Computer Fraud
The U.S. Department of Justice defines computer fraud as any
1. Unauthorized theft, use, access, modification, copying, and
destruction of software or data
2. Theft of money by altering computer records
The Association of the Certified Fraud Examiners provides the
general definition of computer fraud:
Any defalcation or embezzlement accomplished by tampering
Another definition of computer crime:
In a computer crime, the computer is involved—directly or
indirectly—in committing the criminal act. Sabotage of
The Rise in Computer Fraud
Computer systems are particularly vulnerable to computer crimes
for the following reasons:
1. Billions of characters of data are stored in company
2. Organizations want employees, customers, and suppliers to
3. Computer programs only need to be changed or modified once
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4. Modern systems utilize personal computers (PCs), which are
inherently more vulnerable to security risks. It is
5. Computer systems face a number of unique challenges:
reliability (i.e., accuracy, completeness), equipment
The increase in computer fraud schemes is due to some of the
following reasons:
1. Not everyone agrees on what constitutes computer fraud.
2. Many computer frauds go undetected.
3. A high percentage of uncovered frauds are not reported.
4. Many networks have a low level of security.
Computer Fraud Classifications
As shown in Figure 5-2 on page 132, one way to categorize
computer fraud is to use the data processing model: input,
processor, computer instructions, stored data, and output.
Input
The simplest and most common way to commit fraud is to alter
computer input. It requires little, if any computer skills.
Example of input fraud, a New York bank employee changes the
company deposit slips to forged deposit slips. For three days
he deposited bank deposits in his personal account. Then he
disappeared and was not caught as he used an alias name.
There are more examples on pages 155 and 156.
Processor
Computer fraud can be committed through unauthorized system
use, including the theft of computer time and services.
Computer Instructions
Computer fraud can be accomplished by tampering with the
software that processes company data.
Data
The greatest exposure in data fraud comes from employees with
access to the data.
The following are some recent examples of stolen data:
1. The office manager of a Wall Street law firm found
information about prospective mergers and acquisitions in
2. A 22-year old Kazakhstan man broke into Bloomberg’s network
and stole account information, including that of Michael
3. A software engineer tried to steal Intel’s plans for a new
microprocessor. Because he could view but not copy or print
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4. Cyber–criminals used sophisticated hacking and identity
theft techniques to hack into seven major online brokerage
5. The U.S. Department of Veterans Affairs was sued because an
employee laptop that contained the records of 26.5 million
veterans was stolen, exposing them all to identity theft.
Later, another laptop with the records of 38,000 people
disappeared from a subcontractor’s office.
Output
Computer output, displayed on monitors or printed on paper,
can be stolen or misused.
Fraud perpetrators can use computers and output devices to
forge authentic-looking outputs. For example, a company laser–
printer could be used to prepare paychecks.
Multiple Choice 7
Computer fraud is increasing rapidly due to the fact that:
a. not everyone agrees on what constitutes computer fraud
b. many computer frauds go undetected
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Preventing and Detecting Computer Fraud and Abuse
Table 5-5 on page 134 provides a summary of ways to prevent and detect
computer fraud.
2. Increase the difficulty of committing fraud.
4. Reduce fraud losses.
Multiple Choice 10
Ways to prevent and detect computer fraud include
a. develop a strong system of internal controls
b. install fraud detection software
Answer to Multiple Choice Questions:
Multiple Choice Question Answers
Number
Answer
Number
1
D
6
2
B
7
4
A
9
The following are a couple of interesting articles involving fraud.
A Report to the Nation*
According to Gil Geis, president of the Association of Certified Fraud
Examiners, the Report to the Nation on Occupational Fraud and Abuse
represents the largest known privately funded study on this subject. A
total of 2,608 Certified Fraud Examiners (CFE’s) contributed details of
actual fraud and abuse cases totaling $15 billion. The largest fraud
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include asset misappropriation, corruption, false financial statements,
false overtime, petty theft and pilferage, use of company property for
personal benefit, and payroll and sick time abuses.
In this study, the majority of fraud and cases were discovered through
tips and complaints by fellow employees. Sixth, the firm’s unopened
bank statement should be reviewed at the highest possible level by a
responsible person uninvolved with the bank reconciliation. Finally, a
positive and open work environment should be created to reduce the
motivation of employees to commit fraud and abuse.
