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Protect Business Interests from Unethical Co-Owners

Trust is an important aspect of business relationships, especially partnerships.

Unfortunately, that trust is sometimes misplaced. We have seen repeatedly in the news cases in which partners and owners are charged with embezzling from their companies. There are precautions businesses can take when looking for, or adding partners. Here are six pointers that can help protect your business and make sure that everyone with an ownership stake puts the organization ahead of their own, potentially greedy, interests:

1. Always conduct a background check. This is the first and most critical step. Before accepting a new partner, have a thorough view and understanding of the person's financial status and strength. This includes knowing about the individual's previous and current business relationships. Consult with your accountant or attorney about conducting a background check. Investigators check public information that will disclose property ownership, lawsuits, bankruptcies, liens, arrests and convictions. Verify work and education history. Search at the county, state and national levels.

If discrepancies emerge, be sure investigators dig deeper to try to resolve them. If that doesn't work, ask the potential partner for a satisfactory explanation. 2. Require annual financial updates. All partners — without exception — should be required to submit revised financial information at least once a year. Ask your accounting firm to review the information, which typically doesn't change much over the course of a year.

This exercise can also be helpful in other ways. For example, banks often require owners to submit recent financial statements to support loan applications, and regular updates could help unlock additional bank financing if your company wants to increase capital.

3. Enforce a no-exception expense policy. High performing organizations must control expenses. That requires a clear and frequently reiterated policy for reimbursing employees that is enforced on everyone, without exception. If employees are required to show receipts for expenses of more than $25, executives should do the same. Your accounting firm can periodically review your policy and randomly sample reimbursement requests. This can help uncover fraud and may uncover ways to trim expenses. 4. Rigidly oversee vendor approvals and payments. Taking this step can help prevent partners from making fraudulent payments to companies they control. Your company's process for approving new vendors should include verifying a vendor's mailing address, ownership and the nature of the product or services it provides. In addition, payments to every vendor should be documented with a purchase order and invoice. At least two employees should have to sign off on payments. For additional security, set up thresholds that require approval by management. For example, require two or more senior partners to authorize payments on invoices exceeding a threshold, say $5,000 or $10,000. Finally, periodically review vendor payment histories to ensure they conform to company policy. 5. Review and closely manage partner compensation. Monthly draws should be reviewed and approved by all partners before they are paid out. Without appropriate oversight, partners may be tempted to withdraw funds beyond their approved salaries. Owners should also review and amend compensation in a manner that is consistent with the needs of the business as well as the contributions and income expectations of the partners. They must feel they are being fairly compensated. 6. Encourage employees to keep an eye out. Staff members are often aware of fraudulent activity but don't say anything either because they fear losing their jobs or there is no system set up for reporting it. Be sure your business has an anonymous ethics and compliance hotline or system to report suspicions about activities that employees observe in the company.

Setting the tone at the top by ensuring partners always act ethically will trickle down to the rest of the staff. Employees pay close attention, and once they see their bosses acting inappropriately, they may decide to follow suit. Your business should have a code of conduct that everyone at the firm must follow. Partners and other executives should recommit to that code each year.

A well-written code can also provide invaluable support in the event that an employee is let go. Your company may be required to show the documentation it provided employees about its policies and procedures and the consequences for violating them.

These steps can help your business minimize unethical actions not only among partners and co-owners, but also through the enterprise. In the end, your company will be safer and on a more solid footing.

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