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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.

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 5-2


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.

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 5-4


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).

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 5-5


Reasons for Fraudulent Financial
Statements

1. Deceive investors or creditors

2. Increase a companys 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.

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 5-7


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

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 5-8


The Fraud Triangle

Three conditions that are


present when Fraud occurs.

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Pressure

Motivation or incentive to
commit fraud

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

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 5-10


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
misrepresentatio
n to personal
gain
Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 5-11
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.

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 5-12


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

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall 5-15

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