Let’s admit it… we all want to be able to trust other people. And we generally do…until we’re proven wrong. Owners of small, family-owned businesses are no different, and must put their trust in someone to handle their revenue, disbursements, payroll and inventory, among other financial functions.
Even if a family member or friend handles one or all of your financial functions, you’re still at risk for fraud. Whether you think it can happen to you or not, it’s always better to be safe than sorry.
The Need for Effective Internal Controls
Fraud is everywhere. Don’t assume you’re immune just because you have family members, friends and long-term employees in positions of trust to cover revenues, disbursements and inventory.
There is nothing wrong with having individuals close to you in these financial positions if there are effective controls in place that would identify and communicate fraud early. Family and friends are people too, and have to deal with the daily life pressures just like everyone else. The Cressey Fraud Triangle discusses the three elements that lead up to fraudulent behavior: pressure, opportunity and rationalization.
Reducing the Opportunities for Small Business Fraud
It’s great having family and friends working in your business. One of the best things you can do to help maintain those relationships is to reduce the opportunities for them to engage in fraudulent behavior in the first place by making sure there are proper segregation of duties and extensive oversight and monitoring of the duties they are performing. You will be doing everyone a huge favor if all your employees know up-front that you won’t tolerate fraudulent behavior. Implement controls that will alert you when something goes wrong. Keep your eyes and ears open to signs your employees are under serious financial stress.
In my years as a CPA, I have seen where children, in-laws, and 20-year employees have committed fraud in family-owned companies. These situations are devastating and heartbreaking. You might be able to control what you do in your life, but you simply can’t control what and when something happens in another‘s life that suddenly puts so much pressure on them that they will do something that neither you or they would ever think possible.
Internal Controls Help
What is your next step? Consider what internal controls you need to put in place. If you need assistance or advice on how to develop solid internal controls, contact Rea & Associates. Our team of Ohio audit professionals stands ready to evaluate your operation and provide guidance on what types of procedures could be implemented to reduce your risks of fraud.