Ais Romney 2006 Slides 05 Computer Fraud And Abuse

C HAPTER 5 Computer Fraud and Security

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INTRODUCTION • Questions to be addressed in this chapter: – What is fraud, and how are frauds perpetrated? – Who perpetrates fraud and why? – What is computer fraud, and what forms does it take? – What approaches and techniques are used to commit computer fraud?

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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. © 2006 Prentice Hall Business Publishing

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INTRODUCTION •

Include: – Fire or excessive heat – Floods – Earthquakes – High winds disasters – War and terrorist attack When a natural or political disaster strikes, many companies can be affected at the same time. – Example: Bombing of the World Trade Center in NYC. The Defense Science Board has predicted that attacks on information systems by foreign countries, espionage agents, and terrorists will soon be widespread.

• Companies face four types of threats to their information systems: – Natural and political •

•

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• Include: – Hardware or software failures – Software errors or bugs – Operating system crashes – Power outages and fluctuations Natural and political disasters– Undetected data transmission errors Software errors and equipment • Estimated annual economic malfunction losses due to software bugs = $60 billion. • 60% of companies studied had significant software errors in previous year.

INTRODUCTION

• Companies face four types of threats to their information systems: – –

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INTRODUCTION •

Include – Accidents caused by: • Human carelessness • Failure to follow established procedures – Natural and political disasters • Poorly trained or supervised – Software errors and equipment personnel malfunction – Unintentional acts– Innocent errors or omissions – Lost, destroyed, or misplaced data – Logic errors – Systems that do not meet needs or are incapable of performing intended tasks • Information Systems Security Assn. estimates 65% of security problems are caused bySystems, human © 2006 Prentice Hall Business Publishing Accounting Information 10/e error. Romney/Steinbart 6 of 175

• Companies face four types of threats to their information systems:

• Include: INTRODUCTION – Sabotage – Computer fraud – Misrepresentation, false use, or unauthorized disclosure of data – Misappropriation of assets Natural and political disasters – Financial statement fraud Information systems are increasingly Software errors •and equipment malfunction vulnerable to these malicious attacks.

• Companies face four types of threats to their information systems: – – – Unintentional acts – Intentional acts (computer crime)

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INTRODUCTION • In this chapter we’ll discuss: – The fraud process – Why fraud occurs – Approaches to computer fraud – Specific techniques used to commit computer fraud – Ways companies can deter and detect computer fraud

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INTRODUCTION • In this chapter we’ll discuss: – The fraud process – Why fraud occurs – Approaches to computer fraud – Specific techniques used to commit computer fraud – Ways companies can deter and detect computer fraud

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•

The definition is the same whether it is a criminal or civil fraud case. – The only difference is the burden of proof required. • Criminal case: Beyond a Fraud is any and all means a person reasonable doubt.uses to • Civil gain an unfair advantage over another person. case: Preponderance of the evidence OR clear and convincing In most cases, to be considered evidence. fraudulent, an

THE FRAUD PROCESS

• •

act must involve:

– A false statement (oral or in writing) – About a material fact – Knowledge that the statement was false when it was uttered (which implies an intent to deceive) – A victim relies on the statement – And suffers injury or loss as a result © 2006 Prentice Hall Business Publishing

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THE FRAUD PROCESS • Since fraudsters don’t make journal entries to record their frauds, we can only estimate the amount of losses caused by fraudulent acts: – The Association of Certified Fraud Examiners (ACFE) estimates that total fraud losses in the U.S. run around 6% of annual revenues or approximately $660 billion in 2004. • More than we spend on education and roads in a year. • 6 times what we pay for the criminal justice system.

– Income tax fraud (the difference between what taxpayers owe and what they pay to the government) is estimated to be over $200 billion per year. – Fraud in the healthcare industry is estimated to exceed $100 billion a year. © 2006 Prentice Hall Business Publishing

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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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THE FRAUD PROCESS • Fraud perpetrators are often referred to as white-collar criminals. – Distinguishes them from violent criminals, although some white-collar crime can ultimately have violent outcomes, such as: • Perpetrators or their victims committing suicide. • Healthcare patients killed because of alteration of information, etc., that can result in their deaths.

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Types of Frauds OTHER

OCCUPATIONAL • Fraudulent Statements – Financial – Non-financial

• Asset Misappropriation – Theft of Cash – Fraudulent disbursements – Inventory and other assets

• Bribery and Corruption – – – –

Bribery Illegal gratuities Economic extortion Conflict of interest

• • • • • • • • • • •

Intellectual property theft Financial institution fraud Check and credit card fraud Insurance fraud Healthcare fraud Bankruptcy fraud Tax fraud Securities fraud Money laundering Consumer fraud Computer and Internet fraud

Information is from the ACFE’s 2004 Report to the Nation on Occupational Fraud and Abuse and from the Fraud Examiner’s Manual, also published by the ACFE. © 2006 Prentice Hall Business Publishing

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THE FRAUD PROCESS • Three types of occupational fraud: – Misappropriation of assets • • •

Involves theft, embezzlement, or misuse of company assets for personal gain. Examples include billing schemes, check tampering, skimming, and theft of inventory. In the 2004 Report to the Nation on Occupational Fraud and Abuse, 92.7% of occupational frauds involved asset misappropriation at a median cost of $93,000.

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THE FRAUD PROCESS • Three types of occupational fraud: – Misappropriation of assets – Corruption •

• •

Corruption involves the wrongful use of a position, contrary to the responsibilities of that position, to procure a benefit. Examples include kickback schemes and conflict of interest schemes. About 30.1% of occupational frauds include corruption schemes at a median cost of $250,000.

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THE FRAUD PROCESS • Three types of occupational fraud: – Misappropriation of assets – Corruption – Fraudulent statements •

Financial statement fraud involves misstating the financial condition of an entity by intentionally misstating amounts or disclosures in order to deceive users. • Financial statements can be misstated as a result of intentional efforts to deceive or as a result of undetected asset misappropriations that are so large that they cause misstatement. • About 7.9% of occupational frauds involve fraudulent statements at a median cost of $1 million. (The median pales in comparison to the maximum cost.)Publishing © 2006 Prentice Hall Business Accounting Information Systems, 10/e Romney/Steinbart 17 of 175

THE FRAUD PROCESS •

A typical employee fraud has a number of important elements or characteristics: – The fraud perpetrator must gain the trust or confidence of the person or company being defrauded in order to commit and conceal the fraud. – Instead of using a gun, knife, or physical force, fraudsters use weapons of deceit and misinformation. – Frauds tend to start as the result of a perceived need on the part of the employee and then escalate from need to greed. Most fraudsters can’t stop once they get started, and their frauds grow in size. – The fraudsters often grow careless or overconfident over time. – Fraudsters tend to spend what they steal. Very few save it. – In time, the sheer magnitude of the frauds may lead to detection. – The most significant contributing factor in most employee frauds is the absence of internal controls and/or the failure to enforce existing controls.

