Protect your farm from internal fraud

Carrie G Hall

Highlights

  • Studies show smaller enterprises of less than 100 employees are more prone to fraud
  • Fraud can take many forms including theft, misuse of business credit cards or inaccurate reporting of work or vacation time
  • Help prevent fraud by developing well-defined policies and controls and spreading awareness to everyone involved with the business

Family businesses are not immune to internal fraud from employees and family members. Here, Carrie Hall shares advice for spotting and preventing fraud in your operation.

Most farms are family enterprises with family members as shareholders or employees. Often, there are also other employees. How common is fraud in this environment?

While I’m not aware of any information that looks specifically at farms, U.S. studies show smaller enterprises of less than 100 employees are more prone to fraud, and there are actually a number of factors that make family businesses more susceptible. Procedures tend to be less formal, and family members are often the most trusted employees. Furthermore, the perpetrator may not even realize that his or her behaviour is inappropriate.

Studies show smaller enterprises of less than 100 employees are more prone to fraud, and there are a number of factors that make family businesses more susceptible.

Even if it’s detected, fraud often goes unreported and this would be especially true in family businesses where the family would typically want to be discreet about any inappropriate actions.

Do business owners often discount the likelihood of fraud?

Yes, especially with family members and long-term employees. However, the opportunity to commit more extensive fraud increases with a person’s authority, power and degree of oversight.

What forms can fraud take?

The misappropriation of assets is the first to come to mind. This can be as simple as theft of petty cash or selling goods that the individual doesn’t own. Fraud can take many other forms as well – the use of business fuel in personal vehicles without anyone’s knowledge, misuse of business credit cards, inaccurate reporting of work time or vacation time.

How large can the damage be to a business?

Some business owners tend to discount the size of losses, believing they are insignificant. In fact, losses are often substantial. And depending upon the circumstances, there is also the risk of reputational damage.

How do people committing fraud rationalize their behaviour?

Especially in family enterprises, there can be a sense of entitlement, where someone thinks they are owed more than their paycheque. It can also be a misunderstanding unless the business has clearly defined rules and policies and has effectively communicated them.

Are there any red flags in a person’s behaviour that may indicate a likelihood of committing fraud?

The Association of Certified Fraud Examiners has conducted research into the behavioural red flags displayed by perpetrators during the time of their fraud and has identified notable trends. More than 80 per cent of fraudsters exhibit warning signs, and not surprisingly living beyond their means and experiencing financial difficulties consistently are the most commonly observed behavioural red flags.

People who commit fraud don’t typically match the “criminal” stereotype. Most have never been charged or convicted of a fraud-related offence. They tend to be employees who have been on the job for a number of years and they are able to commit the crime because management trusts them.

In addition to financial pressure, their motives could be greed or employee disenfranchisement. They might believe they are entitled to more financial compensation, and they may rationalize that they are just temporarily borrowing the money.

How is fraud most often identified?

Sometimes it’s found by accident and sometimes it’s identified in an internal audit or management review, but the most common method of discovery by far is through a tip.

It’s important for those with suspicions not to conduct their own investigations. They should approach the appropriate person in management and it should be clear to all the employees who the appropriate person is. The whistleblower should remain anonymous if possible and should certainly be shielded from any repercussions.

Are remedies more difficult when it’s a family member?

Situations are all different, so there’s no way to make a blanket prescription. Communicating expectations is sometimes all that’s required. In serious cases, the solution may involve the person leaving the business or there could be legal ramifications.

What preventive measures should family businesses employ?

Prevention is vital, and that starts with the education of everyone involved in the business. You need well-defined policies, and controls must be enforced. There can be different rules for different people in the business, but this should be clear to everyone. Having the proper prevention in place is a lot easier than dealing with a serious problem that arises because policies and internal controls were not in place.

Carrie Hall (@CarrieGHall) is based in Atlanta and is the family business leader for Ernst & Young LLP. She leads a team of professionals that helps family businesses think entrepreneurially and sustain their competitive advantage from generation to generation. Carrie writes about family businesses and how they can successfully compete.