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.
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INTRODUCTION
•
• Include:
– Fire or excessive heat
Companies face four types
of threats to
– Floods
their information systems:
– Earthquakes
– High winds
– Natural and political 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.
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• Include:
– Hardware or software
failures
– Software errors or bugs
– Operating system
crashes
outages and
their information systems: – Power
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
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INTRODUCTION
• Include
– Accidents caused by:
• Human carelessness
their information systems:
• 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 by human error.
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• Companies face four types of threats to
INTRODUCTION
• Include:
– Sabotage
– Computer fraud
– Misrepresentation, false use, or
unauthorized disclosure of data
their information systems:
– 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
– 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
gain an unfair advantage
over
another
person.
• Civil
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
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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.
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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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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.)
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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.
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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.
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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,
to risks
statements
andand
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
• Auditors communicate their fraud
findings to management, the audit
committee, and others.
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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
• Auditors must document their
compliance with SAS-99 requirements.
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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
results
of theirthat
audit
tests impacts fraud
• the
SAS-99
recognizes
technology
risks and
notes opportunities that auditors have
Communicate
findings
to use technology-oriented tools and techniques
Documenttotheir
audit work
design fraud auditing procedures.
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
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The “Fraud Triangle”
Donald Cressey
Rationalization
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The “Fraud Triangle”
Donald Cressey
Rationalization
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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)
• 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
• 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
• 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
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The “Fraud Triangle”
Donald Cressey
Rationalization
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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
A doesn’t
sufficient
funds
to cover
– Charge
a stolen
assethave
to an
expense
account
orthe
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.
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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
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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.
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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”
Donald Cressey
Rationalization
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WHO COMMITS FRAUD AND WHY
• How many people do you know who regard
themselves as being unprincipled or sleazy?
• It is important to understand that fraudsters do
not regard themselves as unprincipled.
– In general, they regard themselves as highly
principled individuals.
– That view of themselves is important to them.
– The only way they can commit their frauds and
maintain their self image as principled individuals is to
create rationalizations that recast their actions as
“morally acceptable” behaviors.
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WHO COMMITS FRAUD AND WHY
• These rationalizations take many forms,
including:
– I was just borrowing the money.
– It wasn’t really hurting anyone. (Corporations are
often seen as non-persons, therefore crimes against
them are not hurting “anyone.”)
– Everybody does it.
– I’ve worked for them for 35 years and been underpaid
all that time. I wasn’t stealing; I was only taking what
was owed to me.
– I didn’t take it for myself. I needed it to pay my child’s
medical bills.
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WHO COMMITS FRAUD AND WHY
• 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.
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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.
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APPROACHES TO COMPUTER FRAUD
• Computer systems are particularly vulnerable to
computer crimes for several reasons:
– Company databases can be huge and access
privileges can be difficult to create and enforce.
Consequently, individuals can steal, destroy, or alter
massive amounts of data in very little time.
– Organizations often want employees, customers,
suppliers, and others to have access to their system
from inside the organization and without. This access
also creates vulnerability.
– Computer programs only need to be altered once,
and they will operate that way until:
• The system is no longer in use; or
• Someone notices.
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APPROACHES TO COMPUTER FRAUD
– Modern systems are accessed by PCs, which
are inherently more vulnerable to security
risks and difficult to control.
• It is hard to control physical access to each PC.
• PCs are portable, and if they are stolen, the data
and access capabilities go with them.
• PCs tend to be located in user departments, where
one person may perform multiple functions that
should be segregated.
• PC users tend to be more oblivious to security
concerns.
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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.
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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.
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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.
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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
Computer
Instructions
Fraud
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COMPUTER FRAUD CLASSIFICATIONS
Data
Fraud
Input
Fraud
Processor
Fraud
Output
Fraud
Computer
Instructions
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
• 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.
– only
Increase
salaries how the system
• Perpetrator
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:
systemof
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
The perpetrator files for an undeserved refund,
such
as a tax refund.
• Cash receipt
frauds
• Fictitious refund fraud
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COMPUTER FRAUD CLASSIFICATIONS
Data
Fraud
Input
Fraud
Processor
Fraud
Output
Fraud
Computer
Instructions
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
Computer
Instructions
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.