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THE FRAUD PROCESS • The National Commission on Fraudulent Financial Reporting (aka, the Treadway Commission) defined fraudulent financial reporting as intentional or reckless conduct, whether by act or omission, that results in materially misleading financial statements. • Financial statements can be falsified to: – – – –

Deceive investors and creditors Cause a company’s stock price to rise Meet cash flow needs Hide company losses and problems

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THE FRAUD PROCESS • Fraudulent financial reporting is of great concern to independent auditors, because undetected frauds lead to half of the lawsuits against auditors. • In the case of Enron, a financial statement fraud led to the total elimination of Arthur Andersen, a premiere international public accounting firm. © 2006 Prentice Hall Business Publishing

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THE FRAUD PROCESS • Common approaches to “cooking the books” include: – Recording fictitious revenues – Recording revenues prematurely – Recording expenses in later periods – Overstating inventories or fixed assets (WorldCom) – Concealing losses and liabilities

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THE FRAUD PROCESS • The Treadway Commission recommended four actions to reduce the possibility of fraudulent financial reporting: – Establish an organizational environment that contributes to the integrity of the financial reporting process. – Identify and understand the factors that lead to fraudulent financial reporting. – Assess the risk of fraudulent financial reporting within the company. – Design and implement internal controls to provide reasonable assurance that fraudulent financial reporting is prevented. © 2006 Prentice Hall Business Publishing

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THE FRAUD PROCESS • SAS 99: The Auditor’s Responsibility to Detect Fraud – In 1997, SAS-82, Consideration of Fraud in a Financial Statement Audit, was issued to clarify the auditor’s responsibility to detect fraud.

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THE FRAUD PROCESS • A revision to SAS-82, SAS-99, was issued in December 2002. SAS-99 requires auditors to: – Understand fraud • • • •

Auditors can’t effectively audit something they don’t understand. SAS-99 also indicated that auditors are not lawyers and “do not make legal determinations of whether fraud has occurred.” The external auditor’s interest specifically relates to acts that result in a material misstatement of the financial statements. Note that SAS-99 relates to external auditors. Internal auditors will have a more extensive interest in fraud than just those that impact financial statements.

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THE FRAUD PROCESS • A revision to SAS-82, SAS-99, was issued in December 2002. SAS-99 requires auditors to: – Understand fraud – Discuss the risks of material fraudulent misstatements •

While planning the audit, members of the audit team should discuss how and where the company’s financial statements might be susceptible to fraud.

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•

The audit team must gather evidence about the existence of fraud by: – Looking for fraud risk factors – Testing company records • A –revision to SAS-82, SAS-99, was issued in Asking management, the audit committee, and others if they December 2002. requires auditors to: know of any past orSAS-99 current fraud or of fraud risks the organizationfraud faces. – Understand • –Special carethe needs to of bematerial exercisedfraudulent in examining revenue Discuss risks misstatements accounts, since they are particularly popular fraud targets.

THE FRAUD PROCESS

– Obtain information

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THE FRAUD PROCESS • A revision to SAS-82, SAS-99, was issued in December 2002. SAS-99 requires auditors to: – – – –

Understand fraud Discuss the risks of material fraudulent misstatements Obtain information Identify, assess, and respond to risks

• Use the gathered information to identify, assess, and respond to risks. • Auditors can respond by varying the nature, timing, and extent of auditing procedures they perform. • They should also carefully evaluate risks related to management override of controls.

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THE FRAUD PROCESS • A revision to SAS-82, SAS-99, was issued in • Auditors must assess the risk of fraud throughout the December audit. 2002. SAS-99 requires auditors to: – – – – –

Understand • When thefraud audit is complete, they must evaluate whether any identified indicate the presence of Discuss the risksmisstatements of material fraudulent misstatements fraud. Obtain information • If so, they should determine the impact on the financial Identify, assess, and to risks statements and the respond audit. Evaluate the results of their audit tests

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THE FRAUD PROCESS • A revision to SAS-82, SAS-99, was issued in December 2002. SAS-99 requires auditors to: – – – – – –

Understand fraud Discuss the risks of material fraudulent misstatements Obtain information Identify, assess, and respond to risks Evaluate the results of their audit tests Communicate findings •

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Auditors communicate their fraud findings to management, the audit committee, and others. Accounting Information Systems, 10/e

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THE FRAUD PROCESS • A revision to SAS-82, SAS-99, was issued in December 2002. SAS-99 requires auditors to: – – – – – – –

Understand fraud Discuss the risks of material fraudulent misstatements Obtain information Identify, assess, and respond to risks Evaluate the results of their audit tests Communicate findings Document their audit work •

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Auditors must document their compliance with SAS-99 requirements. Accounting Information Systems, 10/e

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THE FRAUD PROCESS • A revision to SAS-82, SAS-99, was issued in December 2002. SAS-99 requires auditors to: – – – – – – – –

Understand fraud Discuss the risks of material fraudulent misstatements Obtain information Identify, assess, and respond to risks recognizes that technology impacts fraud risks and • SAS-99 Evaluate the results of their audit tests notes opportunities that auditors have to use technologyCommunicate orientedfindings tools and techniques to design fraud auditing Documentprocedures. their audit work Incorporate a technology focus

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INTRODUCTION • In this chapter we’ll discuss: – The fraud process – Why fraud occurs – Approaches to computer fraud – Specific techniques used to commit computer fraud – Ways companies can deter and detect computer fraud

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WHO COMMITS FRAUD AND WHY • 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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WHO COMMITS FRAUD AND WHY • White-collar criminals tend to mirror the general public in: – – – – – –

Education Age Religion Marriage Length of employment Psychological makeup

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WHO COMMITS FRAUD AND WHY • Perpetrators of computer fraud tend to be younger and possess more computer knowledge, experience, and skills. • Hackers and computer fraud perps tend to be more motivated by: – – – –

Curiosity A quest for knowledge The desire to learn how things work The challenge of beating the system

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WHO COMMITS FRAUD AND WHY • They may view their actions as a game rather than dishonest behavior. • Another motivation may be to gain stature in the hacking community. • Some see themselves as revolutionaries spreading a message of anarchy and freedom. • But a growing number want to profit financially. To do so, they may sell data to: – – – –

Spammers Organized crime Other hackers The intelligence community

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WHO COMMITS FRAUD AND WHY • Some fraud perpetrators are disgruntled and unhappy with their jobs and are seeking revenge against their employers. • Others are regarded as ideal, hard-working employees in positions of trust. • Most have no prior criminal record. • So why are they willing to risk everything?

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WHO COMMITS FRAUD AND WHY • Criminologist Donald Cressey, interviewed 200+ convicted white-collar criminals in an attempt to determine the common threads in their crimes. As a result of his research, he determined that three factors were present in the commission of each crime. These three factors have come to be known as the fraud triangle. – Pressure – Opportunity – Rationalization © 2006 Prentice Hall Business Publishing

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The “Fraud Triangle”

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Donald Cressey

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The “Fraud Triangle”

p Op ni tu or

Pr es su re

Donald Cressey

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WHO COMMITS FRAUD AND WHY • Pressure – Cressey referred to this pressure as a “perceived non-shareable need.” – The pressure could be related to finances, emotions, lifestyle, or some combination.

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WHO COMMITS FRAUD AND WHY • The most common pressures were: - Not being able to pay one’s debts, nor admit it to one’s employer, family, or friends (which makes in non-shareable) •

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May be associated with vices, such as drugs, gambling, mistresses, etc.

