Fraud in the Family ?

The family owned business has an unusual set of relationship issues.  Multiple generations work side by side. Separation of work and family roles, although desired, is almost impossible.  Fraud is never a welcome issue – if it involves a family member it is even worse. Confronting the truth, investigating the damages, and ultimately knowing the damage he or she has caused can be devastating to the business and the family.

Fraud comes in many forms – theft of company assets, bribery and corruption, purposeful violation of government rules and regulations. The answers to fraud prevention and detection are fundamentally the same for all businesses – large and small, public and private.  Let’s go back to the basics:

1. Understand the elements of fraud and fraud deterrents to protect yourself, your business and every individual involved. One of the most basic concepts in fraud management and detection is the Fraud Triangle – famed criminologist Donald R. Cressey came up with the theory to explain why people commit fraud. The three elements are Opportunity, Pressure and Rationalization.  Opportunity is the component over which business owners have the most control. 

1. Opportunity to commit fraud is present when employees have access to assets and the related information that allows them to commit and conceal fraud. As family members and other employees take on more responsibilities in a competitive market place, we often lose sight of the importance of basic internal control concepts.  Most companies are doing more with less resources.  This has resulted in managers with more access to systems and information, as well as more control over the operational areas of a company.  Have you looked at the fundamentals of segregation of duties lately? Have you evaluated your checks and balances over asset access and reporting? Lack of opportunity is key in fraud prevention.

1. Pressure is the motivation or “need” felt by the person that commits fraud. Most people have felt the pressure of escalating medical costs, credit card debt, job loss or divorce. These are very difficult, but common, life problems. To the fraudster, combine this pressure with opportunity and you may have a situation too tempting to resist. 

1. Rationalization is the final leg of the triangle. It is the glue that holds opportunity and motivation together. Common ways to rationalize fraud include, making up for a lost raise or bonus, taking a temporary loan which never gets repaid, or believing that the “Company” doesn’t need the money. Family members rationalize that big brother gets paid too much, so they will even the playing field.

Business owners have the most control over opportunity – focus on this area should be the first and foremost. Enlist your business advisors, forensic accountants, attorneys for help in setting up strong fraud prevention plans. If you suspect you have a fraudster in the “family” – don’t look the other way. Be proactive, hire a professional forensic accountant to help you find the truth, deal with it, and move forward to a successful future.