According to Family Enterprise USA, 87% of U.S. companies are family businesses, which are responsible for 54% of gross domestic product or $7.7 trillion. Although family businesses are an economic pillar of strength, several studies have found that they’re more vulnerable to occupational fraud than other companies. Here’s what you need to know if you run a family business.
Loyalty can hamper prevention
Why might family businesses be more vulnerable to fraud than other companies? For one thing, prevention efforts can be hampered by loyalty and affection. One of the biggest obstacles to fraud prevention is simply not being able to acknowledge that someone in the family would be capable of initiating or overlooking unethical or illegal activities.
Like any other business, family enterprises must include a system of internal controls that make fraud difficult to perpetrate. It may be awkward to exercise authority over members of one’s own family, but someone needs to take charge if issues arise.
Outside advice is essential
Of course, the person in charge potentially could be the one defrauding the company. That’s why independent auditors and legal advisors are critical. Your family business should look outside its 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, protect the business and its stakeholders.
If your company is large enough to have a board of directors, it should include at least one outsider who’s strong enough to tell you things you might not want to hear. In some extreme cases, members of all-family boards have been known to work together to bilk their companies. This becomes much more difficult to do if collusion requires an outsider to participate in illegal activities.
Action may be necessary
Another factor that makes preventing fraud in family businesses difficult is how they tend to handle fraud incidents. Even when legal action is an option, families rarely can bring themselves to pursue action against one of their own. Sometimes families choose to save the perpetrator from public scandal or punishment rather than maintain ethical professional standards. Most fraud perpetrators know that — and, indeed, count on it.
If you discover a family member is committing fraud within your business, ask a trusted attorney or CPA to explain to the perpetrator the illegality and possible consequences of the fraudulent actions. If such interventions don’t work, however, you may have no choice but to seek prosecution.
Remember your stakeholders
Not only can fraud be expensive and harm your family’s security, but there are also employees and other stakeholders to consider. To help prevent fraud and financial losses, set a strong example of high ethical standards and consult with professional advisors capable of casting an objective eye over your business’s operations.
We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this may impact you.