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WHO COMMITS FRAUD AND WHY • The most common pressures were: - Not being able to pay one’s debts, nor admit it to one’s employer, family, or friends (which makes in non-shareable) - Fear of loss of status because of a personal failure • Example would be mismanagement of a personal investment or retirement fund.

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WHO COMMITS FRAUD AND WHY • The most common pressures were: - Not being able to pay one’s debts, nor admit it to one’s employer, family, or friends (which makes in non-shareable) - Fear of loss of status because of a personal failure - Business reversals •

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Not many people can walk away from a failing business.

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WHO COMMITS FRAUD AND WHY • The most common pressures were: - Not being able to pay one’s debts, nor admit it to one’s employer, family, or friends (which makes in non-shareable) - Fear of loss of status because of a personal failure - Business reversals - Physical isolation •

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When an individual is isolated, physically or psychologically, almost any pressure becomes nonshareable.

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WHO COMMITS FRAUD AND WHY • The most common pressures were: - Not being able to pay one’s debts, nor admit it to one’s employer, family, or friends (which makes in non-shareable) - Fear of loss of status because of a personal failure • Many frauds are motivated by nothing - Business reversals more than a perceived need to keep up with the Joneses. - Physical isolation • The problem is that there is always a - Status gaining richer “Jones” down the street and the pressure continues to mount, as do the resulting thefts.

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WHO COMMITS FRAUD AND WHY • The most common pressures were: - Not being able to pay one’s debts, nor admit it to one’s employer, family, or friends (which makes in non-shareable) - Fear of loss of status because of a personal failure - Business reversals • May create pressure to get revenge, - Physical isolation take the money you feel is rightfully owed to you, etc. - Status gaining - Difficulties in employer-employee relations

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WHO COMMITS FRAUD AND WHY • What’s important here is the perception of the pressure. – There might be a number of people who could and would help a tentative fraudster out of his financial woes. – But as long as he perceives that he cannot share his burden, the pressure is present. – Research has also found that an individual’s propensity to commit fraud is more related to how much he worries about his financial position than his actual position. – The millionaire who frets a lot about his financial condition is more likely to commit fraud than the guy who doesn’t have two dimes to rub together but isn’t worried about it.

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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.

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WHO COMMITS FRAUD AND WHY • In the case of financial statement frauds, common pressures include: – To prop up earnings or stock price so that management can: • Receive performance-related compensation. • Preserve or improve personal wealth held in company stock or stock options. • Keep their jobs. – To cover the inability to generate cash flow. – To obtain financing. – To appear to comply with bond covenants or other agreements. – May be opposite of propping up earnings in cases involving income-tax motivations, government contracts, or regulation.

• Click here for a comprehensive list of pressures.

Pressures © 2006 Prentice Hall Business Publishing

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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

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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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The “Fraud Triangle”

ss ur Pr e

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Donald Cressey

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WHO COMMITS FRAUD AND WHY • 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 • 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 • Committing the fraud might involve acts such as: – Misappropriating assets. – Issuing deceptive financial statements. – Accepting a bribe in order to make an arrangement that is not in the company’s best interest.

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WHO COMMITS FRAUD AND WHY • 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 • 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.

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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.

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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: •

Steal a payment from Customer A. – Charge a stolen asset to an expense account or to an • Apply Customer B’s payment to Customer A’s account so account receivable that is about to be written off. Customer A won’t get a late notice. – Create a ghost employee who receives an extra • Apply Customer C’s payment to Customer B’s account, paycheck. so Customer B won’t get a late notice, etc. – Lapping.

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WHO COMMITS FRAUD AND WHY • Concealing the fraud often takes more time and • and Creates “cash”more by transferring money between banks. effort leaves evidence than the actual Requires multiple bank accounts. theft• or misrepresentation. • Basic scheme: • Examples of aconcealment efforts: – Write check on the account of Bank A. – Bank – Charge A doesn’t sufficient funds to cover a stolen assethave to an expense account or the to an so writethat a check fromto anbe account in off. Bank B to accountcheck, receivable is about written be deposited in Bank A. – Create a ghost employee who receives an extra – Bank B doesn’t have sufficient funds to cover the paycheck. check, so write a check from an account in Bank C to be deposited in Bank B, etc. – Lapping. – Kiting.

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WHO COMMITS FRAUD AND WHY • 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 • 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. © 2006 Prentice Hall Business Publishing

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WHO COMMITS FRAUD AND WHY • If the fraud is a financial statement fraud, then the gains received may include: – I got to keep my job. – The value of my stock or stock options rose. – I got a raise, promotion, or bonus. – I got power.

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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

• Click here for a comprehensive list of opportunities. Opportunities © 2006 Prentice Hall Business Publishing

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OPPORTUNITIES PERMITTING EMPLOYEE AND FINANCIAL STATEMENT FRAUD •

Internal Control Factors – Failure to enforce/monitor internal controls – Management not involved in control system – Management override of controls and guidelines – Managerial carelessness, inattention to details – Dominant and unchallenged management – Ineffective oversight by board of directors – No effective internal auditing staff – Infrequent third-party reviews – Insufficient separation of authorization, custody, and recordkeeping duties – Too much trust in key employees – Inadequate supervision – Unclear lines of authority

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OPPORTUNITIES PERMITTING EMPLOYEE AND FINANCIAL STATEMENT FRAUD – – – – – – – –

Lack of proper authorization procedures No independent checks on performance Inadequate documents and records Inadequate system for safeguarding assets No physical or logical security system No audit trails Failure to conduct background checks No policy of annual vacations, rotation of duties

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OPPORTUNITIES PERMITTING EMPLOYEE AND FINANCIAL STATEMENT FRAUD •

Other Factors – Large, unusual, or complex transactions – Numerous adjusting entries at year end – Related-party transactions – Accounting department understaffed and overworked – Incompetent personnel – Rapid turnover of key employees – Lengthy tenure in a key job – Unnecessarily complex organizational structure – No code of conduct, conflict of interest statements, or definitions of unacceptable behavior – Frequently changing auditors, legal counsel – Operating on a crisis basis – Close association with suppliers/customers

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OPPORTUNITIES PERMITTING EMPLOYEE AND FINANCIAL STATEMENT FRAUD – – – – – – –

Assets highly susceptible to misappropriation Questionable accounting practices Pushing accounting principles to the limit Unclear company policies and procedures Failing to teach and stress corporate honesty Failure to prosecute dishonest employees Low employee morale and loyalty

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WHO COMMITS FRAUD AND WHY • Internal controls that may be lacking or unenforced include: – – – – – – –

Authorization procedures Clear lines of authority Adequate supervision Adequate documents and records A system to safeguard assets Independent checks on performance Separation of duties

• One control feature that many companies lack is a background check on all potential employees. © 2006 Prentice Hall Business Publishing

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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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The “Fraud Triangle”

Pr e

ni tu or

ss ur

p Op

e

Donald Cressey

ty

Rationalization © 2006 Prentice Hall Business Publishing

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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. © 2006 Prentice Hall Business Publishing

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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. © 2006 Prentice Hall Business Publishing

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WHO COMMITS FRAUD AND WHY • Creators of worms and viruses often use rationalizations like: – The malicious code helped expose security flaws, so I did a good service. – It was an accident. – It was not my fault—just an experiment that went bad. – It was the user’s fault because they didn’t keep their security up to date. – If the code didn’t alter or delete any of their files, then what’s the problem?

