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Family Office Fraud

Reducing Opportunities for Fraud at Your Family Office

Posted by Michelle Johnson on Jun 25, 2019 6:00:44 PM

Multifamily offices typically rely on a full team of advisors to help grow their businesses and keep them in compliance with tax and regulatory requirements. At the same time, increasingly sophisticated technology makes it easier to communicate with advisors and other members of the family office. Is that same technology exposing the family business to fraud? While your team focuses on meeting your wealth objectives, who is keeping an eye on fraud vulnerabilities?

While many industries widely report fraud cases, family offices are private, and therefore, reported information about fraudulent activities is not readily available. However, given the fact that fraud is on the rise in all industries, one can assume that family offices are not immune to this trend. Many family offices lack adequate anti-fraud controls, which can put them at risk. Those employed by high-net-worth individuals and family offices often have considerable access to company assets and, depending on their roles, personal cash assets. Family members must understand the threat and make it a priority to take measures to address it.

Related Blog: Avoid Fraud by Implementing Internal Controls

Red Flags

Employees will often exhibit erratic behavior when they are committing fraud. Knowing as much as you can about them can be extremely helpful in spotting red flags. If someone spends in uncharacteristic ways or begins to work irregular hours, for example, it may be worth your attention. 

Expense Reports and Credit Cards

According to the Association of Certified Fraud Examiners’ (ACFE) 2019 study on occupational and fraud abuse, expense report fraud is one of the most frequently committed types of fraud. It can cost hundreds of thousands of dollars or more to the family office, as it usually takes a long time to detect. The same holds true for the inappropriate use of credit cards. If the family office’s internal controls are weak or nonexistent, employees can charge items to the business that are not business-related, or they simply inflate their expenses.

Set the Tone at the Top

When you establish a code of conduct at the top, you let your team know that integrity is a priority. Providing education to family members and your family office staff will help them recognize irregular patterns and potentially fraudulent activities. With a larger family office, it could be helpful for you to segregate duties so that one individual doesn’t control checks, cash, signature authority, and bank reconciliations. 

Internal Controls: Why Fraud Risk Assessments Matter

Internal controls include procedures that defend your company’s assets against fraudulent activity. According to the ACFE report, nearly half of all frauds occur because of weak internal controls. You don’t know what you need to protect unless you understand what’s vulnerable. A risk assessment performed by external professionals will help to identify fraud risks and the need to implement internal controls.

A CPA and business advisory firm with a dedicated family office practice can review bank reconciliations, perform financial statement audits, and look for areas of vulnerability. Its professionals can also help increase the efficiency of the overall operation and compliance with applicable regulations. Above all, you’ll have greater peace of mind when you can install proper controls that can save you thousands – even millions – of dollars by preventing fraud.

Questions about managing risk or other Family Office matters? Contact Michelle Johnson, CPA, at 214-635-2501 or fill in the form below.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Topics: Fraud, Family Office