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Computer Fraud Chapter 5
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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. Define computer fraud and discuss the different computer fraud classifications. Explain how to prevent and detect computer fraud and abuse.
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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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Threats to AIS Natural and Political disasters
Software errors and equipment malfunctions Unintentional acts Intentional acts
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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 is white collar crime
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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 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.
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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.)
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SAS #99 Auditors responsibility to detect fraud Understand fraud
Discuss risks of material fraudulent statements Among members of audit team Obtain information Look for fraud risk factors Identify, assess, and respond to risk Evaluate the results of audit tests Determine impact of fraud on financial statements Document and communicate findings See Chapter 3 Incorporate a technology focus
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THE FRAUD PROCESS Fraud perpetrators are often referred to as white- collar criminals. 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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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
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Fraud Triangle
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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 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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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
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WHO COMMITS FRAUD AND WHY
Opportunity Commit Conceal Convert 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
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
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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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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. Lapping. Kiting.
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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
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 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.
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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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Computer Fraud If a computer is used to commit fraud it is called 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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Computer Fraud Classifications
Input Fraud Alteration or falsifying input Processor Fraud Unauthorized system use Computer Instructions Fraud Modifying software, illegal copying of software, using software in an unauthorized manner, creating software to undergo unauthorized activities Data Fraud Illegally using, copying, browsing, searching, or harming company data Output Fraud Stealing, copying, or misusing computer printouts or displayed information
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