS FRAUD AND WHY


The most common pressures were:
- Not being able to pay ones debts, nor admit it to ones employer, family, or friends (which makes in non-shareable) - Fear of loss of status because of a personal failure - Business reversalsMay create pressure to get revenge, - Physical isolation take the money you feel is rightfully owed to you, etc. - Status gaining - Difficulties in employer-employee relations

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WHO COMMITS FRAUD AND WHY


Whats important here is the perception of the pressure.
There might be a number of people who could and would help a tentative fraudster out of his financial woes. But as long as he perceives that he cannot share his burden, the pressure is present. Research has also found that an individuals propensity to commit fraud is more related to how much he worries about his financial position than his actual position. The millionaire who frets a lot about his financial condition is more likely to commit fraud than the guy who doesnt have two dimes to rub together but isnt worried about it.

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WHO COMMITS FRAUD AND WHY


Financial statement fraud is distinct from other types of fraud in that the individuals who commit the fraud are not the direct beneficiaries.
The company is the direct beneficiary. The perpetrators are typically indirect beneficiaries.

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WHO COMMITS FRAUD AND WHY


In the case of financial statement frauds, common pressures include:
To prop up earnings or stock price so that management can: Receive performance-related compensation. Preserve or improve personal wealth held in company stock or stock options. Keep their jobs. To cover the inability to generate cash flow. To obtain financing. To appear to comply with bond covenants or other agreements. May be opposite of propping up earnings in cases involving income-tax motivations, government contracts, or regulation.

Click here for a comprehensive list of pressures.

Pressures
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PRESSURES THAT LEAD TO EMPLOYEE FRAUD


FINANCIAL Living beyond means High personal debt/expenses Inadequate salary/income Poor credit ratings Heavy financial losses Bad investments Tax avoidance Meet unreasonable quotas/goals EMOTIONAL

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Greed Unrecognized performance Job dissatisfaction Fear of losing job Power or control Pride or ambition Beating the system Frustration Non-conformity Envy, resentment Arrogance, dominance Non-rules oriented

LIFESTYLE Support gambling habit Drug or alcohol addiction Support sexual relationships Family/peer pressure

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The Fraud Triangle


Donald Cressey

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Pr es
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su

re

Rationalization
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WHO COMMITS FRAUD AND WHY


Opportunity is the opening or gateway that allows an individual to:
Commit the fraud Conceal the fraud Convert the proceeds

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WHO COMMITS FRAUD AND WHY


Opportunity is the opening or gateway that allows an individual to:
Commit the fraud Conceal the fraud Convert the proceeds

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WHO COMMITS FRAUD AND WHY


Committing the fraud might involve acts such as:
Misappropriating assets. Issuing deceptive financial statements. Accepting a bribe in order to make an arrangement that is not in the companys best interest.

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WHO COMMITS FRAUD AND WHY


Opportunity is the opening or gateway that allows an individual to:
Commit the fraud Conceal the fraud Convert the proceeds

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WHO COMMITS FRAUD AND WHY


Concealing the fraud often takes more time and effort and leaves more evidence than the actual theft or misrepresentation. Examples of concealment efforts:
Charge a stolen asset to an expense account or to an account receivable that is about to be written off.

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WHO COMMITS FRAUD AND WHY


Concealing the fraud often takes more time and effort and leaves more evidence than the actual theft or misrepresentation. Examples of concealment efforts:
Charge a stolen asset to an expense account or to an account receivable that is about to be written off. Create a ghost employee who receives an extra paycheck.

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WHO COMMITS FRAUD AND WHY


Concealing the fraud often takes more time and effort and leaves more evidence than the actual theft or misrepresentation. Examples of concealment efforts:

Steal a payment from Customer A. Charge a stolen asset to an expense account or to an Apply Customer Bs payment to Customer As account so account receivable that islate notice. be written off. about to Customer A wont get a Create a ghost employee who to Customer Bs account, so Apply Customer Cs payment receives an extra paycheck. Customer B wont get a late notice, etc. Lapping.

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WHO COMMITS FRAUD AND WHY


Concealing the fraud often takes more time and Creates cash more evidence between banks. effort and leaves by transferring money than the actual Requires multiple bank accounts. theft or misrepresentation. Basic scheme: Examples of aconcealment efforts: A. Write check on the account of Bank
Bank A doesnt have an expense to cover or to an Charge a stolen asset to sufficient funds accountthe check, so write a check from about to be written be account receivable that isan account in Bank B to off. deposited in Bank A. Create a ghost employee who receives an extra Bank B doesnt have sufficient funds to cover the check, paycheck. so write a check from an account in Bank C to be deposited in Bank B, etc. Lapping. Kiting.

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WHO COMMITS FRAUD AND WHY


Opportunity is the opening or gateway that allows an individual to:
Commit the fraud Conceal the fraud Convert the proceeds

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WHO COMMITS FRAUD AND WHY


Unless the target of the theft is cash, then the stolen goods must be converted to cash or some form that is beneficial to the perpetrator.
Checks can be converted through alterations, forged endorsements, check washing, etc. Non-cash assets can be sold (online auctions are a favorite forum) or returned to the company for cash.
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WHO COMMITS FRAUD AND WHY


If the fraud is a financial statement fraud, then the gains received may include:
I got to keep my job. The value of my stock or stock options rose. I got a raise, promotion, or bonus. I got power.

