In all of my years investigating fraud, probably the most devastating frauds are the ones that occur in family-owned businesses. Because of the fact that there is such an element of “family” at the company, it often means that the owners place a lot of trust in their employees. Even non-family employees are often given the benefit of the doubt and treated as though they are trustworthy.
The sad fact is that family-owned businesses are not immune to fraud. Many times, they are even more vulnerable to internal theft because they lack certain basic controls over information and assets.
The following case study is a real-life story, told from the perspective of a husband and wife team who had poured years of their lives into a small manufacturing business. They invested everything they had, only to have it stolen by an employee who was hired to help expand the business.
Fifteen years of our lives. Fifteen years. He took our money and he took our trust. He altered the way we view the world. We will never look at people in the same way.
Ten years into our business venture, we brought in Jack as our CFO. We needed someone with the financial expertise we didn’t have. We trusted Jack to protect our money. The expansion began, and we did whatever was needed to finance it. We refinanced our house, liquidated retirement accounts, and sold company stock to Jack.
But no matter how much money we put into the company, there was never enough. Sales were higher than ever, yet we never had even a few dollars to spare. Each time I questioned Jack about the fact that we never seemed to get ahead in spite of our booming sales, he calmed my fears.
The truth was that Jack was funneling money out of the company. He saw to it that suppliers were not paid and that our bank debt grew. Jack’s ultimate fantasy was a hostile takeover of our business with the money he stole from us. He prepared the creditors for the takeover by telling them that we were absentee owners who had no business sense. Jack would be the good guy who would come to the rescue and buy out the company.
At the very last moment, right before Jack was going to execute the takeover, we sensed something was terribly wrong and we locked him out of the company. Attorneys and accountants came in immediately to analyze our situation. It quickly became clear that Jack had perpetrated a massive fraud against the company, leaving us with no cash, little hard assets, and huge debts.
It was also clear that, based upon our sales and collection history, we should have had plenty of money. That conclusion was validated when we began seeing positive cash flow within 45 days after Jack was dismissed.
We got some relief from our creditors to attempt to salvage the business. We did well for a few months, but Jack had put us so far into debt (in order to fill his own pockets) that we were always one step away from failure. And then it happened. We lost one key customer and our business was done. Everything we had worked for over fifteen years was gone. We lost our good name and our good credit.
Tomorrow: Figuring out where they went wrong and picking up the pieces.