It’s a growth industry – $1 trillion a year in the US and $3.5 trillion globally. By best estimates, it accounts for nearly 5% of all business activity. The most successful people in this field go unnoticed but that does not keep them from continuing to increase their impact on the enterprise. And there’s equal opportunities for females and males; no discrimination. It cuts across every industry and affects most every business. Yet, when hiring it’s virtually impossible to screen for, equally difficult to prevent and it has ended many an unsuspecting business; private, public and non-profit.
Family businesses, often built on trust, seem particularly susceptible. Trust can cut both ways and act as a shield for fraudulent behavior. When stretched for resources or qualified people, family businesses neglect to put proper controls in place and employees (or family members) may be granted unfettered access to critical accounts. Family activities, often carried out in private meetings, create an atmosphere which may perpetuate fraud, both from inside the family and out. The headlines are littered with such examples.
Why are family business so susceptible? According to the Association of Certified Fraud Examiners, “the smallest organizations tend to suffer disproportionately large losses due to occupational fraud. Additionally, the specific fraud risks faced by small businesses differ from those faced by larger organizations, with certain categories of fraud being much more prominent at small entities than at their larger counterparts.” It’s also not uncommon for some businesses to have two sets of books, the business books, and the “family books”. I was recently approached by a non-family employee who had just joined a family business as a CFO and was faced with this dilemma.
In Breaking Bad, we follow the progression of Walter White from an honest, family man right through to a predatorial empire builder. It begins innocently with a desire to care for his family in the wake of being diagnosed with terminal lung cancer. It continues to spiral out of control, involving many others along the way, including his spouse, as his web of deceit broadens along with his emboldened behavior. The typical perpetrator of fraud is aged 35-45, educated, respected, yet facing limited choices in life or career and seeking some form of financial reprieve or personal satisfaction. Walter White cannot seem to quit his secret career; the financial rewards are too seductive and he continually reminds himself that what he is doing ultimately serves a moral purpose, albeit selfish and short-sighted. This is not unlike the plight of many a fraudster.
It’s nearly impossible to profile for a fraudster in the hiring process. They escape most classifications and their fraudulent behavior is often a crime of opportunity that may arise at various times for different individuals for a plethora of reasons. While organizational culture may be a factor (see Arthur Anderson), the open, trusting culture of a family business can also help fraud to take root. In a family business, the mere notion that career advancement might be hindered for those outside the family or that family members have access to certain company privileges can be enough to motivate the right person.
- Have your bank records sent home while still having multiple eyes review regularly
- Discourage family members from having financial control functions
- Clarify that employees to trust the process more than they trust their co-workers; use vigilance in all matters financial and otherwise
- Review the fundamentals of what may drive those in your enterprise emotionally to commit fraud
- Require regular vacations, encourage positional rotations, grant access to EAP and employ a confidential tip line.
Preparation is key to preventing fraud. Keep your books as open as possible. As a supervisor of others, having a close relationship with your direct reports is certainly a deterrent. Be accessible and model the behavior you expect of others in your family and organization. And when you suspect fraud, act immediately and seek professional help.
For links to numerous articles on fraud and the family business, be sure to visit: https://delicious.com/fambizsuccess/fraud.