pany, that loss represents a significantly
larger percentage of the company’s overall value. The number demonstrates the
enhanced responsibility and trust often
granted to individuals within a smaller
company, leading perpetrators to believe
they can take more with little risk of exposure.
Establishing effective controls
When personal and professional interests
collide, the best approach to maintaining
success and prosperity, from both familial and financial perspectives, is to implement and strictly enforce effective internal controls.
FIVE WAYS TO ENFORCE INTERNAL
1Segregate financial duties. Corruption involving check tampering, skimming, payroll and cash larceny schemes
are twice as common in small organizations compared to larger organizations.
One family member alone should never
control the entire business’ finances. A
simple solution is to create a three-per-son system of checks and balances: one
person opens the bank statements, one
prepares the bank reconciliations, and a
third reviews all transactions and canceled checks.
2Avoid signature stamps for checks. Family businesses, in particular,
should consider requiring two signatures
for any payment over a certain monetary
3Establish routine checks of payroll, supplier and vendor lists by multi-
ple people within the company. Seven-
ty-seven percent of occupational fraud
is committed by employees working in
accounting, operations, sales, executive
management, customer service, pur-
chasing or finance. The final payroll list
should be reviewed by someone other
than the person distributing checks and
preparing the payroll. Similarly, the list of
vendors should periodically be checked
for unrecognized names.
4Give more employees an understand- ing of financial reporting. Even if employees claim to not be “numbers” people,
it’s important that all staff are aware of
financial reporting and are making an effort to understand the business’ finances.
To increase transparency and provide
another level of security, outsource your
financial reporting and ensure someone
is monitoring for fraud.
5Focus on ensuring clear expectations are established for all employees. Every employee – including family members – should understand protocols in a
business from expectations to pay rates
and benefits. Clear expectations help
avoid a power struggle and will clearly
define who is double-checking various
aspects of the business.
Trust is not an internal control
When confronting fraud in a family business, family loyalties or dynamics must
be set aside. Even in small businesses, the
most common way fraud is detected is
through anonymous tips. Organizations
with fraud hotlines are more likely to detect fraud compared to those without, at
a rate of 47.3% compared to just 28.2%.
Appropriate punishments should be
considered in advance and decided upon
by multiple employees. Then, companies
must follow through on those punish-
ments. The ACFE study found that 40.7%
of companies choose not to involve law
enforcement due to either fear of bad
publicity or the desire to remain loyal to
the perpetrator. Decision makers should
maintain a zero-tolerance policy for un-
covered fraudsters, as an effective deter-
rent against copycats.
Another measure a business can take to
mitigate the damaging effects of fraud is
to work with their insurance provider to
ensure their plan includes coverage and
protection from employee dishonesty.
Outside investigative fees are difficult to
estimate due to the amount of layers that
could be in play in any investigation. A
business should explore purchasing an
insurance rider to cover costs of fraud
investigations and potential legal fees, as
well as the cost of financial loss incurred
by the fraudulent activity. In any case,
fraud prevention is a much more cost-effective safeguard than reactive damage
Fraud can happen anywhere
The more you believe it can’t happen in
your business, the more susceptible you
become to it. Most fraud perpetrators
are first-time offenders and are well-standing employees in the company, resulting in greater access to controls and
the belief they won’t get caught. Family
businesses’ increased susceptibility is an
essential reason to defend against fraud
with multiple internal controls and external resources.
For more tips and resources on defending your business against fraud, contact
your local law enforcement agency or financial adviser.
Bill Kowalski ( info@Rehmann.com) is
a principal and director of operations
for Rehmann Corporate Investigative
THE MORE YOU BELIEVE IT CAN’T HAPPEN IN YOUR BUSINESS,
THE MORE SUSCEPTIBLE YOU BECOME TO IT.