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WHO COMMITS FRAUD AND WHY


There are many opportunities that enable fraud. Some of the most common are:
Lack of internal controls Failure to enforce controls (the most prevalent reason) Excessive trust in key employees Incompetent supervisory personnel Inattention to details Inadequate staff

Click here for a comprehensive list of opportunities. Opportunities


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OPPORTUNITIES PERMITTING EMPLOYEE AND FINANCIAL STATEMENT FRAUD


Internal Control Factors Failure to enforce/monitor internal controls Management not involved in control system Management override of controls and guidelines Managerial carelessness, inattention to details Dominant and unchallenged management Ineffective oversight by board of directors No effective internal auditing staff Infrequent third-party reviews Insufficient separation of authorization, custody, and recordkeeping duties Too much trust in key employees Inadequate supervision Unclear lines of authority
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OPPORTUNITIES PERMITTING EMPLOYEE AND FINANCIAL STATEMENT FRAUD


Lack of proper authorization procedures No independent checks on performance Inadequate documents and records Inadequate system for safeguarding assets No physical or logical security system No audit trails Failure to conduct background checks No policy of annual vacations, rotation of duties

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OPPORTUNITIES PERMITTING EMPLOYEE AND FINANCIAL STATEMENT FRAUD


Other Factors Large, unusual, or complex transactions Numerous adjusting entries at year end Related-party transactions Accounting department understaffed and overworked Incompetent personnel Rapid turnover of key employees Lengthy tenure in a key job Unnecessarily complex organizational structure No code of conduct, conflict of interest statements, or definitions of unacceptable behavior Frequently changing auditors, legal counsel Operating on a crisis basis Close association with suppliers/customers
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OPPORTUNITIES PERMITTING EMPLOYEE AND FINANCIAL STATEMENT FRAUD


Assets highly susceptible to misappropriation Questionable accounting practices Pushing accounting principles to the limit Unclear company policies and procedures Failing to teach and stress corporate honesty Failure to prosecute dishonest employees Low employee morale and loyalty

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WHO COMMITS FRAUD AND WHY


Internal controls that may be lacking or unenforced include:
Authorization procedures Clear lines of authority Adequate supervision Adequate documents and records A system to safeguard assets Independent checks on performance Separation of duties

One control feature that many companies lack is a background check on all potential employees.
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WHO COMMITS FRAUD AND WHY


Management may allow fraud by:
Not getting involved in the design or enforcement of internal controls; Inattention or carelessness; Overriding controls; and/or Using their power to compel subordinates to carry out the fraud.

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The Fraud Triangle


Donald Cressey

Op

su

re

po

Pr es

rt u y n it

Rationalization
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WHO COMMITS FRAUD AND WHY


How many people do you know who regard themselves as being unprincipled or sleazy? It is important to understand that fraudsters do not regard themselves as unprincipled.
In general, they regard themselves as highly principled individuals. That view of themselves is important to them. The only way they can commit their frauds and maintain their self image as principled individuals is to create rationalizations that recast their actions as morally acceptable behaviors.
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WHO COMMITS FRAUD AND WHY


These rationalizations take many forms, including:
I was just borrowing the money. It wasnt really hurting anyone. (Corporations are often seen as non-persons, therefore crimes against them are not hurting anyone.) Everybody does it. Ive worked for them for 35 years and been underpaid all that time. I wasnt stealing; I was only taking what was owed to me. I didnt take it for myself. I needed it to pay my childs medical bills.
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Creators of worms and viruses often use rationalizations like:
The malicious code helped expose security flaws, so I did a good service. It was an accident. It was not my faultjust an experiment that went bad. It was the users fault because they didnt keep their security up to date. If the code didnt alter or delete any of their files, then whats the problem?

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WHO COMMITS FRAUD AND WHY


Fraud occurs when:
People have perceived, non-shareable pressures; The opportunity gateway is left open; and They can rationalize their actions to reduce the moral impact in their minds (i.e., they have low integrity).

Fraud is much less likely to occur when


There is low pressure, low opportunity, and high integrity.

Unfortunately, there is usually a mixture of these forces in play, and it can be very difficult to determine the pressures that may apply to an individual and the rationalizations he/she may be able to produce.

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INTRODUCTION
In this chapter well discuss:
The fraud process Why fraud occurs Approaches to computer fraud Specific techniques used to commit computer fraud Ways companies can deter and detect computer fraud

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APPROACHES TO COMPUTER FRAUD The U.S. Department of Justice defines computer fraud as any illegal act for which knowledge of computer technology is essential for its:
Perpetration; Investigation; or Prosecution.

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APPROACHES TO COMPUTER FRAUD Computer fraud includes the following:


Unauthorized theft, use, access, modification, copying, and destruction of software or data. Theft of money by altering computer records. Theft of computer time. Theft or destruction of computer hardware. Use or the conspiracy to use computer resources to commit a felony. Intent to illegally obtain information or tangible property through the use of computers.
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APPROACHES TO COMPUTER FRAUD


In using a computer, fraud perpetrators can steal:
More of something In less time With less effort

They may also leave very little evidence, which can make these crimes more difficult to detect.
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APPROACHES TO COMPUTER FRAUD


