Industries: Financial Services

Most family offices have controls in place to inhibit fraud or losses of key data. But smaller family offices face disproportionately high risk — and some risks are frequently overlooked. BPM Advisory Director Kris Marney, who has 20+ years of experience in accounting leadership, discusses why.

A family office is as unique as the family it works for, having grown in line with the interests of a strong-minded entrepreneurial founder or having evolved organically with varying needs and goals of succeeding generations.

In other ways, family offices are no different than other financial management businesses. They are subject to risks — known and unknown, predictable or unforeseen. Depending on a family office’s history and evolution, some risks are more pressing than others, making risk management a necessity.

Fraud risk emerges when three conditions are met: incentive, opportunity and rationalization. Establishing controls and robust risk management processes enables a family office to mitigate that risk.

The equation is simple, in great part deriving from human nature. If an employee needs money, an incentive exists to find it. It could be needing to pay for a child’s education or for an elderly parent’s long-term care. It could be a rise in credit card debt. In rarer cases, it could be substance abuse. If a person needs cash and works in a financial role, temptation is ever present.

Add temptation to an opportunity, and your risk grows. Gaps in accounting and financial operations present avenues to theft and embezzlement, such as when a person’s duties cross functional areas where separation of duties prevents fraud. For instance, a long-time and trusted employee who handles your accounts payable should also not be wiring transfers to vendors or reconciling bank accounts.

Finally, once financial need exists and the chance to take advantage appears, a perpetrator of fraud usually needs a way to justify it: that’s the rationalization. Unfortunately, the simplest rationalization in the family office is to decide the family has plenty of money, does not need all of it and won’t miss it once it’s gone. Also, financial managers should not discount the disgruntled employee who feels overworked, under-compensated or passed over for promotion.

The smaller your family office, the higher the risk. Smaller offices often rely on a limited number of employees that often have dual roles. Aside from fraud, what if that trusted long-time employee abruptly left for another job, a health issue or an accident?

How quickly could you replace that individual? Do you know where essential records are? What about access and passwords to all accounts? Have you documented internal controls and processes so that a new employee can perform disbursements, payables and money management? Have you trained “understudies” across functions?

Employee transitions present huge operational risks. And don’t discount the employee who never seems to take a vacation. Do they feel they cannot because they’re hiding fraud?

How to implement a risk management framework to protect your family office

Implement a risk management strategy that includes closing operational gaps that allow fraud. Establishing controls with external vendors, formal internal controls and separation of duties is critical. To catch warning signs of fraud, it’s worth noting that other employees often spot anomalies when a potentially fraudulent employee isn’t present. Therefore, implementing mandatory vacation becomes a crucial strategy for identifying suspicious activity. Another key step is an outside review of internal controls based on prevalent fraud risks. It further benefits the family office by clarifying roles, streamlining processes and reducing workloads on key employees.

As the family office grows and assets become more diverse, judicious outsourcing saves employee costs while minimizing risk. If you believe it’s time to audit financial controls and processes across your family office’s functions, BPM’s Family Office Services practice can assist. We work with family offices of all sizes across the U.S. For more information, contact us.

Headshot of Kris Marney

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