Many U.S. businesses are family owned. While it may seem counter intuitive that family members would steal from each other, it is more common than one would think. Family business fraud occurs frequently, and often goes unnoticed for years.
Common Ways Family Members Embezzle From the Family Business
The 2010 Marquet Report on Embezzlement lists numerous categories. The top five most common methods include:
1) Forged or unauthorized checks (35.9% of total cases)
2) Theft of cash receipts (19.2% of total cases)
3) Unauthorized electronic transfers (11.2% of total cases)
4) Vendor fraud schemes (10.1% of total cases)
5) Various payroll schemes (7.6% of total cases).
Other sources reiterate the same or similar methods of embezzlement, such as the creation of “ghost” employees on the payroll, checks made out to phony suppliers or vendors, and kickback schemes 2,.
According to criminologist Donald Cressey three components of the fraud triangle must all be present at the same time: pressure, opportunity, and rationalization. It may be easier for the fraud triangle to occur in a family-owned business, even among relatives.
Pressure: Family members are often subject to the same pressures, such as mounting personal debt, medical debt or pressure from a spouse to maintain a certain standard of living, that contribute to employee theft.
Rationalization: Family members are also no less inclined to rationalize their actions than anyone else. Feelings of resentment about compensation, a sense of entitlement, jealousy, and other feelings that facilitate rationalization extend to family members as well.
Opportunity: Opportunity, the third part of the fraud triangle, means that an employee sees a way to embezzle with a low probability of getting caught. Anecdotal evidence suggests that family businesses may create more opportunities to embezzle than the average business due to the lack of formality surrounding financial processes.
Some Ways to Help Prevent Fraud in a Family Business Include:
- Avoid signature stamps
- Routinely verify the legitimacy of all vendors and suppliers
- Separation of duties, such as having one person responsible for the bank reconciliation and another responsible for accounts payable
- Appropriate payroll approval and review processes
- Monitor write-offs and adjustments to accounts
Veriti Consulting’s business fraud investigation professionals provide advisory services to maximize financial operations, ensuring the safeguarding of assets and providing internal control reviews to prevent embezzlement and employee theft. Hiring experts to partner with your family business to prevent business fraud not only makes sense in terms of avoiding financial losses, it also prevents the conflicts and suspicions that can tear families apart. As an objective third party, Veriti Consulting’s team of CPAs and Certified Fraud Examiners can provide neutrality to decision-making regarding appropriate roles, duties, and processes within the company.