Computer systems are particularly vulnerable to computer crimes for several reasons:
Company databases can be huge and access privileges can be difficult to create and enforce. Consequently, individuals can steal, destroy, or alter massive amounts of data in very little time. Organizations often want employees, customers, suppliers, and others to have access to their system from inside the organization and without. This access also creates vulnerability. Computer programs only need to be altered once, and they will operate that way until:
The system is no longer in use; or Someone notices.
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APPROACHES TO COMPUTER FRAUD


Modern systems are accessed by PCs, which are inherently more vulnerable to security risks and difficult to control.
It is hard to control physical access to each PC. PCs are portable, and if they are stolen, the data and access capabilities go with them. PCs tend to be located in user departments, where one person may perform multiple functions that should be segregated. PC users tend to be more oblivious to security concerns.
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APPROACHES TO COMPUTER FRAUD


Computer systems face a number of unique challenges:
Reliability (accuracy and completeness) Equipment failure Environmental dependency (power, water damage, fire) Vulnerability to electromagnetic interference and interruption Eavesdropping Misrouting

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APPROACHES TO COMPUTER FRAUD Organizations that track computer fraud estimate that most U.S. businesses have been victimized by at least one incident of computer fraud.

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APPROACHES TO COMPUTER FRAUD These frauds cost billions of dollars each year, and their frequency is increasing because:
Not everyone agrees on what constitutes computer fraud.
Many dont believe that taking an unlicensed copy of software is computer fraud. (It is and can result in prosecution.) Some dont think its a crime to browse through someone elses computer if their intentions arent malicious.
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Many computer frauds go undetected. An estimated 80-90% of frauds that are uncovered are not reported because of fear of:
Adverse publicity Copycats Loss of customer confidence.

There are a growing number of competent computer users, and they are aided by easier access to remote computers through the Internet and other data networks.
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Some folks believe it cant happen to us. Many networks have a low level of security. Instructions on how to perpetrate computer crimes and abuses are readily available on the Internet. Law enforcement is unable to keep up with the growing number of frauds. The total dollar value of losses is difficult to calculate.
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APPROACHES TO COMPUTER FRAUD Economic espionage, the theft of information and intellectual property, is growing especially fast. This growth has led to the need for investigative specialists or cybersleuths.

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APPROACHES TO COMPUTER FRAUD Computer Fraud Classification


Frauds can be categorized according to the data processing model:
Input Processor Computer instructions Stored data Output

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COMPUTER FRAUD CLASSIFICATIONS


Data Fraud

Input Fraud

Processor Fraud

Output Fraud

Computer Instructions Fraud


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COMPUTER FRAUD CLASSIFICATIONS


Data Fraud

Input Fraud

Processor Fraud

Output Fraud

Computer Instructions Fraud


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APPROACHES TO COMPUTER FRAUD


Input Fraud
The simplest and most common way to commit a fraud is to alter computer input. Requires little computer skills. Perpetrator only need to understand how the system operates Can take a number of forms, including: Disbursement frauds The perpetrator causes a company to: Pay too much for ordered goods; or Pay for goods never ordered.

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APPROACHES TO COMPUTER FRAUD


Input Fraud
The simplest and most common way to commit a fraud is to alter computer input. Requires little computer skills. Perpetrator only need to understand how the system operates Can take a number of forms, including: Disbursement frauds Inventory frauds The perpetrator enters data into the system to show that stolen inventory has been scrapped.

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APPROACHES TO COMPUTER FRAUD


Input Fraud
The simplest and most common way to commit a fraud is to alter computer input. Perpetrators may enter Requires little computer skills. data to: only need to understand Perpetrator Increase their salaries how the system operates Create a fictitious employee Can take a number of forms, including: Retain a terminated employee on the records. Disbursement frauds In the latter two instances, the perpetrator intercepts and cashes the resulting paychecks. Inventory frauds Payroll frauds

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APPROACHES TO COMPUTER FRAUD


Input Fraud
The simplest and most common way to commit a fraud is to alter computer input. Requires little computer skills. Perpetrator only need to understand how the system operatesThe perpetrator hides the theft by falsifying system Can take a number of forms, including: input. Disbursement fraudsCash of $200 is received. The EXAMPLE: perpetrator records a cash receipt of $150 and Inventory frauds pockets Payroll frauds the $50 difference. Cash receipt frauds

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APPROACHES TO COMPUTER FRAUD


Input Fraud
The simplest and most common way to commit a fraud is to alter computer input. Requires little computer skills. Perpetrator only need to understand how the system operates Can take a number of forms, including: Disbursement frauds Inventory frauds Payroll fraudsperpetrator files for an undeserved refund, such The as tax refund. Cash receiptafrauds Fictitious refund fraud

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COMPUTER FRAUD CLASSIFICATIONS


Data Fraud

Input Fraud

Processor Fraud

Output Fraud

Computer Instructions Fraud


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Processor Fraud
Involves computer fraud committed through unauthorized system use. Includes theft of computer time and services. Incidents could involve employees:
Surfing the Internet; Using the company computer to conduct personal business; or Using the company computer to conduct a competing business.

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In one example, an agriculture college at a major state university was experiencing very sluggish performance from its server. Upon investigating, IT personnel discovered that an individual outside the U.S. had effectively hijacked the colleges server to both store some of his/her research data and process it. The college eliminated the individuals data and blocked future access to the system. The individual subsequently contacted college personnel to protest the destruction of the data. Demonstrates both:
How a processor fraud can be committed. How oblivious users can sometimes be to the unethical or illegal nature of their activities.