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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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INTRODUCTION • In this chapter we’ll discuss: – The fraud process – Why fraud occurs – Approaches to computer fraud – Specific techniques used to commit computer fraud – Ways companies can deter and detect computer fraud

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APPROACHES TO COMPUTER FRAUD • The U.S. Department of Justice defines computer fraud as any illegal act for which knowledge of computer technology is essential for its: – Perpetration; – Investigation; or – Prosecution.

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APPROACHES TO COMPUTER FRAUD • Computer fraud includes the following: – Unauthorized theft, use, access, modification, copying, and destruction of software or data. – Theft of money by altering computer records. – Theft of computer time. – Theft or destruction of computer hardware. – Use or the conspiracy to use computer resources to commit a felony. – Intent to illegally obtain information or tangible property through the use of computers. © 2006 Prentice Hall Business Publishing

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APPROACHES TO 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. © 2006 Prentice Hall Business Publishing

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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. © 2006 Prentice Hall Business Publishing

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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. © 2006 Prentice Hall Business Publishing

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APPROACHES TO COMPUTER FRAUD – Computer systems face a number of unique challenges: • Reliability (accuracy and completeness) • Equipment failure • Environmental dependency (power, water damage, fire) • Vulnerability to electromagnetic interference and interruption • Eavesdropping • Misrouting

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APPROACHES TO COMPUTER FRAUD • Organizations that track computer fraud estimate that most U.S. businesses have been victimized by at least one incident of computer fraud.

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APPROACHES TO COMPUTER FRAUD • These frauds cost billions of dollars each year, and their frequency is increasing because: – Not everyone agrees on what constitutes computer fraud. • Many don’t believe that taking an unlicensed copy of software is computer fraud. (It is and can result in prosecution.) • Some don’t think it’s a crime to browse through someone else’s computer if their intentions aren’t malicious. © 2006 Prentice Hall Business Publishing

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APPROACHES TO COMPUTER FRAUD – Many computer frauds go undetected. – An estimated 80-90% of frauds that are uncovered are not reported because of fear of: • Adverse publicity • Copycats • Loss of customer confidence.

– There are a growing number of competent computer users, and they are aided by easier access to remote computers through the Internet and other data networks. © 2006 Prentice Hall Business Publishing

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APPROACHES TO COMPUTER FRAUD – Some folks believe “it can’t happen to us.” – Many networks have a low level of security. – Instructions on how to perpetrate computer crimes and abuses are readily available on the Internet. – Law enforcement is unable to keep up with the growing number of frauds. – The total dollar value of losses is difficult to calculate. © 2006 Prentice Hall Business Publishing

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APPROACHES TO COMPUTER FRAUD • Economic espionage, the theft of information and intellectual property, is growing especially fast. • This growth has led to the need for investigative specialists or cybersleuths.

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APPROACHES TO COMPUTER FRAUD • Computer Fraud Classification – Frauds can be categorized according to the data processing model: • • • • •

Input Processor Computer instructions Stored data Output

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COMPUTER FRAUD CLASSIFICATIONS Data Fraud

Input Fraud

Processor Fraud

Output Fraud

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COMPUTER FRAUD CLASSIFICATIONS Data Fraud

Input Fraud

Processor Fraud

Output Fraud

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APPROACHES TO COMPUTER FRAUD • Input Fraud – The simplest and most common way to commit a fraud is to alter computer input. • Requires little computer skills. • Perpetrator only need to understand how the system operates – Can take a number of forms, including: • Disbursement frauds •

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The perpetrator causes a company to: – Pay too much for ordered goods; or – Pay for goods never ordered.

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APPROACHES TO COMPUTER FRAUD • Input Fraud – The simplest and most common way to commit a fraud is to alter computer input. • Requires little computer skills. • Perpetrator only need to understand how the system operates – Can take a number of forms, including: • Disbursement frauds • Inventory frauds •

The perpetrator enters data into the system to show that stolen inventory has been scrapped.

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APPROACHES TO COMPUTER FRAUD • Input Fraud – The simplest and most common way to commit a fraud is to alter computer input. • Perpetrators may enter data to: • Requires little computer skills. – Increase salaries how the system • Perpetrator only needtheir to understand operates – Create a fictitious employee – Can take a number of forms, including: – Retain a terminated employee on the records. • Disbursement • In the frauds latter two instances, the perpetrator and cashes the resulting paychecks. • Inventoryintercepts frauds • Payroll frauds

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APPROACHES TO COMPUTER FRAUD • Input Fraud – The simplest and most common way to commit a fraud is to alter computer input. • Requires little computer skills. • Perpetrator only need to understand how the system operates • The perpetrator hides the theft by falsifying – Can take a number forms, including: system of input. • Disbursement frauds Cash of $200 is received. The • EXAMPLE: records a cash receipt of $150 and • Inventoryperpetrator frauds pockets the $50 difference. • Payroll frauds • Cash receipt frauds

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APPROACHES TO COMPUTER FRAUD • Input Fraud – The simplest and most common way to commit a fraud is to alter computer input. • Requires little computer skills. • Perpetrator only need to understand how the system operates – Can take a number of forms, including: • Disbursement frauds • Inventory frauds • Payroll frauds • Cash receipt frauds • Fictitious refund fraud

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COMPUTER FRAUD CLASSIFICATIONS Data Fraud

Input Fraud

Processor Fraud

Output Fraud

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APPROACHES TO COMPUTER FRAUD • Processor Fraud – Involves computer fraud committed through unauthorized system use. – Includes theft of computer time and services. – Incidents could involve employees: • Surfing the Internet; • Using the company computer to conduct personal business; or • Using the company computer to conduct a competing business.

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APPROACHES TO COMPUTER FRAUD • In one example, an agriculture college at a major state university was experiencing very sluggish performance from its server. • Upon investigating, IT personnel discovered that an individual outside the U.S. had effectively hijacked the college’s server to both store some of his/her research data and process it. • The college eliminated the individual’s data and blocked future access to the system. • The individual subsequently contacted college personnel to protest the destruction of the data. • Demonstrates both: – How a processor fraud can be committed. – How oblivious users can sometimes be to the unethical or illegal nature of their activities.

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COMPUTER FRAUD CLASSIFICATIONS Data Fraud

Input Fraud

Processor Fraud

Output Fraud

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APPROACHES TO COMPUTER FRAUD • Computer Instructions Fraud – Involves tampering with the software that processes company data. – May include: • Modifying the software • Making illegal copies • Using it in an unauthorized manner

– Also might include developing a software program or module to carry out an unauthorized activity. © 2006 Prentice Hall Business Publishing

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APPROACHES TO COMPUTER FRAUD • Computer instruction fraud used to be one of the least common types of frauds because it required specialized knowledge about computer programming beyond the scope of most users. • Today these frauds are more frequent--courtesy of web pages that instruct users on how to create viruses and other schemes.

