Christopher Didio 
Nathan Merulla
“They are family. They would never do that!” Our guard comes down as it is hard to imagine a family member capable of business fraud. Unfortunately, that is when the opportunity arises.
Opportunity
According to the report “Occupational Fraud 2024: A Report to the Nations” published by the Association of Certified Fraud Examiners (ACFE), small businesses with less than 100 employees had a median loss of $141,000 due to fraud, which was the second highest after organizations with 10,000 or more workers. Family-owned businesses are more vulnerable to fraud due to the availability of opportunity. The reason is the lack of resources available for these businesses to monitor fraudulent activities. With so few employees, owners must remain aware of everyone, even those close to home.
Prevention
Effective internal controls are crucial in preventing fraud, yet they are often overlooked in family businesses. This is due to various factors, such as the company’s size and our trust in our family members. However, they cannot be forgotten as they serve as the first line of defense against fraud.
Proper segregation of duties is the foundation of internal controls as they prevent one employee from being able to be the recordkeeper, authorizer of transactions and custodian of assets. For example, the employee responsible for writing the checks should not be recording it in the accounting software. When an employee with access like that goes unchecked, it exposes the business to potential fraud.
Unfortunately, collusion between multiple employees can circumvent good internal controls. Business owners must also monitor employees’ behaviors, as it could indicate signs of potential fraud within the business. According to the ACFE, the most common red flag behavior found in fraudsters is living beyond their means. Employees who exhibit excess spending must have a source of their funds. Therefore, owners should review bank and credit card statements each month to ensure that no unusual transactions occur. Payroll is another area susceptible to fraud and must be monitored. Employers should perform this task themselves or with the help of outside assistance.
Outside Professional Assistance
It may be beneficial to seek the assistance of an outside professional, such as a forensic accountant, auditor or legal counsel, to provide an objective outlook. These professionals will ask the necessary questions that may lead to identifying irregularities in the business that a family member may have overlooked. While this may seem inconvenient and unnecessary, it is essential to prevent fraud, which can severely impact the livelihood of a small business. Don’t let fraud ruin the business you have worked hard to build.
Christopher Didio, CPA, CFE, is the managing partner and a certified fraud examiner, and Nathan Merulla, CPA, is a senior auditor at Dannible & McKee, LLP, a public accounting firm headquartered in Syracuse, New York. For more information on internal controls and other measures you can take to safeguard your business from fraud, feel free to contact Chris at (315) 472-9127 or cdidio@dmcpas.com. To find out more about Dannible & McKee, visit www.dmcpas.com
2024-report-to-the-nations.pdf (acfe.com)
