When a family taps into its built-in comradery and all-inclusive nature for economic advancement great things can (and do) happen. For generations, family-owned businesses have been the mainstay of the American Dream and today, more than 50 percent of our country’s Gross National Product (GNP) is generated by this ideal. About 90 percent of all businesses in the U.S. are either family-owned or family-controlled. But be warned, while working with family members may have its advantages, you should also be aware of potential pitfalls.
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Some families learn too late that blood lines aren’t always strong enough to prevent fraud from wreaking havoc on their company; and in addition to the stress of trying to pick up the pieces of a business in shambles, family members are often left to deal with the added stress of a family in turmoil. Frankly, it’s never easy to discover that your trust has been betrayed, but when a family member is at the root of the betrayal, it’s especially difficult.
Although trust is important, trust is not an internal control and it’s not going to stop fraud from occurring in your organization. The sad fact is that no matter how well you think you know a person you never truly know what they are capable of until it’s too late. Ultimately, if properly motivated, a family member will exploit your trust in much the same way as a stranger would.
In his book, Other People’s Money, A Study in the Social Psychology of Embezzlement, scholar, author and criminologist Donald Cressey, wrote:
“Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property (p. 30).”
It doesn’t matter if you are dealing with a family member or a stranger, if the following three components are present — perceived non-sharable financial need, perceived opportunity and rationalization — fraud is likely to occur. The Fraud Triangle is discussed in greater detail by clicking here.
Watch: Your Business Is Not Immune To Fraud
The Threat Is Real
On average, the typical organization realizes a 5 percent loss of revenue every year directly resulting from fraud, according to 2014 Report to the Nations on Occupational Fraud and Abuse, published by the Association of Certified Fraud Examiners (ACFE). But this percentage increases substantially for small businesses.
“While the absolute median loss for the largest entities is slightly higher than that for small businesses, it is important to note that the overall impact of a $154,000 loss for many small businesses is much greater than the relative impact of a $160,000 loss at an organization with more than 10,000 employees.”
TIP: If you have a board of directors in place, at least one member of the board should be an “outsider.” A Certified Public Accountant (CPA), Certified Fraud Examiner (CFE), an attorney or another trusted source can provide your board with unbiased guidance and insight with regard to the overall well being of your business. Because they are likely familiar with the signs and symptoms of occupational fraud, your advisor is in a better position to identify the red flags.
Just because you have never had fraud occur in your company before doesn’t mean that such a crisis can’t and won’t happen at some time during your business’s lifetime. If you do discover that your company has been a victim of fraud, it is essential that you address the situation immediately.
Confronting fraud is hard enough, but when the alleged fraudster is a member of your family, the task can become unbearable. Your trusted advisors can help mediate the conversation and if it appears as though the conversation is going nowhere, they can help guide you through the litigation phase to help you recover what your company’s losses.
Professional advisors, impartial 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.
Email Rea & Associates to learn more.