2015

Fraud continues to pose a significant risk to family and privately held businesses, with a recent survey reporting they suffer a median loss of $154,000. Furthermore, it is reported that 5% of revenue is lost to fraud annually.*

Family businesses are built on trusted relationships developed over many years. Such relationships with valued suppliers, customers and advisors are often the key reason behind family businesses success but, they can also create vulnerability where the criminally minded will seek to take advantage.

Being victimised by fraud should not be stigmatised as fraudsters engage in often complex schemes specifically designed to deceive owners and management undetected. The following case study demonstrate how fraudsters can harm unsuspecting family businesses.

A family owned business sought advice on four suspicious payments totalling $21,000 which appeared to have been paid to their former finance manager, who had been made redundant four months earlier. They reported the matter directly to the police without any supporting evidence meaning the police were unable to make much progress. While the family was concerned that this could just be the tip of the iceberg.

The family engaged forensic accountants to undertake an investigation in order to identify evidence of any additional fraud for reporting to police and for making a claim on their fidelity insurance. The investigation found that the former finance manager had misappropriated $475,000 to their own payroll account through over 200 individual payments using electronic fund transfers. The main operating account required two signatories however the finance manager deceived the owner in co-authorising inter-company transfers so that another bank account could be used that only required a single EFT authority. 

The person misappropriated the monies by duplicating legitimate payments for operating expenses including rent, utilities, stationary even payroll taxes and director drawings. In addition, the person re-activated former agency contract staff as ghost employees and remitted their wages to her own payroll account.

The investigation found that the first fraudulent transaction occurred three months into the finance manager’s employment. The last attempted fraud occurred whilst the investigation was in progress, five months after they had left via redundancy. The person tried to use telephone banking to withdraw $2,000 as the family had not withdrawn their account password authority for telephone banking, nor knew that they had one.

Interviews of staff revealed that the person never took annual leave, sick leave or left their office unlocked. The person also exhibited signs of being a control freak and often had mood swings.

A forensic examination was done of the persons work computer which identified they were running a book keeping business on the family business computer system and even billing their separate clients, including the their previous employer. Recovery and review of emails identified the person had sent confidential tender information for a significant Government hiring contract, which had been submitted by the family, to their previous employer who was a key competitor.

The forensic accountants prepared a report that the family used to brief the police and make a claim on insurance. The police subsequently successfully charged the former finance manager, who was already known to them as a convicted fraudster to fund their cocaine habit.  

The claim on insurance was unsuccessful because the insurance company found that the family business did not have sufficient segregation of duties around preparation and authorisation of transactions for payment. They required three separate functions and persons, whereas the family business only had two.

The above case study demonstrates what can and does occur. These incidents can be prevented by identifying potential risks that they can occur and putting in place controls to prevent those risks. Segregation of duties, accounting reconciliations, dual account authorities and review are critical in preventing and detecting fraud. There is no guarantee of stopping all fraud but controlling risks is the first step to ensuring family businesses can grow unimpeded by financial and reputational losses caused by fraud.

* Global Fraud Survey 2014, Association of Certified Fraud Examiners