How to Handle Embezzlement in the Family Business
Originally published: 09.01.13 by Lois Lang
What to do when you suspect a fmily member of fraud
Hearing about embezzlement in a public company rarely shocks anyone, but when it happens in a family business, people are often stunned. “How could he steal from his own family?” “Doesn’t she know she’s hurting her siblings/cousins/parents?”
As tough and painful as embezzlement is, it’s not as uncommon as many of us would like to think. Sure, the kind of embezzlement that results in jail time is rare, but other levels of it happen daily. How can this happen? Many factors lead to embezzlement, including chronic financial strain, a general sense of family entitlement, lack of internal company controls, and the reality or perception of being overworked and underpaid. To make matters worse, often the embezzler doesn’t even know that what he or she is doing is wrong.
Here’s an example of how embezzlement can start small and quickly grow: Jim (the business owner’s son) fills up his gas tank once on a Friday and pays for it with the business account, knowing the miles he drives will be primarily for personal, not business use. He tells himself it’s okay because he has filled the tank on his own some weekends and used “his gas” for business on Monday and Tuesday. Then, he takes a few vacation days and doesn’t record it as paid time off. He picks up gift cards for employee recognition and pockets a few for himself. He knows that dad pays him less than local competitors, and this is the way he evens it out. He notices other family members treating the business the same way, so it simply becomes the “way we do things around here” — it is their company culture, not embezzlement.
The misuse of company assets, time and money escalates. Soon, Jim adds a non-working family member to payroll, petty cash disappears, one out of ten customer checks are rerouted to Jim’s personal account, and personal items are consistently charged to the business credit card. Eventually, an employee in accounting notices and agonizes about who and when to tell.
So, while embezzlement may start small and often innocently in a family business, it can quickly escalate into something big that damages the business, hurts non-family employee morale and breaks family trust.
What do you do when you realize a family member is embezzling from the business? Action is obviously required, and taking a cautious, thoughtful, respectful approach is wise. To begin, have a pre-meeting of key leaders, without the suspect family member present, to address the following questions:
- Do we have clear, hard, verifiable facts before we assume fault and intent?
- Who will be at the meeting to lay the facts out?
- Are we going to involve the legal system?
- If we continue employment with this family member, do we need to change their job position?
- How or will we message this to the rest of the family? To other employees? To the Board of Directors?
- How or did the company contribute to this problem?
- If the company did, what steps will we take to prevent it in the future?
- How or did the family contribute to this problem?
- If the family did, what steps will we take, as a family, to prevent it in the future?
- Has this family member had chronic, known problems with finances?
- Generally, how can we protect the company from future misuse of company assets or embezzlement?
- How do we protect the whistleblower?
- Do we have a whistleblower program set-up internally? Are employees trained annually?
- Do we talk openly in Family Council about our responsibility to financially protect and care for company assets? Do we give specific examples of what is and is not allowed?
- Do we have a solid non-compete clause in our employment contracts and/or employee handbook in case we have to release the family member from employment?
- Do we consistently run a professional background check on applicants?
- If I need to walk the family member out the door, how do I prepare? Computer security, locks, passwords, current company asset retrieval, bank account access protection, social media tracking, last paycheck, etc.
- Do we need to involve the corporate attorney, Board of Directors, outside legal attorney, CPA, business psychologist? If so, when and how?
Once you’re clear on these aspects, it’s time for the second meeting—this one with the suspect family member. When you begin the meeting, keep it at the level of discovery. Lay out the facts and ask the family member their perception of what happened. Really listen to what they say and how they say it. Remember, it’s common for family members not to realize they are, indeed, embezzling. If this is a first offense, and if the embezzlement is not excessive, some education may be the best course of action. However, if you believe the family member knew what he or she was doing and did it anyway, or if the embezzlement is substantial, termination may be the only option.
During the meeting, you need to be vigilant in checking yourself by asking, “What would I do if this wasn’t a family member?” and “Is this at a level where I will be able to trust them again?” Your answers to these two questions will reveal a lot about your best action plan.
Keep Your Family and Business Strong
Of course, education of all employees (family and non-family), strict policies about how the company’s assets and resources can be used, and enforced controls that can spot any wrongdoing are the best ways to reduce your family business’ chances of falling victim to embezzlement. Acknowledging what could happen, along with some planning to prevent it, will keep your family and business strong, successful and honest.
Articles by Lois Lang
How to Handle Embezzlement in the Family Business
This article explains what actions you should take when you think a family member may be embezzling from the business.
5 Tips for Family Business Succession Planning
Passing the torch
choices might not
be best for