Chapter 5 Computer Fraud Copyright © 2012 Pearson Education 5-1

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 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) Copyright © 2012 Pearson Education 5-3

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 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 5-5

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 Copyright © 2012 Pearson Education 5-6

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 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 5-8

The Fraud Triangle PressureOpportunityRationalization Copyright © 2012 Pearson Education 5-9

Pressure Motivation or incentive to commit fraud Types: 1.Employee Financial Emotional Lifestyle 2.Financial Industry conditions Management characteristics Copyright © 2012 Pearson Education 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 misrepresentation to personal gain Copyright © 2012 Pearson Education 5-11

Rationalizations Justification of illegal behavior 1.Justification I am not being dishonest. 2.Attitude I don’t need to be honest. 3.Lack of personal integrity Theft is valued higher than honesty or integrity. Copyright © 2012 Pearson Education 5-12

Computer Fraud  Any illegal act in which knowledge of computer technology is necessary for:  Perpetration  Investigation  Prosecution Copyright © 2012 Pearson Education 5-13

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 Copyright © 2012 Pearson Education 5-14

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 5-15