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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
Computer
Instructions
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.
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COMPUTER FRAUD CLASSIFICATIONS
Data
Fraud
Input
Fraud
Processor
Fraud
Output
Fraud
Computer
Instructions
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.
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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
• 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
COMPUTER FRAUD
AND
ABUSE
computers that have broadband
TECHNIQUES
Internet access with denial-of-service
programs. These infected computers
the zombies.
 Perpetrators have devisedare
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 server.
 Denial of service attacks 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.
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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
personal
 Data
diddlingand banking information about all of the bank’s
customers.
 Data
leakage
– He would
notify
the bank’s customers of this breach if he was
 Denial
of service
attacks
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
request a copy of some sensitive
 Eavesdropping
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 of
service attacks
applications
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
Phreaking
else’s computer to carry out illicit
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 thief
Hacking
ran up $80,000 in debt under the postal inspector’s identity
Phreaking
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
numbers or listening to communications as they provide this
information to sales clerks or others.
TECHNIQUES
–
or have
dumpster
divingmany methods to commit
 Scavenging
Perpetrators
devised
• Searchingfraud
corporate
personalThese
recordsinclude:
by rifling garbage cans,
computer
andorabuse.
communal trash bins, and city dumps for documents with confidential
 company
Data diddling
information.
• May
Dataalso
leakage
look for personal information such as checks, credit card
bank statements,
tax returns, discarded applications for
 statements,
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, impersonating, social engineering, and data
 Identity theft
leakage schemes.
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COMPUTER FRAUD AND ABUSE
TECHNIQUES
 Perpetrators have devised many methods to commit
• Thefraud
U.S. Department
Justiceinclude:
suggests the following four
computer
and abuse.ofThese










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
Eavesdropping
whom it is given.
Email threats
– Check financial information regularly for what should
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
Hijackingaccounts.
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.
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COMPUTER FRAUD AND ABUSE
• Another common form of Internet misinformation is the spreading of
“urban legends”—oftenTECHNIQUES
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.
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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
 Perpetrators
have such
devised
methods
to commit
legitimate company,
as amany
financial
institution.
EBay, PayPal,
computer
fraud
and abuse.
These include:
and banks are
commonly
spoofed.
 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
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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
computer
fraud he
and
abuse.anThese
include:
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
and lastmisinformation
name in the salutation of the email.
 Internet
If you need
to enter PayPal’s website, type “https:” in the URL
– Internet
terrorism
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
Once an individual
computer
fraudlarge
and South
abuse.
These banks.
include:
opened
themisinformation
related email, a script was downloaded on their
 Internet
computer. The script would alter the individual’s web browser so
 Internet
terrorism
that
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.
The
oblivious user
provide ID and password information,
 Masquerading
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:
 Internet misinformation
 Internet terrorism
 Logic time
bombssuggests that if you have any questions about
• Consumer
Reports
 Masquerading
impersonation
the
legitimacy of or
a website,
you should try entering the wrong
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.
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• Companies may use filtering software to
detect dictionary attacks, search mail for
COMPUTER FRAUD
AND ABUSE
competitive leaks, and block inappropriate
attachments, such as pornography and
TECHNIQUES
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
company did not filter the spam, he
 Spamming
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.
• 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.
• 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:
– Parents to monitor their children’s
 Social engineering
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
© 2006 Prentice Hall Business Publishing
• 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 •
© 2006 Prentice Hall Business Publishing
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
Software piracy• Also called back doors.
• 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.
• 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
© 2006 Prentice Hall Business Publishing
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.
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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.
 Perpetrators have
devised
many
methods
to commit
– Destroy
or alter
data
or programs.
computer fraud– and
These
include:
Takeabuse.
control of
the computer.
 Virus
– Destroy or alter file allocation tables.
– 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
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:
COMPUTER
FRAUD
AND
ABUSE
– Install
reliable virus
software
that scans for,
identifies, and destroys viruses.
TECHNIQUES
– 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 while
include:
– A worm
is a stand-alone
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.
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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.
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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.
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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
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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.
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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.
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Homework
• Sent file .ppt to ydlulu@gmail.com with
minimum 12 slides
• Name of File/Subject : SIA5_name of
student
• Topic: E-commerce security
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