One of the things that make family businesses such appealing places to work is trust. Trust also is one of the things that make family businesses vulnerable to fraud. It only takes one lone wolf to damage or destroy an enterprise you and your family have spent years building.

Accept the possibility

One of the biggest obstacles for family businesses is acknowledging that a family member would be capable of initiating or overlooking unethical or illegal activities. But like any other business, your family enterprise must make fraud difficult by establishing a system of checks and balances. It may be awkward for one family member to exercise authority over others, but someone needs to take charge if issues arise.

Of course, the person in charge potentially could be the one defrauding the company. That is why independent auditors and attorneys are critical. Your family business should look outside its immediate circles to retain professional advisors who can be objective when assessing the company. In particular, audited financial statements from independent accountants protect your business and supply peace of mind to its stakeholders. Also, if your company is large enough to have a board of directors, whether formal or informal, it should include at least one outsider who is strong enough to tell you things you may not want to hear.

Punish or perish

Another problem family businesses might face is what to do if they find that someone in the family has, indeed, defrauded the company. While legal action is an option, it is one families rarely can bring themselves to pursue against one of their own — at least not at first.

If you find your business in that situation, ask a trusted advisor to explain to the perpetrator the illegality and possible consequences of the fraudulent actions. If such interventions do not work, you and other family members may have no choice but to pursue legal action.

Avoid blind trust

Just as it is more difficult to accept that the family closet is hiding a fraudster, it also is harder to resist a loved one’s pleas for assistance. In worst cases, families may have to choose between maintaining ethical professional standards and saving a loved one from scandal or punishment.

Objective professional advisors and a corporate culture based on trust — but not blind trust — can help prevent a rogue family member from harming what should be a source of mutual prosperity. Contact us for more information.