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COMPUTER FRAUD CLASSIFICATIONS Data Fraud

Input Fraud

Processor Fraud

Output Fraud

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APPROACHES TO COMPUTER FRAUD • Data Fraud – Involves: • Altering or damaging a company’s data files; or • Copying, using, or searching the data files without authorization.

– In many cases, disgruntled employees have scrambled, altered, or destroyed data files. – Theft of data often occurs so that perpetrators can sell the data. • Most identity thefts occur when insiders in financial institutions, credit agencies, etc., steal and sell financial information about individuals from their employer’s database. © 2006 Prentice Hall Business Publishing

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COMPUTER FRAUD CLASSIFICATIONS Data Fraud

Input Fraud

Processor Fraud

Output Fraud

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APPROACHES TO COMPUTER FRAUD • Output Fraud – Involves stealing or misusing system output. – Output is usually displayed on a screen or printed on paper. – Unless properly safeguarded, screen output can easily be read from a remote location using inexpensive electronic gear. – This output is also subject to prying eyes and unauthorized copying. – Fraud perpetrators can use computers and peripheral devices to create counterfeit outputs, such as checks. © 2006 Prentice Hall Business Publishing

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INTRODUCTION • In this chapter we’ll discuss: – The fraud process – Why fraud occurs – Approaches to computer fraud – Specific techniques used to commit computer fraud – Ways companies can deter and detect computer fraud

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • Data diddling • •

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Changing data before, during, or after it is entered into the system. Can involve adding, deleting, or altering key system data.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • Data diddling • Data leakage • Unauthorized copying of company data.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • Data diddling • Data leakage • Denial of service attacks •

•

An attacker overloads and shuts down an Internet Service Provider’s email system by sending email bombs at a rate of thousands per second—often from randomly generated email addresses. May also involve shutting down a web server by sending a load of requests for the web pages.

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•

Carried out as follows: – The attacker infects dozens of computers that have broadband Internet access with denial-of-service programs. These infected computers the zombies. Perpetrators have devised are many methods to commit – The attacker then activates the computer fraud and abuse. These include: denial-of-service programs, and the • Data diddling zombies send pings (emails or • Data leakage requests for data) to the target • Denial of service attacks server. The victim responds to each, not realizing they have fictitious return addresses, and waits for responses that don’t come. – While the victim waits, system performance degrades until the system freezes up or crashes. – The attacker terminates the program after an hour or two to limit the victim’s ability to trace the source.

COMPUTER FRAUD AND ABUSE TECHNIQUES

•

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • Data diddling • Data leakage • Denial of service attacks • Experts estimate there as many as 5,000 denial-of-service attacks weekly in the U.S. • A denial-of-service can cause severe economic damage to its victim or even drive them out of business.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • • • •

Data diddling Data leakage Denial of service attacks Eavesdropping •

Perpetrators surreptitiously observe private communications or transmission of data. • Equipment to commit these “electronic wiretaps” is readily available at electronics stores.

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•

•

COMPUTER FRAUD AND ABUSE A threatening message is sent to a victim to induce the victim to TECHNIQUES do something that would make it possible to be defrauded.

•

Several banks in the Midwest were contacted by an overseas Perpetrators haveindicated devisedthat: many methods to commit perpetrator who computer fraud andinto abuse. These include: – He had broken their computer system and obtained • Data personal diddlingand banking information about all of the bank’s customers. • Data leakage – He would notify the bank’s customers of this breach if he • Denial of service attacks was not paid a specified sum of money. • Eavesdropping • Email threats

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COMPUTER FRAUD AND ABUSE • Involves sending an email message that TECHNIQUES appears to have come from someone other than the actual sender.

• Perpetrators have devised many methods to commit • Email spoofers may: computer fraud and abuse. These include:

– Claim to be system administrators • Data diddling and ask users to change their • Data leakage passwords to specific values. • Denial of service attacks – Pretend to be management and • Eavesdropping request a copy of some sensitive information. • Email threats • Email forgery (aka, spoofing)

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit • Unauthorized access to and use of computer systems—usually by computer fraud and abuse. These include: means of a personal computer and a telecommunications •network. Data diddling Data leakagebreak into systems using known flaws in operating • •Most hackers •systems, Denial ofapplications service attacks programs, or access controls. Eavesdropping • •Some are not very malevolent and mainly motivated by curiosity a desire to overcome a challenge. •and Email threats • •Others malicious intent and can do significant damage. Emailhave forgery (aka, spoofing) • Hacking

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • • • • • • • •

Data diddling Data leakage Denial of service attacks • Hacking that attacks phone systems and Eavesdropping Email threats uses phone lines to transmit viruses and to access, steal, and destroy data. Email forgery (aka, spoofing) • They also steal telephone services and Hacking may break into voice mail systems. Phreaking • Some hackers gain access to systems through dial-up modem lines.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • • • • • • • • •

Data diddling Data leakage Denial of service attacks Eavesdropping Email threats Email forgery (aka, spoofing) Hacking • Involves gaining control of someone else’s computer to carry out illicit Phreaking activities without the user’s knowledge. Hijacking • The illicit activity is often the perpetuation of spam emails.

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COMPUTER FRAUD AND ABUSE TECHNIQUES

•

• Assuming someone’s identity, typically for economic gain, by illegally obtaining and using confidential Perpetrators have devised many methods information to commit such as the person’s social security number, bank account number, computer fraud and abuse. These include: or credit card number. • Data diddling • Identity thieves benefit financially by: • Data leakage – Taking funds out of the victim’s bank account. • Denial of service attacks – Taking out mortgages or other loans under the victim’s • Eavesdropping identity. • Email threats out credit cards and running up large balances. – Taking • •Email forgery spoofing) If the thief (aka, is careful and ensures that bills and notices are • Hacking sent to an address he controls, the scheme may be prolonged until such time as the victim attempts to buy a • Phreaking home or car and finds out that his credit is destroyed. • Hijacking • Identity theft

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • • • • • • • • • •

Data diddling Data leakage • Victims can usually clear their credit, but the effort requires a Denial of service attacks significant amount of time and expense. •Eavesdropping Identity theft was made a federal offense in 1998, but it is a Email threats growing crime industry. (aka, spoofing) •Email Oneforgery U.S. postal inspector, whose job duties involved investigation of identity thefts, was himself a victim. The Hacking thief ran up $80,000 in debt under the postal inspector’s Phreaking identity before the inspector discovered the problem. Hijacking Identity theft

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•

Identity thieves can steal corporate or individual identities by: – Shoulder surfing •

COMPUTER FRAUD AND ABUSE Watching people enter telephone calling card numbers or credit card TECHNIQUES numbers or listening to communications as they provide this information to sales clerks or others.

