When the Fraudster is a Family Member

Yes, February is the month of love and what better way to show how much family loves you than by sharing a few fraud "love" stories.  If you have family members working for your business or who is a partner in your business, it is a very fine line among obligation and a good business decision if you do not hire them rationally.  I am not saying that all family owned and operated businesses are doomed for failure, what I am saying is there is so much trust and obligation placed on family businesses that it makes any accusations on a family member more personal and damaging than if the accusation was on an unrelated employee.

Nothing hurts worse than when you find out your trusted family member whether a partner or an employee steals from you.  The overwhelming feeling of betrayal is magnified beyond comprehension.  Most business owners are blindly reluctant to require family members to follow the same protocol as a regular employee because the "family member" card always seems to trump all.  If you think for one second that circumstance would not cause a family member to betray your trust, think again. 

Just for argument sake, the related fraud story listed below in the fraud cases revolve around 28 year old Ariel Rivera.  She was the office manager at Christensen Audiology in Lincoln Nebraska.  She recently plead guilty to theft by deception for embezzling $136,000 by writing unauthorized checks.  The fraud lasted two years and unfortunately she only received probation.  One can only speculate that the sentence was light because Christensen Audiology just so happened to be her fathers business!  I imagine her dear old dad wanted to teach her a lesson without making her pay the ultimate price.  That is more than most family related fraud cases will charge against a family member.  I give the dad credit for all least filing charges, but the sentence was too light. 

Another fraud case revolves around a cabinet shop in California.  The owner decided to hire his brother who had cabinet experience as well as sales experience.  The owner made his brother an officer, which unfortunately gave the brother too much power with the shop employees who consistently did what they were told regardless if they felt uneasy about it.  During a one year period the cabinet shop started showing severe cash flow issues.  The sales were dropping, the payroll increased, the cost of goods went through the roof and the instead of showing a consistent 18% profit as in previous years, the cabinet shop was now showing a significant loss.  The biggest tell tale sign was the cost of goods which did not make any sense.  Against the owners family blinding judgment I told him that someone in the shop with authority had to be ordering materials for unrelated jobs.  After really evaluating who could be the culprit it was determined that my client’s brother was doing something he should not be doing.  After investigating, it was determined that the brother had been running a side business building cabinets out of the shop and having the corporation pay for all the labor and materials.  To make matters worse, these were jobs that belonged to the corporation so the brother would receive 100% payment for the jobs and the company was footing the bill to build them.  Adding insult to injury, the brother was also being paid a very substantial salary to manage and bring the work in.  I do not think you could pour anymore salt into this wound.  Unfortunately, the cabinet owner did not press charges against his brother which cost an estimated loss of $160,000 for that year.

To hire family or not to hire family, the big question of the day.  If you do, make sure your family members follow the same rules as any other employee or you will be setting a very poor tone at the top.  Your internal controls and fraud policy are going to be key and if all employees follow the same rules you will be able to keep peace of mind knowing that you will not be a victim of fraud, let alone a victim of fraud involving a family member. 

Julie A. Aydlott, CFE
Business Fraud Prevention, LLC


Marquet International
Downlaod the 2011 Marquet Report on Embezzlement

Nebraska Woman Gets Probation After Embezzling $136K Ariel Rivera, 28, of Lincoln, Nebraska has been sentenced to five years probation for embezzling $136,000 from Christensen Audiology & Hearing Aid Center where she had been employed as office manager and chief financial officer. Rivera is reportedly the daughter of Roy Christensen, the owner of the business. Rivera, who pleaded guilty to the charge of theft by deception, apparently wrote and forged unauthorized checks to herself from company accounts. Rivera was arrested last May. Her scheme spanned a two year period, from March 2008 to March 2010. Rivera has also been sued in civil court by the company to recover the monies she stole, which came to a grand total of totaled $136,797.67, which she has been ordered to repay. Read the story here, here and here. Pretty light sentence, IMHO ...