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COMPUTER FRAUD CLASSIFICATIONS


Data Fraud

Input Fraud

Processor Fraud

Output Fraud

Computer Instructions Fraud


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APPROACHES TO COMPUTER FRAUD Computer Instructions Fraud


Involves tampering with the software that processes company data. May include:
Modifying the software Making illegal copies Using it in an unauthorized manner

Also might include developing a software program or module to carry out an unauthorized activity.
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Computer instruction fraud used to be one of the least common types of frauds because it required specialized knowledge about computer programming beyond the scope of most users. Today these frauds are more frequent--courtesy of web pages that instruct users on how to create viruses and other schemes.

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COMPUTER FRAUD CLASSIFICATIONS


Data Fraud

Input Fraud

Processor Fraud

Output Fraud

Computer Instructions Fraud


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APPROACHES TO COMPUTER FRAUD


Data Fraud
Involves:
Altering or damaging a companys data files; or Copying, using, or searching the data files without authorization.

In many cases, disgruntled employees have scrambled, altered, or destroyed data files. Theft of data often occurs so that perpetrators can sell the data.
Most identity thefts occur when insiders in financial institutions, credit agencies, etc., steal and sell financial information about individuals from their employers database.
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COMPUTER FRAUD CLASSIFICATIONS


Data Fraud

Input Fraud

Processor Fraud

Output Fraud

Computer Instructions Fraud


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APPROACHES TO COMPUTER FRAUD


Output Fraud
Involves stealing or misusing system output. Output is usually displayed on a screen or printed on paper. Unless properly safeguarded, screen output can easily be read from a remote location using inexpensive electronic gear. This output is also subject to prying eyes and unauthorized copying. Fraud perpetrators can use computers and peripheral devices to create counterfeit outputs, such as checks.
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INTRODUCTION
In this chapter well discuss:
The fraud process Why fraud occurs Approaches to computer fraud Specific techniques used to commit computer fraud Ways companies can deter and detect computer fraud

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COMPUTER FRAUD AND ABUSE TECHNIQUES


Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Data diddling Changing data before, during, or after it is entered into the system. Can involve adding, deleting, or altering key system data.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Data diddling Data leakage Unauthorized copying of company data.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Data diddling Data leakage Denial of service attacks An attacker overloads and shuts down an Internet Service Providers email system by sending email bombs at a rate of thousands per secondoften from randomly generated email addresses. May also involve shutting down a web server by sending a load of requests for the web pages.

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Carried out as follows: The attacker infects dozens of computers that have broadband Internet access with denial-of-service programs. These infected computers are the Perpetrators have devisedzombies. many methods to commit The attacker then activates the denialcomputer fraud and abuse. These include: of-service programs, and the zombies Data diddling send pings (emails or requests for data) Data leakage to the target server. The victim Denial of service attacks responds to each, not realizing they have fictitious return addresses, and waits for responses that dont come. While the victim waits, system performance degrades until the system freezes up or crashes. The attacker terminates the program after an hour or two to limit the victims ability to trace the source.

COMPUTER FRAUD AND ABUSE TECHNIQUES

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Data diddling Data leakage Denial of service attacks Experts estimate there as many as 5,000 denial-of-service attacks weekly in the U.S. A denial-of-service can cause severe economic damage to its victim or even drive them out of business.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Data diddling Data leakage Denial of service attacks Eavesdropping Perpetrators surreptitiously observe private communications or transmission of data. Equipment to commit these electronic wiretaps is readily available at electronics stores.

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COMPUTER FRAUD AND ABUSE A threatening message is sent to a victim to induce the victim to do TECHNIQUES something that would make it possible to be defrauded.

Several banks in the Midwest were contacted by an overseas Perpetratorswho indicated that: perpetrator have devised many methods to commit computer fraud and abuse. Thesesystem and obtained personal He had broken into their computer include: Data diddling information about all of the banks customers. and banking Data leakage He would notify the banks customers of this breach if he was not paid a specified sum of Denial of service attacks money. Eavesdropping Email threats

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COMPUTER FRAUD AND ABUSE Involves sending an email message that TECHNIQUES come from someone other appears to have
Perpetrators have devised many methods to commit Email spoofers may: computer fraud and abuse. These include:
than the actual sender. Claim to be system administrators and Data diddling ask users to change their passwords to Data leakage specific values. Denial of service attacks Pretend to be management and request a copy of some sensitive information. Eavesdropping Email threats Email forgery (aka, spoofing)

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Perpetrators have devised many methods to commit Unauthorized access to and use of computer systemsusually by computer fraud and abuse. These include:
means of a personal computer and a telecommunications network. Data diddling Most hackers break into systems using known flaws in operating Data leakage systems, applications programs, or access controls. Denial of servicemalevolent and mainly motivated by curiosity and a Some are not very attacks Eavesdropping a challenge. desire to overcome Email threats Others have malicious intent and can do significant damage. Email forgery (aka, spoofing) Hacking

