Chapter 8: Fraud and Errors

Define Computer Fraud

Any type of fraud that requires computer technology to perpetrate.

Define White Collar Criminal

businessperson who resorts to trickery or cunning crimes usually involve violation of trust or confidence

Define Corruption

dishonesties conduct by those in power which often involves actions that are illegitimate or immoral (ex: bribery)

Examples of input fraud

employee sold customers full price tickets and entered them as half price and pocketed the rest railroad employees entered data to scrap more than 200 cars. removed cars, painted and then resold them

Most frequent fraudulent financial reporting involve

fictitiously inflating revenues, holding the books open (recognizing revenues before they are earned), closing the books early (delaying current expenses to a later period), overstating inventories or fixed assets, and concealing losses and liabilities

Data Fraud

illegally using, copying, browsing, searching, or harming company data

Define Sabotage

intentional act where the intent is to destroy a system or some of its components

Fraud detection is much more effective when data analytics software tools are used to examine entire ____

population

Examples of Software errors and equipment malfunctions

power outages errors or bugs operating system crashes

Elements of fraud triangle

pressure opportunities rationalization

Examples of intentional acts

sabatoge misrepresentation false use fraud

For Fraud taking ____ is not very effective

samples

5 elements for there to legally be an act of fraud

1) Fals Statement, representation, or disclosure 2) Material Fact - induces a person to act 3) Intent to deceive 4) Justifiable reliance, relies on misrepresentation 5) Injury or Loss by victim

Examples of misappropriation of assets (page 229)

-stealing assets -paying for goods and services not received by the company -embezzling cash received - approving bad loans

SAS No. 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 -document and communicate findings -incorporate a technology focus

Examples of processor fraud

1) An insurance company installed software to detect abnormal system activity and found that employees were using company computers to run an illegal gambling website. 2) Two accountants without the appropriate access rights hacked into Cisco's stock option system, transferred more than $6.3 million of Cisco stock to their brokerage accounts, and sold the stock.

Treadway Commission recommended 4 actions to reduce fraudulent financial reporting:

1) Establish an organizational environment that contributes to teh integrity of financial reporting process 2) Identify and understand the factors that lead to fraudulent financial reporting 3) Assess the risk of fraudulent financial reporting within the company 4) Design and implement internal controls to provide reasonable assurance of preventing fraudulent financial reporting

Challenges to use data analytics to prevent and detect fraud (7)

1) Properly coping out what data or account is to be tested 2) obtaining proper data in clean and electronic format 3) large numbers false positives 4) various software systems 5) data security 6) cost of acquiring data 7) fraud perpetrators concealing activities

Benefits to using data analytics to prevent and detect fraud (6)

1) Test for most frequent types of fraud schemes 2) examines data reactively or proactively 3) identify fraud before it becomes material 4) help investigators focus detection efforts on suspicious and high risk transactions 5) analyze numeric and non-numeric data and compare data from internal and external sources 6) test internal controls to determine how well they are working

Example of data fraud

1) The office manager of a Wall Street law firm sold information to friends and relatives about prospective mergers and acquisitions found in Word files. They made several million dollars trading the securities. 2) A 22-year-old Kazakh man broke into Bloomberg's network and stole account information, including that of Michael Bloomberg, the mayor of New York and the founder of the financial news company. He demanded $200,000 in exchange for not using or selling the information. He was arrested in London when accepting the ransom.

Ways to improve detection methods

1) fraud risk assessment program 2) audit trail 3) periodicity external and internal audits 4) fraud detection software 5) fraud hotline 6) motivation to report fraud 7) computer security officer 8) monitor system activities

Ways to reduce losses from fraud and errors

1) maintain adequate insurance 2) develop comprehensive contingency, disaster recovery and business continuity plans 3) store backup copies of program and data files in a secure off site location 4) use software to monitor system activity and recover from the different types of threats

ways to make fraud and errors less likely to occur

1) organization culture that stresses integrity and ethics 2) structure, management philosophy, and style that minimizes likelihood of fraud 3) Obtain board of director and C level buy-in and support for the corporate application of security standards 3)Assign authority and responsibility for business objectives to specific departments and individuals 4) identify the events that led to increased fraud and take steps to prevent 5) comprehensive set of security policies 6) corporate security standards are applied to all new technology before implemented 7) HR policies 8) anti fraud policies 9) supervising employees 10) company code of conduct 11) train employees in integrity 12) increase penalty