– or have dumpster divingmany • Scavenging Perpetrators devised

methods to commit • Searchingfraud corporate personalThese recordsinclude: by rifling garbage cans, computer andorabuse.

communal trash bins, and city dumps for documents with confidential

• Data diddling company information. •• May Dataalso leakage look for personal information such as checks, credit card • statements, bank statements, tax returns, discarded applications for Denial of service attacks credit cards, or other records that contain social security • pre-approved Eavesdropping numbers, names, addresses, phone numbers, and other data that allow • them Emailtothreats assume an identity. • Email forgery – Redirecting mail (aka, spoofing) Hacking •• Intercepting mail and having it delivered to a location where others can it. • access Phreaking – Using Internet, email, and other technology in spoofing, phishing, • Hijacking eavesdropping, • Identity theftimpersonating, social engineering, and data leakage schemes. © 2006 Prentice Hall Business Publishing

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit • Thefraud U.S. Department Justiceinclude: suggests the following computer and abuse.ofThese • • • • • • • • • •

four ways to minimize the chances of being victimized by Data diddling identity theft: Data leakage – Do not give out corporate or personal information Denial of unless service there attacks is a good reason to trust the person to whom it is given. Eavesdropping – Check financial information regularly for what should Email threats be there, well as for what should not be there. Email forgery (aka, as spoofing) – Periodically review your credit report. Hacking – Maintain careful records of banking and financial Phreaking accounts. Hijacking Identity theft

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include:

• Internet misinformation • Using the Internet to spread false or misleading information about people or companies. • May involve: – Planting inflammatory messages in online chat rooms. – Websites with misinformation. – Pretending to be someone else online and making inflammatory comments that will be attributed to that person. – A “pump-and-dump” occurs when an individual spreads misinformation, often through Internet chat rooms, to cause a runup in the value a stock and then sells off his shares of the stock. A number of pump-and-dump cases have been prosecuted by the SEC. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 122 of 175

•

COMPUTER FRAUD AND ABUSE TECHNIQUES

Another common form of Internet misinformation is the spreading of “urban legends”—often by innocently forwarding emails. – Urban legends may often include damaging implications about products, as a recent suggesting that certain • company Perpetrators havesuch devised many email methods to commit lipsticks contain lead or that using plastic cookware in the computer fraud and abuse. These include: microwave can cause cancer. • Internet misinformation – Before forwarding any emails with negative information about individuals, companies, or their products, it’s a good idea to check the veracity of the information first. – Emails with urban legends often attribute their “facts” to credible sources, such as the federal government, Stanford University researchers, the FBI, etc. – There are several websites that attempt to verify the truth of emails that are circulated. One such website is www.snopes.com. You can easily locate the email you received on these websites, by searching under a key term in the email, such as “lipstick.” – You are likely to find that most emails you were getting ready to forward are either false or only partially true.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • Internet misinformation • Internet terrorism • •

Hackers use the Internet to disrupt electronic commerce and destroy company and individual communications. Viruses and worms are two main forms of Internet terrorism.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • Internet misinformation • Internet terrorism • Logic time bombs • A program that lies idle until triggered by some circumstance or a particular time. • Once triggered, it sabotages the system, destroying programs, data, or both. • Usually written by disgruntled programmers. • EXAMPLE: A programmer places a logic bomb in a payroll application that will destroy all the payroll records if the programmer is terminated. © 2006 Prentice Hall Business Publishing

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • • • • • • •

Internet misinformation Internet terrorism Logic time bombs Masquerading or impersonation

The perpetrator gains access to the system by pretending to be an authorized user. The perpetrator must know the legitimate user’s ID and password. Once in the system, he enjoys the same privileges as the legitimate user.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • • • • • • •

Internet misinformation Internet terrorism Logic time bombs Masquerading or impersonation Packet sniffers

Programs that capture data from information packets as they travel over the Internet or company networks. Confidential information and access information can be gleaned from the captured data—some of which is later sold.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • • • • • • •

Internet misinformation Internet terrorism Logic time bombs Masquerading or impersonation Packet sniffers Password cracking

An intruder penetrates a system’s defenses, steals the file of valid passwords, decrypts them, and then uses them to gain access to almost any system resources.

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COMPUTER FRAUD AND ABUSE TECHNIQUES •

Sending out a spoofed email that appears to come from a

•

• Internet misinformation The recipient is advised that information or a security check is needed on terrorism his account, and advised to click on a link to the • Internet company’s website • Logic time bombs to provide the information. The link connectsorthe individual to a website that is an imitation of • Masquerading impersonation the spoofed company’s actual website. These counterfeit websites • Packet sniffers appear very authentic, as do the emails. • Password cracking • Phishing

• Perpetrators have devised methods to commit legitimate company, such as amany financial institution. EBay, PayPal, computer fraud and abuse. These include: and banks are commonly spoofed.

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COMPUTER FRAUD AND ABUSE TECHNIQUES One newly graduated college student recently took a job in

California and deposited his first paycheck of approximately $5,000 • Perpetrators in the bank. have devised many methods to commit fraud he and abuse.anThese include: • computer That same night, received email from the bank, inviting him • click Internet to on misinformation the link in the email to set up online banking for his new bank account. • Internet terrorism • He followed and provided the requested information to • Logic timedirections bombs set up online banking. • Masquerading or impersonation • Two hourssniffers later, he was nervous and called the bank—only to find • Packet out that his bank account had been cleaned out and closed. • Password cracking • Phishing

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COMPUTER FRAUD AND ABUSE As a rule of thumb, it is a good idea not to click on any link provided in an emailTECHNIQUES and to go directly to the website instead. PayPal, whose email address is commonly spoofed for phishing Perpetrators have devised many methods to commit scams, offers the following advice: computer abuse. include: – If PayPalfraud ever and sends you an These email, they will include your first • Internet and lastmisinformation name in the salutation of the email. •– Internet terrorism If you need to enter PayPal’s website, type “https:” in the URL instead of bombs “http:” in order to enter on the company’s secured • Logic time server. • Masquerading or impersonation If you receive •– Packet sniffers a suspicious email, get out of your browser and go back in before proceeding directly to a company website. • Password cracking • Phishing

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many to commit In 2004, a phishing-related scam tookmethods place in South America with respect to three American computer fraudlarge and South abuse. These banks. include:Once an individual

opened themisinformation related email, a script was downloaded on their • Internet computer. The script would alter the individual’s web browser so • terrorism thatInternet if the user entered the URL of one of these three banks, the • Logic would time bombs browser redirect them to a counterfeit website for that bank. • Masquerading The oblivious user provide ID and password information, or would impersonation and was instantly • Packet sniffers set up for a high-tech robbery of his bank account. • Password cracking • Phishing

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include:

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• Internet misinformation • Internet terrorism • Logic time bombssuggests that if you have any questions about Consumer Reports • Masquerading the legitimacy of or a website, you should try entering the wrong impersonation password. A phishing website will typically accept an incorrect • Packet sniffers password—which cues you that it is a phishing scam. • Password cracking • Phishing

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Example of a website produced for a phishing scam.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • • • • • • • •

Internet misinformation Internet terrorism Logic time bombs Masquerading or impersonation Packet sniffers Password cracking • Tapping into a telecommunications line and latching onto a legitimate user before that Phishing user logs into a system. Piggybacking • The legitimate user unknowingly carries the perpetrator into the system.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • • • • • • • • •

Internet misinformation Internet terrorism Logic time bombs Masquerading or impersonation • Made famous in the movie, Office Space. Packet sniffers • The programmer instructs the Password cracking computer to round interest Phishing calculations down to two Piggybacking decimal places and deposits Round-down technique the remaining fraction into the account of a programmer or an accomplice.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • • • • • • • • • •