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Data diddling Data leakage Denial of service attacks Eavesdropping Hacking that attacks phone systems and Email threats uses phone lines to transmit viruses and to access, steal, and destroy data. Email forgery (aka, spoofing) They also steal telephone services and Hacking may break into voice mail systems. Phreaking Some hackers gain access to systems through dial-up modem lines.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Data diddling Data leakage Denial of service attacks Eavesdropping Email threats Email forgery (aka, spoofing) Hacking Involves gaining control of someone elses computer to carry out illicit activities without Phreaking the users knowledge. Hijacking The illicit activity is often the perpetuation of spam emails.
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Assuming someones identity, typically for economic gain, by illegally obtaining and using confidential information such Perpetrators have devised many methods to commit as the persons social security number, bank account computer fraud and abuse. These include: number, or credit card number. Data diddling Identity thieves benefit financially by: Data leakage Taking funds out of the victims bank account. Denial of service attacks Taking out mortgages or other loans under the victims Eavesdropping identity. Email Taking out credit cards and running up large balances. threats Email forgeryis careful and ensures that bills and notices are sent to If the thief (aka, spoofing) Hacking an address he controls, the scheme may be prolonged until such time as Phreaking the victim attempts to buy a home or car and finds out that his credit Hijacking is destroyed. Identity theft
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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Data diddling Data leakage Victims can usually clear their credit, but the effort requires a Denial of service attacks significant amount of time and expense. Eavesdropping was made a federal offense in 1998, but it is a Identity theft Email threats growing crime industry. Email forgery (aka, inspector, whose job duties involved investigation One U.S. postal spoofing) of identity thefts, was himself a victim. The thief ran up $80,000 in Hacking debt under the postal inspectors identity before the inspector Phreaking discovered the problem. Hijacking Identity theft
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Identity thieves can steal corporate or individual identities by: Shoulder surfing
sales clerks or others.

COMPUTER FRAUD AND ABUSE Watching people enter telephone calling card numbers or credit card TECHNIQUES numbers or listening to communications as they provide this information to
trash bins, and city dumps for documents with confidential company

Scavenging or dumpster diving Perpetrators have devised

many methods to commit Searching corporate or abuse. These rifling garbage cans, communal computer fraud and personal records by include:

Data diddling information. Data leakage May also look for personal information such as checks, credit card statements,service attacks tax returns, discarded applications for preDenial of bank statements, approved credit cards, or other records that contain social security numbers, Eavesdropping names, addresses, phone numbers, and other data that allow them to assumethreats Email an identity. Email forgery Redirecting mail (aka, spoofing) Hacking Intercepting mail and having it delivered to a location where others can access it. Phreaking Using Internet, email, and other technology in spoofing, phishing, Hijacking eavesdropping, impersonating, social engineering, and data leakage Identity theft schemes.
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Perpetrators have devised many methods to commit The U.S. and abuse. These include: computer fraud Department of Justice suggests the following four
ways to minimize the chances of being victimized by identity Data diddling theft: Data leakage give out corporate or personal information unless Do not Denial of there is a good reason to trust the person to whom it is service attacks given. Eavesdropping Check Email threats financial information regularly for what should be there, as well as for what should not be there. Email forgery (aka, spoofing) Hacking Periodically review your credit report. Maintain careful records of banking and financial accounts. Phreaking Hijacking Identity theft
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Perpetrators have devised many methods to commit computer fraud and abuse. These include:

Internet misinformation Using the Internet to spread false or misleading information about people or companies. May involve: Planting inflammatory messages in online chat rooms. Websites with misinformation. Pretending to be someone else online and making inflammatory comments that will be attributed to that person. A pump-and-dump occurs when an individual spreads misinformation, often through Internet chat rooms, to cause a run-up in the value a stock and then sells off his shares of the stock. A number of pump-and-dump cases have been prosecuted by the SEC.
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Another common form of Internet misinformation is the spreading of urban legendsoften by innocently forwarding emails. Urban legends may often include damaging implications about company products, such as a recent email many methods to commit contain Perpetrators have devised suggesting that certain lipsticks lead or that using plastic cookware in the microwave can cause cancer. computer fraud and abuse. These include: Before forwarding any emails with negative information about individuals, Internet misinformation companies, or their products, its a good idea to check the veracity of the information first. Emails with urban legends often attribute their facts to credible sources, such as the federal government, Stanford University researchers, the FBI, etc. There are several websites that attempt to verify the truth of emails that are circulated. One such website is www.snopes.com. You can easily locate the email you received on these websites, by searching under a key term in the email, such as lipstick. You are likely to find that most emails you were getting ready to forward are either false or only partially true.
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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Internet misinformation Internet terrorism Hackers use the Internet to disrupt electronic commerce and destroy company and individual communications. Viruses and worms are two main forms of Internet terrorism.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Internet misinformation Internet terrorism Logic time bombs A program that lies idle until triggered by some circumstance or a particular time. Once triggered, it sabotages the system, destroying programs, data, or both. Usually written by disgruntled programmers. EXAMPLE: A programmer places a logic bomb in a payroll application that will destroy all the payroll records if the programmer is terminated.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Internet misinformation Internet terrorism Logic time bombs Masquerading or impersonation

The perpetrator gains access to the system by pretending to be an authorized user. The perpetrator must know the legitimate users ID and password. Once in the system, he enjoys the same privileges as the legitimate user.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Internet misinformation Internet terrorism Logic time bombs Masquerading or impersonation Packet sniffers

Programs that capture data from information packets as they travel over the Internet or company networks. Confidential information and access information can be gleaned from the captured datasome of which is later sold.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Internet misinformation Internet terrorism Logic time bombs Masquerading or impersonation Packet sniffers Password cracking

An intruder penetrates a systems defenses, steals the file of valid passwords, decrypts them, and then uses them to gain access to almost any system resources.

