A Brighter Way
A Brighter Way
One of the things that make family businesses such appealing places to work is trust. That's also one of the things that make family businesses vulnerable to fraud. It may be difficult for family members to believe any of their clan would intentionally harm a company that benefits all of them, but it happens more often than you might think. And it takes only one lone wolf to damage or destroy an enterprise you and your family have spent years building.
Family businesses are no more vulnerable to fraud than other organizations, but their fraud prevention and punishment efforts can be hampered by loyalties and emotions that don't exist in other companies. One of the biggest obstacles to fraud prevention in a family business is simply acknowledging that someone in the family would be capable of initiating or overlooking unethical or illegal activities.
But like any other business, family enterprises must include a system of checks and balances that make it difficult for anyone to defraud the company. It may be awkward for one family member to exercise authority over other relatives, but someone needs to take charge and be willing to take a stand if or when issues arise.
Of course, the person in charge potentially could be the one defrauding the company. That's why independent auditors and attorneys are critical. Family businesses should look outside their immediate circles of relatives and friends to retain professional advisors who can be objective when assessing the company. Audited financial statements from independent accountants, in particular, both protect the business and supply peace of mind to its stakeholders.
If your company is large enough to have a board of directors, whether formal or informal, that board or advisory group should include at least one outsider who's strong enough to tell you things you may not want to hear. Business associations such as the Young Presidents' Organization (www.ypo.org) or the Entrepreneurs' Organization (www.eonetwork.org), along with industry-specific trade organizations, can be good resources both to discuss family business issues and identify potential board members.
In some extreme cases, members of all-family boards or officers have been known to work together to bilk their companies – something that's much more difficult to do when collusion requires the assistance of an unrelated board member.
Another problem family businesses might face is what to do if they find that someone in the family has, indeed, defrauded the company. While legal action is an option, it's one families rarely can bring themselves to pursue against one of their own – at least not at first.
If you find yourself in that situation, ask a trusted attorney or accountant to explain to the perpetrator the illegality and possible consequences of the fraudulent actions in an effort to stop him or her without further damaging the company. If such interventions don't work, however, you and other family members may have no choice but to prosecute.
Sadly, just as it's more difficult to accept that the family closet is hiding a fraudster. It's also much harder to resist a loved one's pleas for assistance. In worst cases, families may have to choose between maintaining ethical professional standards and saving a loved one from scandal or punishment.
From a distance, the choice may seem obvious, but when it comes to family there are rarely easy answers. Objective professional advisors, non-family officers and board members, and a corporate culture based on trust – but not blind trust – can help prevent a rogue family member from harming what should be a source of mutual prosperity.
Note: This content is accurate as of the published date above and is subject to change. Please seek professional advice before acting on any matter contained in this article.
