Help Prevent Fraud in Your Family Business

Statistics on fraud rates in family-run businesses are scant. This is probably because most family enterprises keep incidents of financial malfeasance under wraps and don’t involve law enforcement or the courts. Because punishing offenders is critical to preventing future fraud, such secrecy can encourage schemes and raise the risk of large financial losses. So although your family business may be different from those run by unrelated individuals, it needs just as many internal controls to prevent bad behavior.

Antifraud policies are critical

Fraud prevention efforts in family businesses often are hampered by loyalty and affection. One of the biggest potential obstacles is failing to acknowledge that someone in the family could be capable of initiating or overlooking illegal activities. If there’s a black sheep in your flock, that person may be all too willing to exploit such family goodwill.

However awkward it might feel to enforce rules and exercise authority over your own family members, fraud policies are critical to your company’s well-being. If you don’t already have a robust list of internal controls that’s followed faithfully, act to implement antifraud policies as soon as possible. Which controls are mandatory depends on the size, industry and other characteristics of your business. But in general, all businesses should segregate accounting duties, limit access to sensitive files, train workers to spot fraud and provide them with a confidential mechanism to report suspicions.

Role of outside input

Independent auditors and legal advisors are also essential. Your family business should look outside its immediate circles of relatives and friends to retain professional advisors who can be objective when assessing your company. Audited financial statements from independent accountants, in particular, protect your business and its stakeholders.

If your company is big enough to have a board of directors, the board should include at least one outsider who’s willing to tell you things you might not want to hear. In some extreme cases, members of all-family boards have been known to work together to bilk their companies. But with outside input, this type of scheme becomes much more difficult to perpetrate.

Dealing with perpetrators

What if you uncover fraud in progress? Regardless of whether the suspect is a family member, engage a fraud investigator to look into the matter. If this outside expert finds evidence of wrongdoing, strongly consider reporting the crime and taking legal action.

If the perpetrator is a family member and you’re reluctant to expose the person, ask a trusted attorney or CPA to explain the illegality and possible consequences of any fraudulent activity. Just keep in mind that such interventions don’t always work. At the very least, terminate the family member’s involvement in your business.

Key word is “business”

The term “family business” contains the word “family.” But as an owner, you need to emphasize the second word, “business,” and ensure that everyone in your organization is working for its success. If you haven’t already, draw up a code of ethics and require all employees, including family members, to sign it. Then, model the code so your team knows where you stand. Contact us for help with internal controls or to investigate potential fraud.

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