Common Misconceptions about Fraud in the Family BusinessBondBeebe
Jacqueline Thompson, CPA
No family-owned business likes to think that their trusted employees would steal from the business –certainly not their family members. Unfortunately, family businesses aren’t exempt from fraud, and assuming that your company is safe from embezzlement, malfeasance, or any other fraudulent act can put your business at grave risk.
In my years of accounting work, here are the most common misconceptions I’ve encountered regarding family business fraud:
Fraud Doesn’t Happen in Family Businesses. Any business is vulnerable to fraud. Trust cannot be your internal control. Your company becomes even more vulnerable if you ignore any potential threats and fail to take the necessary steps to protect your business.
My Employees Are All Trustworthy, They Would Never Steal. Unfortunately, research shows that long-term employees are the most-likely to commit fraudulent acts. A seemingly devoted employee who never takes vacation may be doing so because leaving the office might expose the fraudulent activity.
We Have Internal Controls, So Our Company is Safe. Internal controls are essential, yes, but not sufficient. If internal controls are not properly designed or enforced, or not updated based on changes in your family business, you could be putting your company at risk. They also need to be supported with a top-down culture of ethics and an adequate risk management approach.
My Instincts Will Tell Me If There is Fraud. The data shows that the average occupational fraud scheme lasts 18 months before it is detected. If you’re not staying on top of your company’s financial data and there are no or weak internal controls, fraud can be happening right under your nose.
Preventing Fraud in the Family Business
Now that we’ve dispelled several common myths, it is important to turn to the proactive steps you can take to prevent fraud in your family business. Here are some basic procedures and systems you can implement:
Develop a Proper Segregation of Duties. No one person should have control over an entire financial transaction from beginning to end. For example, the person who signs the checks should not be the person who has access to the check stock or be able to write the checks. When one person has total control over the whole financial process, there are no checks and balances, and fraud can easily be committed.
Make Vacation Mandatory. This seemingly small step can go a long way towards preventing and identifying fraudulent activity. When another person steps in to take over a process or task, they may be able to uncover red flags pointing to suspicious activity.
Regularly Review Your Financials. Staying on top of the financial condition of your company will help you identify any suspicious transactions or payments. Set aside time each month to review bank reconciliations and the checking account.
Conduct Internal Audits. To make sure your internal control system is sufficient and working as designed, conduct internal audits and test your procedures. Ensure proper implementation, and also adapt internal control design as needed to protect key areas of your business, including finances, technology, and intellectual property.
Trust is essential in any business, and it is one of the traits that helps make family businesses so resilient. However, that trust cannot be blind. Fraud prevention mechanisms are important for any business, regardless of the mission, longevity, or family ties.