Fraud in Family Business

Every good business must place trust in its employees and those with whom they do business. It's quite simply an essential piece of any successful business. Unfortunately, that trust is what leads to the opportunity to commit fraud. Management offers access to data, documents, and money to those who have become trusted employees. And that access is what opens the door to fraud. Without access to the money and the information, no fraud could be committed.

And in family businesses that experience internal fraud, the pain of the violation of trust is often even worse. Family ties don't protect the family business from fraud. The trust afforded by family members sometimes makes it even easier for the dishonest sibling, uncle, or cousin to steal the company blind.

When a family member is put into a management position, there is often the risk that the new executive is not fully qualified for the job. This can increase the potential for fraud, as an underperformer may feel the need to enhance the financial performance of their department or division in order to meet expectations. Many times there is also a feeling of entitlement by a family member in an executive position. This can lead to an abuse of expense reporting, payroll irregularities, or other theft of assets.

What's a family business to do? It starts with fraud prevention. Especially in companies with executives who think that family members won't ever steal from them. Preventing fraud in a family business should be a top priority to protect the company from financial ruin.

Fraud prevention is much easier and more cost effective than investigating fraud and trying to recover the proceeds of fraud. Even when a family member is the thief, the potential recovery of stolen funds is still low. The average company will recover less than 25% of the proceeds of fraud and will incur significant costs in the process.

Policies and procedures are critical to fraud prevention in any business, even a family business. Lax adherence to the rules by family members can lead to fraud, and it might also cause other employees to disregard the standards too. Inconsistent enforcement of rules can also create an atmosphere of disparity, another factor that could push employees toward fraud.
Family businesses often pose a greater risk of fraud because their controls over assets and data are inadequate. The family atmosphere often leads to more trust, which leads to less control over processes. Inadvertently, non-family members may be afforded the same level of trust given to family members.

Unfortunately, some of the worst fraud cases I've seen have been perpetrated by family members. Regardless of whether fraud is committed by family or non-family, it makes sense to actively prevent it. Fraud experts can help develop controls that are specifically designed to prevent fraud. Good controls are good business because they protect the employees, the family, and the bottom line.


Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.