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Perpetrators have devised many methods to commit company, such as a financial institution. EBay, PayPal, and banks are computerspoofed. commonly fraud and abuse. These include:
Sending out a spoofed email that appears to come from a legitimate

Internet misinformation The recipient is advised that information or a security check is needed on his account, and advised to click on a link to the companys website Internet terrorism to provide the information. Logic time bombs The link connects theimpersonation website that is an imitation of the Masquerading or individual to a spoofed companys actual website. These counterfeit websites appear Packet sniffers very authentic, as do the emails. Password cracking Phishing

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COMPUTER FRAUD AND ABUSE TECHNIQUES One newly graduated college student recently took a job in California

and deposited his first paycheck of approximately $5,000 in the bank. Perpetrators have devised many methods to commit That same night, he received an email from the bank, inviting him to computer fraud the email to setThese include: for his new bank click on the link in and abuse. up online banking Internet account. misinformation followed directions He Internet terrorism and provided the requested information to set up online banking. Logic time bombs Two hours later, he was nervous and called the bankonly to find out Masquerading or impersonation thatPacket sniffers his bank account had been cleaned out and closed. Password cracking Phishing

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COMPUTER FRAUD AND ABUSE As a rule of thumb, it is a good idea not to click on any link provided in TECHNIQUES an email and to go directly to the website instead.
PayPal, whose email address is commonly spoofed for phishing scams, Perpetrators have devised many methods to commit offers the following advice: computer fraud sendsabuse. email, they will include your first and If PayPal ever and you an These include: Internet misinformation last name in the salutation of the email. Internet terrorism PayPals website, type https: in the URL If you need to enter instead of bombs Logic time http: in order to enter on the companys secured server. If you receive or impersonation Masqueradinga suspicious email, get out of your browser and go back in before Packet sniffers proceeding directly to a company website. Password cracking Phishing

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Perpetrators have devised manyplace in South America with In 2004, a phishing-related scam took methods to commit respect to three large South American banks. Once computer fraud and abuse. These include: an individual
opened the misinformationa script was downloaded on their computer. Internet related email, The script would alter the individuals web browser so that if the user Internet entered the terrorism URL of one of these three banks, the browser would Logic time bombs redirect them to a counterfeit website for that bank. The oblivious user Masquerading or password information, and was instantly set up for would provide ID andimpersonation ahigh-techsniffers of his bank account. Packet robbery Password cracking Phishing

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Internet misinformation Internet terrorism Logic time bombs Consumer Reports suggests that if you have any questions about the Masquerading or impersonation legitimacy of a website, you should try entering the wrong password. A phishing website will typically accept an incorrect passwordwhich Packet sniffers cues you that it is a phishing scam. Password cracking Phishing

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Example of a website produced for a phishing scam.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Internet misinformation Internet terrorism Logic time bombs Masquerading or impersonation Packet sniffers Password cracking Tapping into a telecommunications line and latching onto a legitimate user before that user Phishing logs into a system. Piggybacking The legitimate user unknowingly carries the perpetrator into the system.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Internet misinformation Internet terrorism Logic time bombs Masquerading or impersonation Made famous in the movie, Office Space. Packet sniffers The programmer instructs the Password cracking computer to round interest Phishing calculations down to two decimal Piggybacking places and deposits the remaining Round-down technique fraction into the account of a programmer or an accomplice.
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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Internet misinformation Internet terrorism Logic time bombs Masquerading or impersonation Packet sniffers Password cracking Involves the theft of tiny slices of money over a period of Phishing time. Piggybacking Round-down technique The round-down is just a special form of a salami Salami technique technique.
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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Social engineering Perpetrators trick employees into giving them information they need to get into the system. A perpetrator might call an employee and indicate he is the systems administrator and needs to get the employees password.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Social engineering Software piracy Copying software without the publishers permission. In the U.S., its estimated that 26% of software in use is pirated. Fines for individuals and corporations are stiff, and individuals convicted of software piracy can serve jail terms of up to 5 years.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Social engineering Software piracy Spamming Emailing an unsolicited message to multitudes of people, often in an attempt to sell a product. Many times the product offers are fraudulent.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Social engineering Software piracy Spamming Spammers use creative means to find valid email addresses: Scanning the Internet for addresses posted online. Hacking into company databases and stealing mailing lists. Staging dictionary (aka direct harvesting) attacks. These attacks use special software to guess addresses at a particular company and send blank emails. Messages not returned are usually valid. These attacks are very burdensome to corporate email systems.
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Companies may use filtering software to detect dictionary attacks, search mail for competitive leaks, and block inappropriate attachments, such as pornography and illegal MP3 files. Filtering is not always viable. The director of Perpetrators have devised many methods to commit internal audit at a major healthcare company computer fraud and abuse. These include: changes email addresses frequently because Social engineering of the volume of spam email in his inbox. Software piracy When asked why his company did not filter Spamming the spam, he replied, Because were a healthcare company, we cannot filter out any references to body parts or prescription medications. There is increasing public clamor for laws to clamp down on spamming. In December 2004, a federal judge awarded over $1 billion to a small Midwestern Internet service provider in an action against three spammers.

COMPUTER FRAUD AND ABUSE TECHNIQUES

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Perpetrators have devised many methods to commit computer fraud and abuse. monitors include: habits, such as Software that These computing
Social engineering web-surfing habits, and sends the data it gathers to Software piracysomeone else, typically without the users permission. Spamming One type, called adware (for advertisingSpyware supported software) does two things: Causes banner ads to pop up on your monitor as you surf the net. Collects information about your Web-surfing and spending habits and forwards it to a company gathering the dataoften an advertising or large media organization.

