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Chapter 5 Computer Fraud

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall

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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

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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.

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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).

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Reasons for Fraudulent Financial Statements


1.
2. 3.

Deceive investors or creditors


Increase a companys stock price Meet cash flow needs

4.

Hide company losses or other problems

Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall

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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

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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 technological focus


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The Fraud Triangle


Three conditions that are present when Fraud occurs

Pressure Opportunity Rationalization

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Pressure
Motivation or incentive to commit fraud Types:
1.Employee
Financial Emotional Lifestyle

2.Financial
Industry conditions Management characteristics

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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

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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

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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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Copyright 2012 Pearson Education, Inc. publishing as Prentice Hall

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

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Computer Fraud Classifications


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

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