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Conflict-of-Interest Policies Prevent Fraud - Here's How
Monday, September 11, 2023

Conflict-of-Interest Policies Prevent Misunderstandings — and Fraud

Small businesses generally operate on principles of trust, particularly if several family members are involved. You might trust any employee to lock up the office at the end of the day or provide any colleague with administrative privileges to your website. After all, you know these people.

But as businesses grow and hire new employees, it makes less sense to trust everyone implicitly. Even if your business remains small, some workers may be motivated to put their own financial interests ahead of your company’s. For this reason, businesses of every size need a conflict-of-interest policy that outlines ethical expectations and the consequences of violating them.

An employer, not an employee, decision

To understand the problem, it helps to look at a fictional example. Let’s say that Owen is the manager of a manufacturing company’s purchasing department. He’s also part owner of a business that sells supplies to the manufacturer — a fact he hasn’t disclosed to his employer. To complicate matters, Owen has personally profited from his business’s lucrative long-term contract with his employer.

What makes this scenario a conflict of interest isn’t so much that Owen has profited from his position, but that his employer is ignorant of the relationship. When employers are informed about their employees’ outside business interests, they can act to exclude certain workers, vendors or customers from participation in transactions where there might be a conflict of interest. Or they can choose to allow parties to continue participating in transactions — even if it runs contrary to what many consider ethical best practices. But it’s the employer’s, not the employee’s, decision to make.

Develop and communicate a policy

Sometimes employees simply neglect to inform their employers about possible conflicts of interest because they may not recognize them as such. In other cases, workers go to great lengths to hide conflicts. Perhaps they’re afraid a conflict will jeopardize their jobs or get them into legal trouble. Or they may be profiting too much from artificially inflated prices to want to give up an activity, even if it represents a conflict.

Prevention is the best policy here. Develop a conflict-of-interest policy and communicate it to all employees. Provide specific examples of conflicts and spell out exactly why you consider the activities depicted to be deceptive, unethical and possibly illegal. Don’t forget to state the consequences of nondisclosure of conflicts, such as immediate termination.

Full disclosure

You might also ask employees to complete an annual disclosure statement on which they list the names and addresses of their family members, their family’s employers and business interests, and whether the employees have an interest in those entities. To help ensure accurate statements, provide employees with a hotline to call if they have questions about your policy, aren’t sure how it relates to their circumstances or want to report someone else with an apparent conflict.

Also, protect your business from conflicted vendors and customers. Before entering into new agreements, compare the names and addresses on your employee disclosure statements with ownership information provided by prospective business partners.

Who’s profiting?

Some undisclosed conflicts may be entirely innocent. But others could indicate that an employee is profiting at your company’s expense. Contact us to investigate suspicious activities and to help implement internal controls.

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