Fraud and the Family Business: It’s Not So Unusual

Fraud and the Family Business: It’s Not So Unusual

The dynamics of a family-owned business are like no other, writes Robert Rothbort at Accounting Today.   There’s usually a great atmosphere of trust.

But that can leave family businesses uniquely vulnerable to fraud.  Here are some common schemes:

• “Ghost” employees. The family member overseeing payroll creates “ghost” employees that do not exist and arranges for their paychecks to be direct deposited into their own bank account.
• Inventory fraud. Family members with easy access to inventory steal it and then sell it themselves for profit.
• Credit card abuse. Family members put personal expenses on the company credit card.
• Cash skimming. A family employee steals by slowly skimming cash from the cash register or cash box before it’s recorded in the company books.
• Fictitious vendors and suppliers. A family member creates a fake supplier or vendor—perhaps even a shell company—and then directs payment via check or wire transfer.

Family Businesses are Vulnerable to Fraud

How can owners guard themselves against this sort of thing?  Some ideas Rothbort suggests include:

• Avoid signature stamps for checks. Family businesses should also consider requiring two signatures on large checks.
• Separation of financial duties. Bank statements should be opened by a family member other than the one preparing the bank reconciliations. Transactions and canceled checks should be reviewed by someone else.
• Review of supplier and vendor lists. The list of vendors should periodically be checked for fictitious names, and, if suspicious, should be further investigated.
• Review of payroll. Payroll should also be reviewed for unauthorized employees and unapproved pay by someone other than the person preparing payroll.
• Have more frequent business meetings about finances. Make sure all financial reporting is transparent. Even if the family business member is not a “numbers person,” they should still make an effort to try to understand.
• Establish clear expectations among all family business members. Be upfront with other family members on issues such as expectations, rate of pay and other benefits.