Internet misinformation Internet terrorism Logic time bombs Masquerading or impersonation Packet sniffers Password cracking • Involves the theft of tiny slices of money over a Phishing period of time. Piggybacking Round-down technique• The round-down is just a special form of a salami Salami technique technique.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • Social engineering •

Perpetrators trick employees into giving them information they need to get into the system. • A perpetrator might call an employee and indicate he is the systems administrator and needs to get the employee’s password.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • Social engineering • Software piracy • • •

Copying software without the publisher’s permission. In the U.S., it’s estimated that 26% of software in use is pirated. Fines for individuals and corporations are stiff, and individuals convicted of software piracy can serve jail terms of up to 5 years.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • Social engineering • Software piracy • Spamming • •

Emailing an unsolicited message to multitudes of people, often in an attempt to sell a product. Many times the product offers are fraudulent.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • Social engineering • Software piracy • Spamming •

Spammers use creative means to find valid email addresses: – Scanning the Internet for addresses posted online. – Hacking into company databases and stealing mailing lists. – Staging dictionary (aka direct harvesting) attacks. • These attacks use special software to guess addresses at a particular company and send blank emails. • Messages not returned are usually valid. • These attacks are very burdensome to corporate email systems. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 141 of 175

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Companies may use filtering software to detect dictionary attacks, search mail for competitive leaks, and block inappropriate attachments, such as pornography and illegal MP3 files. • Filtering is not always viable. The director Perpetrators have devised many methods to commit of internal auditinclude: at a major healthcare computer fraud and abuse. These company changes email addresses • Social engineering frequently because of the volume of spam • Software piracy email in his inbox. When asked why his • Spamming company did not filter the spam, he replied, “Because we’re a healthcare company, we cannot filter out any references to body parts or prescription medications.” • There is increasing public clamor for laws to clamp down on spamming. In December 2004, a federal judge awarded over $1 billion to a small Midwestern Internet service provider in an action against three spammers.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud abuse. include: • and Software that These monitors computing habits, such • • • •

Social engineering as web-surfing habits, and sends the data it Software piracygathers to someone else, typically without the user’s permission. Spamming – One type, called adware (for advertisingSpyware supported software) does two things: • Causes banner ads to pop up on your monitor as you surf the net. • Collects information about your Websurfing and spending habits and forwards it to a company gathering the data—often an advertising or large media organization.

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• Usually comesABUSE bundled with COMPUTER FRAUD AND freeware and shareware TECHNIQUES downloaded from the Internet.

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May be disclosed in the Perpetrators have devised many methods to commit licensing agreement, but users unlikely to read it. computer fraud and abuse. are These include: • Reputable adware companies • Social engineering claim they don’t collect • Software piracy sensitive or identifying data. • Spamming – But there is no way for users to • Spyware control or limit the activity. – It is not illegal, but many find it objectionable.

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Software has been developed to detect and eliminate spyware, but it may also impair the downloaded software. – Some is intentionally difficult to uninstall.

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COMPUTER FRAUD AND ABUSE • A keystroke logger records a user’s TECHNIQUES keystrokes and emails them to or •

saves them for the party that planted Perpetrators have devisedthe many methods logger. These to arecommit sometimes computer fraud and abuse.used These by: include: • Social engineering – Parents to monitor their children’s computer usage. • Software piracy – Businesses to monitor employee • Spamming activity. • Spyware – Fraudsters to capture passwords, • Keystroke loggers credit card numbers, etc. – A keystroke logger can be a hardware device attached to a computer or can be downloaded on an individual’s computer in the same way that any Trojan horse might be downloaded.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • • • • •

Social engineering Software piracy Spamming Spyware Keystroke loggers

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Spyware and keystroke loggers are very problematic for companies with employees who telecommute or contact the company’s computer from remote locations. Spyware on those computers makes the company’s systems vulnerable. Individuals are also exposed when they use wireless networks, such as those that may be available in coffee shops.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • • • • • •

Social engineering Software piracy Spamming • Spyware Keystroke loggers Superzapping •

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Unauthorized use of special system programs to bypass regular system controls and perform illegal acts. The name is derived from an IBM software utility called Superzap that was used to restored crashed systems.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • • • • • • •

Social engineering • Also called back doors. Software piracy • Programmers create trap doors to Spamming modify programs. Spyware • The trap door is a way into the system Keystroke loggersthat bypasses normal controls. Superzapping • The trap door should be removed Trap doors before the program is implemented. •

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If it is not, the programmer or others may later gain unauthorized access to the system.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • A set of unauthorized computer • • • • • • • •

Social engineering Software piracy Spamming • Spyware Keystroke loggers • Superzapping Trap doors Trojan horse •

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instructions planted in an authorized and otherwise properly functioning program. Allows the creator to control the victim’s computer remotely. The code does not try to replicate itself but performs an illegal act at some specific time or when some condition arises. Programs that launch denial of service attacks are often Trojan horses. Accounting Information Systems, 10/e

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • • • • • • • • •

Social engineering Software piracy Spamming Spyware Keystroke loggers Superzapping • Hackers search for an idle modem by Trap doors programming their computers to dial Trojan horse thousands of phone lines. War dialing • Hackers enter through the idle modem and gain access to the connected network.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • • • • • • • • • •

Social engineering Software piracy Spamming Spyware Keystroke loggers Superzapping • Driving around in cars looking for Trap doors unprotected home or corporate Trojan horse wireless networks. War dialing • If the hackers mark the sidewalk of War driving the susceptible wireless network, the practice is referred to as warchalking.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • Virus • Many viruses have two phases: – First, when some predefined event occurs, the virus replicates itself and spreads to other systems or files. – Another event triggers the attack phase in which the virus carries out its mission. – A virus may lay dormant or propagate itself without causing damage for an extended period.

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COMPUTER FRAUD AND ABUSE • Damage may take many forms: TECHNIQUES – Send email with the victim’s name as the alleged •

source. – Destroy or alter datamethods or programs. Perpetrators have devised many to commit – and Take abuse. control ofThese the computer. computer fraud include: – Destroy or alter file allocation tables. • Virus – Delete or rename files or directories. – Reformat the hard drive. – Change file content. – Prevent users from booting. – Intercept and change transmissions. – Print disruptive images or messages on the screen. – Change screen appearance. • As viruses spread, they take up much space, clog communications, and hinder system performance.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and symptoms: abuse. These include: • Virus • Virus

– Computer will not start or execute – Performs unexpected read or write operations – Unable to save files – Long time to load programs – Abnormally large file sizes – Slow systems operation – Unusual screen activity – Error messages

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • Viruses are contagious and easily spread from • Virus

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one system to another. They are usually spread by: – Opening an infected email attachment or file (most common); or – Running an infected program. Some viruses can mutate, which makes them more difficult to detect and destroy. The emails often appear to come from sources like Microsoft and seem very convincing.

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Virus protections include: – Install reliable virus software that scans for, identifies, and destroys viruses. – Keep the antivus program up to date. – Scan incoming at the to server level, Perpetrators have devised manyemail methods commit rather than when it hits the desktops. computer fraud and abuse. These include: – Certify all software as virus-free before • Virus loading it. • Software from unknown sources may be virus bait, especially if it seems too good to be true. – Deal with trusted software retailers. – Use electronic techniques to make tampering evident. – Check new software on an isolated machine. – Have two backups of all files. – Do not put diskettes or CDs in strange machines, or let others put unscanned disks in your machine.

