Yesterday we heard the story of a fraud in a family business from the perspective of the husband and wife owners. After ten successful years in manufacturing, they really wanted to take their business to the next level.
They committed themselves to growing the business, and they recognized that they needed help to do it. They weren’t finance experts, so they hired a CFO to manage the money while they worked on operations and technology.
In five years, Jack (the CFO) destroyed everything they had built. They tried to salvage the company but were unsuccessful. The family was left with no money and no assets.
Here is their perspective on where they went wrong:
In looking back on our experience with Jack, we now see the many red flags that presented themselves. We had several opportunities to protect ourselves, but we just didn’t know enough about fraud.
First and foremost, we should have done a background check on Jack. We should have confirmed previous employment, as that might have yielded information that would have made us more cautious.
When Jack began firing longtime employees, we should have been suspicious. Key employees in all areas of the company were let go by Jack, and he replaced them with his own people. Most notably, he fired our accounting clerk and brought in his wife. Clearly, this was done to help cover his financial tracks.
Most importantly, we didn’t have any checks and balances in place. Jack made financial moves that didn’t require any authorization from us. We never should have allowed him to make financial decisions on his own. He called all the shots and his wife covered for him.
The family courageously regrouped and began again. They opened a new company, and they were able to re-establish relationships with certain customers. This is how they moved forward:
For better or worse, Jack changed the way we do business. We do not fully trust anyone. We purposely changed attorneys and banks in order to establish new professional relationships. We didn’t want to do business with anyone who had ties to Jack.
Even though our new business is only run by family, we have implemented more checks and balances. We require multiple signatures for significant transactions, and we use a lockbox for customer payments. Basic controls that we lacked in our former company have now been established.
We could not fathom that our business partner would ever cheat us. We found out the hard way that no one can be trusted when there is money on the table. We also found out that we were not alone. When we talk about our experience, we often find that something similar has happened to everyone. Sadly, this happens all the time.
Several years into their new venture, the family is finding success. They have been able to raise money to gradually expand, and they now have a financially healthy company with excellent long-term prospects. But their trust has been permanently broken.