Without trust between you and your employees, your business probably wouldn’t be very successful. Delegating responsibility, sharing ideas, working as a team — all require a certain level of trust. However, too much trust can lead to occupational fraud and conflicts of interest. To maintain the proper balance, establish a policy that outlines your disclosure expectations and require employees to follow it.
Purchasing power
What constitutes conflict of interest? Let’s look at a fictional example: Veronica is the manager of a manufacturing company’s purchasing department. She’s also part owner of a business that sells supplies to the manufacturer — a fact she hasn’t disclosed to her employer. And, in fact, Veronica has personally profited from her business’s lucrative long-term contract with her employer.
What makes this scenario a conflict of interest isn’t so much that Veronica has profited from her position, but that her employer is ignorant of the relationship. When employers are informed about their employees’ outside business interests, they can act to exclude employees, vendors, or customers from participation in transactions where there might be a conflict of interest. Or they can allow parties to continue participating in a transaction — even if it runs contrary to ethical best practices. But it’s the employer’s, not the employee’s, decision to make.
Conflict of interest: Prevention is the best policy
Sometimes employees simply neglect to inform their employers about possible conflicts of interest. In other cases, they go to great lengths to hide conflicts. Perhaps they’re afraid a conflict will jeopardize their jobs or get them into legal trouble.
Prevention is the best policy here. Develop conflict-of-interest policies and communicate them 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.
Providing personal information
You might also require 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 (or any others). 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 a new agreement, compare the names and addresses on your employee disclosure statements with ownership information provided by prospective business partners.
Conflict of interest not necessarily fraud
Conflicts of interest aren’t necessarily fraud. But if you don’t know how an employee is personally profiting off your company, it could suffer serious consequences, including financial losses. Contact us for help reducing this risk.
© 2021
CPA/CFE
lanasa@hwco.com