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COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit computer fraud and abuse. These include: • Virus •

Viruses attack computers, but any device that is part of the communications network is vulnerable, including: – Cell phones – Smart phones – PDAs

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COMPUTER FRAUD AND ABUSE TECHNIQUES • • Perpetrators havetodevised many for: methods to commit A worm is similar a virus except computer fraud and abuse.program, These include: – A worm is a stand-alone while a virus is only a

• Virus segment of code hidden in a host program or executable file. • –Worms A worm will replicate itself automatically, while a virus requires a human to do something like open a file. • Worms often reproduce by mailing themselves to the recipient’s mailing list. • They are not confined to PCs and have infected cell phones in Japan. • A worm typically has a short but very destructive life. • It takes little technical knowledge to create worms or viruses; several websites provide instructions. • Most exploit known software vulnerabilities that can be corrected with a software patch, making it important to install all patches as soon as they are available. © 2006 Prentice Hall Business Publishing Accounting Information Systems, 10/e Romney/Steinbart 158 of 175

COMPUTER FRAUD AND ABUSE TECHNIQUES • Perpetrators have devised many methods to commit fraud and abuse. These include: profusely that • computer You receive an email from a friend, apologizing • • • •

•he/she Virus has previously sent you an email that was infected with a •virus. Worms friend’s email gives you instructions to look for and remove •The The low-tech, do-it-yourself attack the offending virus. You delete the file from your hard drive. The only problem is that the file you just deleted was part of your operating system. Your friend was well-intended and has done the same thing to his/her computer. REMEDY: Before even considering following instructions of this sort, check the list of hoaxes that are available on any virus protection website, such as: – www.norton.com – www.mcafee.com

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INTRODUCTION • In this chapter we’ll discuss: – The fraud process – Why fraud occurs – Approaches to computer fraud – Specific techniques used to commit computer fraud – Ways companies can deter and detect computer fraud

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PREVENTING AND DETECTING COMPUTER FRAUD • Organizations must take every precaution to protect their information systems. • Certain measures can significantly decrease the potential for fraud and any resulting losses. • These measures include: – – – –

Make fraud less likely to occur Increase the difficulty of committing fraud Improve detection methods Reduce fraud losses

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PREVENTING AND DETECTING COMPUTER FRAUD • Organizations must take every precaution to protect their information systems. • Certain measures can significantly decrease the potential for fraud and any resulting losses. • These measures include: – – – –

Make fraud less likely to occur Increase the difficulty of committing fraud Improve detection methods Reduce fraud losses

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PREVENTING AND DETECTING COMPUTER FRAUD • Make fraud less likely to occur – Create a culture that stresses integrity and commitment to ethical values and competence. – Adopt an organizational structure, management philosophy, operating style, and appetite for risk that minimizes the likelihood of fraud. – Require oversight from an active, involved, and independent audit committee. – Assign authority and responsibility for business objectives to specific departments and individuals, encourage initiative in solving problems, and hold them accountable for achieving those objectives. © 2006 Prentice Hall Business Publishing

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PREVENTING AND DETECTING COMPUTER FRAUD – Identify the events that lead to increased fraud risk, and take steps to prevent, avoid, share, or accept that risk. – Develop a comprehensive set of security policies to guide the design and implementation of specific control procedures, and communicate them effectively to company employees. – Implement human resource policies for hiring, compensating, evaluating, counseling, promoting, and discharging employees that send messages about the required level of ethical behavior and integrity. – Effectively supervise employees, including monitoring their performance and correcting their errors.

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PREVENTING AND DETECTING COMPUTER FRAUD – Train employees in integrity and ethical considerations, as well as security and fraud prevention measures. – Require annual employee vacations, periodically rotate duties of key employees, and require signed confidentiality agreements. – Implement formal and rigorous project development and acquisition controls, as well as change management controls. – Increase the penalty for committing fraud by prosecuting fraud perpetrators more vigorously. © 2006 Prentice Hall Business Publishing

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PREVENTING AND DETECTING COMPUTER FRAUD • Organizations must take every precaution to protect their information systems. • Certain measures can significantly decrease the potential for fraud and any resulting losses. • These measures include: – – – –

Make fraud less likely to occur Increase the difficulty of committing fraud Improve detection methods Reduce fraud losses

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PREVENTING AND DETECTING COMPUTER FRAUD • Increase the difficulty of committing fraud – Develop a strong system of internal controls – Segregate the accounting functions of: • Authorization • Recording • Custody

– Implement a program segregation of duties between systems functions – Restrict physical and remote access to system resources to authorized personnel © 2006 Prentice Hall Business Publishing

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PREVENTING AND DETECTING COMPUTER FRAUD – Require transactions and activities to be authorized by appropriate supervisory personnel. Have the system authenticate the person and their right to perform the transaction before allowing the transaction to take place. – Use properly designed documents and records to capture and process transactions. – Safeguard all assets, records, and data. – Require independent checks on performance, such as reconciliation of two independent sets of records, where possible and appropriate. © 2006 Prentice Hall Business Publishing

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PREVENTING AND DETECTING COMPUTER FRAUD – Implement computer-based controls over data input, computer processing, data storage, data transmission, and information output. – Encrypt stored and transmitted data and programs to protect them from unauthorized access and use. – Fix known software vulnerabilities by installing the latest updates to operating systems, security, and applications programs.

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PREVENTING AND DETECTING COMPUTER FRAUD • Organizations must take every precaution to protect their information systems. • Certain measures can significantly decrease the potential for fraud and any resulting losses. • These measures include: – – – –

Make fraud less likely to occur Increase the difficulty of committing fraud Improve detection methods Reduce fraud losses

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PREVENTING AND DETECTING COMPUTER FRAUD • Improve detection methods. – Create an audit trail so individual transactions can be traced through the system to the financial statements and vice versa. – Conduct periodic external and internal audits, as well as special network security audits. – Install fraud detection software. – Implement a fraud hotline.

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PREVENTING AND DETECTING COMPUTER FRAUD – Employ a computer security officer, as well as computer consultants and forensic specialists as needed. – Monitor system activities, including computer and network security efforts, usage and error logs, and all malicious actions. – Use intrusion detection systems to help automate the monitoring process.

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PREVENTING AND DETECTING COMPUTER FRAUD • Organizations must take every precaution to protect their information systems. • Certain measures can significantly decrease the potential for fraud and any resulting losses. • These measures include: – – – –

Make fraud less likely to occur Increase the difficulty of committing fraud Improve detection methods Reduce fraud losses

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PREVENTING AND DETECTING COMPUTER FRAUD • Reduce Fraud Losses – Maintain adequate insurance. – Develop comprehensive fraud contingency, disaster recovery, and business continuity plans. – Store backup copies of program and data files in a secure, off-site location. – Use software to monitor system activity and recover from fraud.

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SUMMARY • In this chapter, you’ve learned what fraud is, who commits fraud, and how it’s perpetrated. • You’ve learned about the many variations of computer fraud, and you’ve learned about techniques to reduce an organization’s vulnerability to these types of fraud. © 2006 Prentice Hall Business Publishing

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