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One of the principles of cryptography is double-blind design: Make it so as few people as possible have access to both key and lock. In this case, the solution is to have the administrator encrypt the passwords as well as improve security through mechanisms like further password-encrypting the password folder, making the password folder a hidden folder and providing no information as to find it, having user logs, etc. The best and simplest way is to encrypt the passwords in the first place. When a user enters a password, it is turned into dots or *****.
This is to prevent onlookers from seeing it. But it is possible for that process to occur and for the password to still be saved in plain text elsewhere. When one signs up for a forum, it is quite often that one's plain text password is sent to the person in an e-mail. This would mean that any trojan that could read e-mails could easily acquire the person's password for a site. Solving that problem is certainly slightly stickier, but when it comes to an OS, it's very easy. When the password is signed in, it is encrypted locally.
This encryption needs to be chosen by the administrator. Only administration has access to the encryption algorithm, so only the administrator can log onto a computer and find passwords. That way, if a breach does occur and someone does find the password folder, they see gibberish. Ideally, user names should be encoded as well. What about password retrieval? Use password hint services. Upon signing up for the password, the user also creates some unique security questions. These should be unique enough so as to avoid potential social engineering approaches: The classic “What is your mother's maiden name” or “Who was your first pet” can be risky.
The best approach is to let the user type in their own question then answer it. However, this program will have to make sure that the password is not in the text at all, else people give themselves backdoors which can compromise security. If this fails, then administration can log people in and recall passwords. Other basic security tricks can solve this problem, however. The password folder should always be hidden and password-protected itself by a password known only to the admin. This means that even if someone had a key to the encryption for the passwords, they still couldn't access the password list.
And they would find it difficult to locate the password folder in the first place. Similarly, user logs of who logs in and out at various times is a deterrent to this activity. If only legitimate users can log on, then it is easy to find who did it and pursue disciplinary action. The problem comes when a password is stolen from one person by another employee or someone else with access to the company, but at the least, it starts the investigation appropriately. However, it is important to bear in mind that in the modern era it's rarely someone breaking into an office and stealing passwords, or even some intrepid employee doing so.
Rather, the most likely risk are keyloggers, trojans and malware that seek out the information. Again, if the information is sufficiently encrypted, there is no problem; however, this means that the key should only be stored locally on the administrator computer, if it is stored locally at all (I would suggest keeping it in a CD-ROM). This means that proper anti-spyware programs and hygiene are key to avoid password theft problems. Ideally, administrators would sharply control what can be run and what can't be run. When
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