Theft in the family business: Is it happening to you?

Theft in the family business: Is it happening to you?


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SALT LAKE CITY — It all started when a daughter working in her father's business found herself taking money that she had not earned. Over a two-year period things went from bad to worse, and she ended up stealing money in the six-figure range.

The families' CPA was the one that detected the abnormality. The most severe problems arose when the IRS gave the business owner an ultimatum: "Pay the tax or we will criminally prosecute your daughter."

The owner loved his daughter, but he didn't want to bail her out and he didn't have the money to pay the IRS, so he allowed the prosecution to go forward. Heartbroken for his daughter and worried about his business, the daughter was convicted of a felony. She was given years of probation and was ordered restitution of all the funds.

The crazy twist of events didn't end at that point: Because the daughter then had a felony on her record she was unable to obtain a job, and so she ultimately found herself again working for her father in the same company she originally stole from.

Corporate scandals, embezzlement of funds, front-page headlines about theft only happen in large corporations, right? It is believed that these large, faceless corporations are the businesses that are most vulnerable to theft. This may be true, but could these things happen in your family business? The answer is yes.


There are two keys to keeping your business from being stolen from. First is to have a system for prevention, and second is to have a system for detection.

–Tom Grafton, CPA


Sadly, theft is more likely to happen in a family business where there is a higher level of trust and more responsibility given to fewer people — an environment where there are fewer formalities and structures in place to safeguard the companies’ assets.

“There are two keys to keeping your business from being stolen from. First is to have a system for prevention, and second is to have a system for detection,” said Tom Grafton, a CPA from Lincoln, Neb., and expert in the field.

Why do people steal?

To understand the problem of theft, you must first enter the mind of someone who steals. It isn’t always the person you see on the streetcorner who has a menacing look that is most likely to steal from your company. Often the more likely perpetrator is someone who looks more middle-class, less threatening and is possibly a relative.

People steal for many reasons. The main reason people steal is that they have a specific need. It could be temporary, and the thought could be that they would put the money back when they were done “borrowing” it. The problem is that the money usually does not find its way back to the company.

The second reason people might steal is because they have uncontrolled access to funds or assets. The temptation of having access to money and thinking that no one would know is some got “lost” is simply too much temptation for some people to overcome.

The third reason people steal is because of personal pressures. They may have a debt that is coming due. They may have an addiction to drugs, alcohol or shopping that they need to satisfy. They may be in an abusive relationship, and they see the money as a way out. Whatever the reason may be, there are many reasons why people steal.

Related:

How vulnerable is your business?There are several ways in which your business might be vulnerable. The first way is if there are people in the organization that handle money and transactions without a second set of eyes to check those transactions. Having a second person to count money and to make deposits will not only protect the business from thieves, it also protects the employees from undue temptation and also false accusation if at some time the money doesn’t add up. Trusting one person to handle the finances in a family business is a mistake that is often paid for in theft.

How do you protect your business against theft?

Grafton shares that there are four things you can do to prevent theft in the family business and three major activities to detect theft when it does happen.

Prevention:

  1. Limit physical access to blank check stock and account for all checks utilized.
  2. Limit authorized signature to the bank account.
  3. Limit access to business debit/credit cards.
  4. Perform background checks on potential hires.

Detection:

  1. Produce monthly financial statements and scan for unusual balances.
  2. Review or perform monthly bank reconciliations to assure accurate preparation and validity of reconciling items.
  3. Receive (unopened) bank and credit card statements each month and review for reasonableness, unknown or unusual activities.

Be aware that the reasons people steal are varied. Be vigilant in knowing your employees and their personal challenges. Talk about the responsibility for each employee to be a steward of the assets they are charged to look over. Protect them from their own weaknesses by putting in systems of checks and balances that help them to avoid unnecessary temptation.

Don’t let your family business fall victim to the unfortunate event of theft. Prepare your people, put the systems in place to prevent and detect theft, and then move forward with confidence.

Dave Specht was professor of family business management at the University of Nebraska-Lincoln. He owns Advising Generations LLC, a multi-generational family-business consulting firm. Dave is a speaker and writer on the topic. www.davespecht.com

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Dave and Taneil Spechts

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