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Trust and loyalty are desirable traitsin familystructuresandin business; however, these traits can also leave a family business
vulnerable. In fact, family businesses are
especially vulnerable to fraud, according to the Association of Certified Fraud
Examiners’ (ACFE) 2016 Global Fraud
Study. The study found that businesses
with fewer than 100 employees, which are
in many cases family-owned, experience
fraud at a rate of 28.8%, compared to the
19.8% experienced by those with more
than 10,000 employees.
In a family business, trust and secu-
rity often have an inverse relationship,
meaning as trust increases in a business,
the quality of internal controls and secu-
rity is minimized. Business relationships
– particularly among family members
– can become strained when individu-
als believe they are owed more money
or authority than they receive. Personal
financial pressure and emotional stress
outside the business can also create ten-
sion within an organization. In worst-
case scenarios, family members know
there is little risk of exposure, and the
perceived benefits of financial fraud out-
weigh these risks.
When family members are suspected
of fraud within the business, they may not
be held accountable due to the dynamic
of family relationships. Family members
are often more hesitant to report relatives
to authorities, seeking to save the family
member from jail time or the embarrassment that ensues.
Of course, smaller companies suffer
more when fraudulent activity occurs. It’s
more difficult to control the damage in a
$5 million company than in a $250 million company. Misappropriated money
often makes a greater impact, and the
damage is experienced throughout the
entire organization, affecting company
culture. While a perpetrator in a large
organization may be viewed as a singular
“bad egg,” one in a small family business
can be viewed as an institutional problem, or part of ongoing corruption to
other employees.
According to the study, the median
fraudulent loss of $150,000 suffered by
small organizations was the same as the
fraudulent loss experienced by large organizations. However, in a smaller com-