Way stop increase the difficulty in committing fraud (9)

1) strong system of internal controls 2) segregate functions 3)authorization for transactions 4) properly designed documents and records 5) safeguard all assets 6) independent checks 7) computer based controls 8) encryption 9) fix software vulnerabilities

Define Pressure

A person's incentive or motivation for committing fraud.

Examples of Unintentional Acts

Accidents caused by human carelessness innocent errors lost data logic errors systems that don't meet company needs

Define Fraud

Any an all means a person uses to gain an unfair advantage over another person

Opportunity allows a perpetrator to do three things

Commit the fraud conceal the fraud convert theft or misrepresentation to personal gain

Define Lapping

Concealing the theft of cash by means of a series of delays in posting collections to accounts receivable.

Define Check Kiting

Creating cash using the lag between the time a check is deposited and the time it clears the bank.

Example of Natural and Political Disasters

Fire Flood War/Terrorism

Fraudulent Financial Reporting

Intentional or reckless conduct, whether by act or omission, that results in materially misleading financial statements.

Outlier Detection

Items outside the range of similar data can indicate fraud, such as a purchase or sales order number out of sequence. To combat fraud, some banks will notify users of a check number significantly out of order.

Define Cookie

a text file created by a website that is stored on a visitors hard drive Store info about the user and what they've done on the site

Investment Fraud

Misrepresenting or leaving out facts in order to promote an investment that promises fantastic profits with little or no risk. *Examples include Ponzi schemes and securities fraud.

4 threats to AIS

Natural and Political Disasters Software errors and equipment malfunctions Unintentional Acts Intentional Acts

Why is computer fraud increasing rapidly? (7)

Not everyone agrees on what constitutes computer fraud many instances of computer fraud go undetected high % of fraud is not reported many networks are not secure Internet sites offer step by step instructions on how to perpetrate computer fraud and abuse Law enforcement cannot keep up with growth of computer fraud calculating losses is difficult

Regression Analysis

This statistical method helps evaluate how strong the connection is between two or more data items. For example, there may be a historical relationship between shipping costs and sales. If sales were to increase dramatically without a corresponding increase in shipping costs, that might indicate fictitious sales.

Define Opportunity

The condition or situation that allows a person or organization to commit and conceal a dishonest act and convert it to personal gain.

Define Rationalization

The excuse that fraud perpetrators use to justify their illegal behavior.

Most significant contributing factor in most misappropriations I the

absence of internal controls or failure to enforce existing internal controls

Examples of computer fraud

Unauthorized theft, use, access, modification, copying, or destruction of software, hardware, or data. Theft of assets covered up by altering computer records. Obtaining information or tangible property illegally using computers.

Semantic Modeling

Using semantic analysis, investigators can analyze both structured and unstructured text for hidden clues to fraudulent activity. For example, computers can analyze reports written by those involved in an automobile insurance claim (policy holders, claims adjusters, insurance agents, and police) to see if there are inconsistencies that might indicate a fraudulent claim.

Computer Instructions Fraud

tampering with company software, copying software illegally, using software in an unauthorized manner, and developing software to carry out an unauthorized activity

Input Fraud

the simplest and most common way to commit a computer fraud is to alter or falsify computer input

Misappropriation of Assets

theft of company assets by employees

Processor Fraud

unauthorized system use, including the theft of computer time and services

Output Fraud

unless properly safeguarded, displayed or printed output can be stolen, copied, or misused

Anomaly Detection

using trends and patterns Anything unexpected, out of the ordinary, or not in line with expected trends or patterns can indicate fraud. One way to perpetrate cash disbursements fraud is to begin making payments to an inactive vendor. Examining this new activity might uncover a fraud.