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Usually comes bundled with COMPUTER FRAUD AND ABUSE freeware and shareware TECHNIQUES from the Internet. downloaded

May be disclosed in the licensing Perpetrators have devised many methods to commit agreement, but users are unlikely computer fraud and abuse. to read it. These include: Reputable adware companies Social engineering claim they dont collect sensitive Software piracy or identifying data. Spamming But there is no way for users to Spyware control or limit the activity.
It is not illegal, but many find it objectionable.

Software has been developed to detect and eliminate spyware, but it may also impair the downloaded software.
Some is intentionally difficult to uninstall.

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COMPUTER FRAUD AND ABUSE A keystroke logger records users TECHNIQUES emails themato or saves keystrokes and

them for the party that planted the Perpetrators have devisedlogger. These are sometimes used by: many methods to commit computer fraud and abuse. These include: their childrens Parents to monitor Social engineering computer usage. Software piracy Businesses to monitor employee activity. Spamming Fraudsters to capture passwords, Spyware credit card numbers, etc. Keystroke loggers A keystroke logger can be a hardware device attached to a computer or can be downloaded on an individuals computer in the same way that any Trojan horse might be downloaded.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Social engineering Software piracy Spamming Spyware Keystroke loggers Spyware and keystroke loggers are very problematic for companies with employees who telecommute or contact the companys computer from remote locations. Spyware on those computers makes the companys systems vulnerable. Individuals are also exposed when they use wireless networks, such as those that may be available in coffee shops.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Social engineering Software piracy Spamming Spyware Keystroke loggers Superzapping

Unauthorized use of special system programs to bypass regular system controls and perform illegal acts. The name is derived from an IBM software utility called Superzap that was used to restored crashed systems.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Social engineering Also called back doors. Software piracy Programmers create trap doors to modify Spamming programs. Spyware The trap door is a way into the system Keystroke loggersthat bypasses normal controls. Superzapping The trap door should be removed before Trap doors the program is implemented. If it is not, the programmer or others may later gain unauthorized access to the system.

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Perpetrators have devised many methods to commit computer fraud and A set of unauthorized computer abuse. These include:
Social engineering Software piracy Spamming Spyware Keystroke loggers Superzapping Trap doors Trojan horse instructions planted in an authorized and otherwise properly functioning program. Allows the creator to control the victims computer remotely. The code does not try to replicate itself but performs an illegal act at some specific time or when some condition arises. Programs that launch denial of service attacks are often Trojan horses.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Social engineering Software piracy Spamming Spyware Keystroke loggers Superzapping Hackers search for an idle modem by Trap doors programming their computers to dial Trojan horse thousands of phone lines. War dialing Hackers enter through the idle modem and gain access to the connected network.
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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Social engineering Software piracy Spamming Spyware Keystroke loggers Superzapping Driving around in cars looking for Trap doors unprotected home or corporate wireless Trojan horse networks. War dialing If the hackers mark the sidewalk of the War driving susceptible wireless network, the practice is referred to as warchalking.
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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Virus Many viruses have two phases: First, when some predefined event occurs, the virus replicates itself and spreads to other systems or files. Another event triggers the attack phase in which the virus carries out its mission. A virus may lay dormant or propagate itself without causing damage for an extended period.

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COMPUTER may take many forms: ABUSE FRAUD AND Damage TECHNIQUES Send email with the victims name as the alleged

source. Perpetrators have devised many methods to commit Destroy or alter data or programs. computer fraud and abuse. of the computer. Take control These include: Virus Destroy or alter file allocation tables. Delete or rename files or directories. Reformat the hard drive. Change file content. Prevent users from booting. Intercept and change transmissions. Print disruptive images or messages on the screen. Change screen appearance. As viruses spread, they take up much space, clog communications, and hinder system performance.

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Perpetrators have devised many methods to commit computer fraudVirus symptoms: and abuse. These include:
Virus Computer will not start or execute Performs unexpected read or write operations Unable to save files Long time to load programs Abnormally large file sizes Slow systems operation Unusual screen activity Error messages
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Perpetrators have devised many methods to commit computer fraudViruses are contagious and easily spread from one and abuse. These include:
Virus system to another. They are usually spread by: Opening an infected email attachment or file (most common); or Running an infected program. Some viruses can mutate, which makes them more difficult to detect and destroy. The emails often appear to come from sources like Microsoft and seem very convincing.

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Virus protections include: Install reliable virus software that scans for, identifies, and destroys viruses. Keep the antivus program up to date. devised many methods to commit Perpetrators haveScan incoming email at the server level, rather than when hits the computer fraud and abuse.it These desktops. include: Certify all software as virus-free before loading Virus it. Software from unknown sources may be virus bait, especially if it seems too good to be true. Deal with trusted software retailers. Use electronic techniques to make tampering evident. Check new software on an isolated machine. Have two backups of all files. Do not put diskettes or CDs in strange machines, or let others put unscanned disks in your machine.

