1. Henri Teittinen Aling with the textbook: Romney & Steinbart (2012)
AIS Fraud
Henri Teittinen
Aling with the textbook:
Romney & Steinbart (2012)

2. Learning Objectives
Explain the threats faced by modern information systems.
Define fraud and describe both the different types of fraud and 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.

3. INTRODUCTION
Information systems are becoming increasingly more complex.
Organizations and society are becoming increasingly more dependent on these systems.

4. Threats to AIS Natural and Political disasters
Software errors and equipment malfunctions
Unintentional acts
Intentional acts

5. Fraud
Any means a person uses to gain an unfair advantage over another person; includes:
A false statement, representation, or disclosure
A material fact, which induces a victim to act
An intent to deceive
Victim relied on the misrepresentation
Injury or loss was suffered by the victim
Fraud perpetrators are often referred to as white-collar criminals.
Fraud is white collar crime

6. 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 company’s 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.

7. Two Categories of Fraud
Misappropriation of assets
Theft of company assets which can include physical assets (e.g., cash, inventory) and digital assets (e.g., intellectual property such as protected trade secrets, customer data)
Fraudulent financial reporting
“cooking the books” (e.g., booking fictitious revenue, overstating assets, etc.)

8. Conditions for Fraud
Opportunity to:
Commit
Conceal
Convert to personal gain
Rationalize
Justify behavior
Attitude that rules don’t apply
Lack personal integrity
These three conditions must be present for fraud to occur:
Pressure
Employee
Financial
Lifestyle
Emotional
Financial Statement
Management
Industry conditions

9. 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
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

10. 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.
Reasons for Fraudulent Financial Statements
Deceive investors or creditors
Increase a company’s stock price
Meet cash flow needs
Hide company losses or other problems

11. 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

12. 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

13. 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.

14. WHO COMMITS FRAUD AND WHY
These rationalizations take many forms, including:
I was just borrowing the money.
It wasn’t really hurting anyone. (Corporations are often seen as non-persons, therefore crimes against them are not hurting “anyone.”)
Everybody does it.
I’ve worked for them for 35 years and been underpaid all that time. I wasn’t stealing; I was only taking what was owed to me.
I didn’t take it for myself. I needed it to pay my child’s medical bills.

15. 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.

16. 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

17. Preventing and Detecting Fraud 1. Make Fraud Less Likely to Occur
Organizational
Systems
Create a culture of integrity
Adopt structure that minimizes fraud, create governance (e.g., Board of Directors)
Assign authority for business objectives and hold them accountable for achieving those objectives, effective supervision and monitoring of employees
Communicate policies
Develop security policies to guide and design specific control procedures
Implement change management controls and project development acquisition controls

18. Preventing and Detecting Fraud 2. Make It Difficulty to Commit
Organizational
Systems
Develop strong internal controls
Segregate accounting functions
Use properly designed forms
Require independent checks and reconciliations of data
Restrict access
System authentication
Implement computer controls over input, processing, storage and output of data
Use encryption
Fix software bugs and update systems regularly
Destroy hard drives when disposing of computers

19. Preventing and Detecting Fraud 3. Improve Detection
Organizational
Systems
Assess fraud risk
External and internal audits
Fraud hotline
Audit trail of transactions through the system
Install fraud detection software
Monitor system activities (user and error logs, intrusion detection)

20. Preventing and Detecting Fraud 4. Reduce Fraud Losses
Organizational
Systems
Insurance
Business continuity and disaster recovery plan
Store backup copies of program and data files in secure, off-site location
Monitor system activity