You may think that the trusting, tight-knit nature of family-owned businesses means they have a lower risk of fraud. But some experts believe the risk and occurrence of misappropriation are actually greater in family businesses due in part to that very environment of trust. Furthering the problem, the perpetrator may not realize his or her behavior is inappropriate.
Research consistently shows that fraud risks are everywhere, and family businesses are far from immune. Certain actions, such as a family member using the company credit card to fuel a personal vehicle or a trusted employee taking unrecorded time off, can start out as “innocent,” but if left unobstructed can quickly escalate into bigger, bolder deceptions. While each situation is unique, common factors contributing to inappropriate behavior include a sense of entitlement to maintain lifestyle, trying to live up to performance expectations and inadequate internal controls.
Here are four fraud myths you need to confront when assessing your family business’s risks:
Myth #1 — Our people wouldn’t commit fraud.
You cannot vouch for all of your employees, regardless of relationship or employment history. The opportunity to commit more extensive and financially devastating fraud correlates with a person’s authority, position and power along with the degree of oversight.
Myth #2 — Fraud couldn’t happen to us — we’re a stable organization.
Fraud risks can affect any business. As organizations become more decentralized and complex, management must remain vigilant in their endeavors to detect and prevent all types of fraud. These include, but are not limited to, corruption, intellectual property theft, bribery and money laundering.
Myth #3 — If fraud occurred, it would be discovered quickly.
Individual fraud detection mechanisms have limitations. Typically, employees with the responsibility for monitoring the company’s internal controls do not have the training or experience needed to properly review these controls. Because of that, though internal and external audits play useful roles, these functions have limited reach when it comes to fraud deterrence and detection.
Myth #4 — Damage wouldn’t be significant.
Both the rate of occurrence and amount of loss are greater for private companies than public companies. Rate of recovery tends to decrease based on the size of the damage incurred. Reputational damage to the business and family can be even harder to measure, as the impact is so far-reaching. Remember, insurance coverage is limited to actual tangible losses proven by the company and does not generally account for secondary losses, such as reputational damage or legal and investigation costs.
Take action to prevent fraud now, not later.
Awareness and enforced controls that can prevent and detect wrongdoing are the best ways to reduce your family business’s chances of falling victim to fraud. Make the rules about the use of company resources clear to both family and non-family employees, and allow no exceptions.
If you suspect fraud, it’s critical that you take immediate action. As fraud is most often detected by other employees, instruct them to raise suspected issues to management, HR or legal rather than taking matters into their own hands. If termination is required, you’ll need to protect the whistle-blower, the business and the family.
Remember: the potential of fraud occurring in your organization is a possibility that you must confront. You may never need to execute on a fraud action plan, but like every other aspect of running your business, it’s a scenario that should be addressed before it’s too late.
Tell me: How has your family business worked to prevent fraud? What “lessons learned” can you share that others can benefit from?
Carrie Hall, EY Family Business Leader, Americas