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Perpetrators have devised many methods to commit computer fraud and abuse. These include:
Virus Viruses attack computers, but any device that is part of the communications network is vulnerable, including: Cell phones Smart phones PDAs

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Perpetrators have a virus except for:methods to commit A worm is similar to devised many computer fraudstand-alone program, while a virus is only a segment A worm is a and abuse. These include:

Virus of code hidden in a host program or executable file. Worms will replicate itself automatically, while a virus requires a A worm human to do something like open a file. Worms often reproduce by mailing themselves to the recipients mailing list. They are not confined to PCs and have infected cell phones in Japan. A worm typically has a short but very destructive life. It takes little technical knowledge to create worms or viruses; several websites provide instructions. Most exploit known software vulnerabilities that can be corrected with a software patch, making it important to install all patches as soon as they are available.
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Perpetrators have devised many methods to commit computer fraud andfrom a friend, apologizing profusely that he/she You receive an email abuse. These include:

has previously sent you an email that was infected with a virus. Virus The friends email gives you instructions to look for and remove the Worms offending virus. do-it-yourself attack The low-tech, You delete the file from your hard drive. The only problem is that the file you just deleted was part of your operating system. Your friend was well-intended and has done the same thing to his/her computer. REMEDY: Before even considering following instructions of this sort, check the list of hoaxes that are available on any virus protection website, such as:
www.norton.com www.mcafee.com

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INTRODUCTION
In this chapter well discuss:
The fraud process Why fraud occurs Approaches to computer fraud Specific techniques used to commit computer fraud Ways companies can deter and detect computer fraud

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Organizations must take every precaution to protect their information systems. Certain measures can significantly decrease the potential for fraud and any resulting losses. These measures include:
Make fraud less likely to occur Increase the difficulty of committing fraud Improve detection methods Reduce fraud losses

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Organizations must take every precaution to protect their information systems. Certain measures can significantly decrease the potential for fraud and any resulting losses. These measures include:
Make fraud less likely to occur Increase the difficulty of committing fraud Improve detection methods Reduce fraud losses

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Make fraud less likely to occur
Create a culture that stresses integrity and commitment to ethical values and competence. Adopt an organizational structure, management philosophy, operating style, and appetite for risk that minimizes the likelihood of fraud. Require oversight from an active, involved, and independent audit committee. Assign authority and responsibility for business objectives to specific departments and individuals, encourage initiative in solving problems, and hold them accountable for achieving those objectives.
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Identify the events that lead to increased fraud risk, and take steps to prevent, avoid, share, or accept that risk. Develop a comprehensive set of security policies to guide the design and implementation of specific control procedures, and communicate them effectively to company employees. Implement human resource policies for hiring, compensating, evaluating, counseling, promoting, and discharging employees that send messages about the required level of ethical behavior and integrity. Effectively supervise employees, including monitoring their performance and correcting their errors.

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Train employees in integrity and ethical considerations, as well as security and fraud prevention measures. Require annual employee vacations, periodically rotate duties of key employees, and require signed confidentiality agreements. Implement formal and rigorous project development and acquisition controls, as well as change management controls. Increase the penalty for committing fraud by prosecuting fraud perpetrators more vigorously.
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Organizations must take every precaution to protect their information systems. Certain measures can significantly decrease the potential for fraud and any resulting losses. These measures include:
Make fraud less likely to occur Increase the difficulty of committing fraud Improve detection methods Reduce fraud losses

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Increase the difficulty of committing fraud
Develop a strong system of internal controls Segregate the accounting functions of:
Authorization Recording Custody

Implement a program segregation of duties between systems functions Restrict physical and remote access to system resources to authorized personnel
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Require transactions and activities to be authorized by appropriate supervisory personnel. Have the system authenticate the person and their right to perform the transaction before allowing the transaction to take place. Use properly designed documents and records to capture and process transactions. Safeguard all assets, records, and data. Require independent checks on performance, such as reconciliation of two independent sets of records, where possible and appropriate.
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Implement computer-based controls over data input, computer processing, data storage, data transmission, and information output. Encrypt stored and transmitted data and programs to protect them from unauthorized access and use. Fix known software vulnerabilities by installing the latest updates to operating systems, security, and applications programs.

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Organizations must take every precaution to protect their information systems. Certain measures can significantly decrease the potential for fraud and any resulting losses. These measures include:
Make fraud less likely to occur Increase the difficulty of committing fraud Improve detection methods Reduce fraud losses

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PREVENTING AND DETECTING COMPUTER FRAUD Improve detection methods.


Create an audit trail so individual transactions can be traced through the system to the financial statements and vice versa. Conduct periodic external and internal audits, as well as special network security audits. Install fraud detection software. Implement a fraud hotline.

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Employ a computer security officer, as well as computer consultants and forensic specialists as needed. Monitor system activities, including computer and network security efforts, usage and error logs, and all malicious actions. Use intrusion detection systems to help automate the monitoring process.

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Organizations must take every precaution to protect their information systems. Certain measures can significantly decrease the potential for fraud and any resulting losses. These measures include:
Make fraud less likely to occur Increase the difficulty of committing fraud Improve detection methods Reduce fraud losses

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Reduce Fraud Losses
Maintain adequate insurance. Develop comprehensive fraud contingency, disaster recovery, and business continuity plans. Store backup copies of program and data files in a secure, off-site location. Use software to monitor system activity and recover from fraud.

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SUMMARY
In this chapter, youve learned what fraud is, who commits fraud, and how its perpetrated. Youve learned about the many variations of computer fraud, and youve learned about techniques to reduce an organizations vulnerability to these types of fraud.
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