*Report to the Nation on Occupational Fraud and Abuse (Austin, Tex:
Association of Certified Fraud Examiners, 1996). p. 43
At Omega Engineering*
Omega is the classic situation of an inside hack attack, in this case a
logic bomb that detonates at a specified time. They are the most
difficult to defend against, said William Cook, a partner at Brinks,
Hofer, Gilson & Lione, a Chicago-based law firm. “That is exactly what
happened,” said Al DiFrancesco, Omega’s director of human resources.
“Three weeks after Lloyd was fired, our employees came to work and
could not boot their computers,” he said.
COMPUTER CRIME
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the supervisory privileges to make network additions, changes, and
deletions. In the wake of the damage caused by the logic bomb, Omega
*Adapted from Kim Girard, “Ex–Employee Nabbed in $10M Hack Attack,”
Computerworld, February 28, 1998 p. 6.
Note to the Instructor: The following is taken from the Certified Fraud
Examiners Manual that includes additional information regarding fraud
schemes that may be included for the students.
EMPLOYEE FRAUD SCHEMES
Cash
Cash is the focal point of most accounting entries. Cash, both on
deposit in banks and petty cash, can be misappropriated through many
different schemes. These schemes can be either on-book or off-book,
depending on where they occur. Generally, cash schemes are smaller than
Skimming
Skimming involves removing cash from the entity before the cash is
recorded in the accounting system. This is an off-book scheme; receipt
of the cash is never reported to the entity. A related type of scheme
EXAMPLE
According to an investigation, fare revenues on the Chicago
Transit Authority’s (CTA) rail system allegedly were
misappropriated by agency employees. The statistics indicate that
the thefts are not confined to the one station that originally
was suspected and that the fare-skimming by transit workers might
have been reduced by news of the investigation. In the four days
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ticket agents and one supervisor or clerk. Early reports
indicated that agents pocketed money after recording “transfer”
or “monthly passes” as cash-paying customers passed through
turnstiles.
Voids/Under-Rings
EXAMPLE
Roberta Fellerman, a former Ball State University employee, was
indicted on federal charges of stealing about $105,000 from the
school’s bookstore operations. Fellerman was charged with
stealing the money over a thirty–three month period.
Swapping Checks for Cash
One common method where an employee can misappropriate cash is to
exchange his own check for cash in the cash register or cash drawer.
Periodically, a new check is written to replace the old check. This
process can be continued so that on any given day, there is a current
check for the cash removed. This is a form of unauthorized “borrowing”
EXAMPLE
Lisa Smith, a Garfield High School fiscal clerk at a central
treasurer function allegedly “borrowed” $2,400 by placing 23
personal checks in deposits which were made from various student
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Alteration of Cash Receipts Documentation
A lack of segregation of duties can create an opportunity for an
employee to misappropriate company funds. For example, if the same
person is responsible for both collecting and depositing the cash
EXAMPLE
An elected county treasurer allegedly stole $62,400 over a three
year period from property tax receipts. Every other day, after
cash receipt transactions were batched and posted to the
subsidiary accounting records, the treasurer altered the total
cash receipts and the actual deposit. Therefore, the control
account and the deposit were equal but that total did not match
Fictitious Refunds and Discounts
Fictitious refunds occur when an employee enters a transaction as if a
refund were given; however, no merchandise is returned, or no discount
is approved which substantiates the refund or discount. The employee
misappropriates funds equal to the fictitious refund or discount. This
scheme is most prevalent in the retail/merchandise industry; however,
it can occur in any operation in which a refund or discount is given.
EXAMPLE
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university. The money was allegedly taken from the Tuition
Assistance Program, operated by the New York State Higher
Education Services Corporation to provide expenses money to needy
students. However, NYU officials assert that the funds came from
a University account, not from State money.
Kiting
Kiting is the process whereby cash is recorded in more than one bank
account, but in reality, the cash is either nonexistent or is in
transit. Kiting schemes can be perpetrated using one bank and more than
one account or between several banks and several different accounts.
EXAMPLE
Ronald W.P. Sylvia, 59, and his son-in-law, Philip L. Grandone,
33, both of Dartmouth, admitted to participating in a check–
kiting scheme that bilked the Bank of Boston out of $907,000.
Grandone, owner of two pharmacies in the New Bedford area, had
cash-flow problems when Sylvia, operator of two auto sales and
leasing businesses, offered to write a check to cover some of his