Conflict-of-Interest Policies Prevent Misunderstandings — and Fraud

By: Tony LaNasa

September 13, 2023

Small businesses, especially those that are family-run, often rely on the principle of trust. You likely trust any of your employees to lock up at the end of the day, and you might grant administrative access to your website to various workers. After all, these people are familiar and trustworthy. However, as a company expands and hires additional personnel, it makes less sense to trust everyone fully. Even if your firm remains small, certain employees may be driven to prioritize their own financial interests over those of the company. As a result, organizations of all sizes require a conflict-of-interest policy that sets ethical expectations and outlines the repercussions of failing to meet them.

A Decision for an Employer, not an Employee

A fictitious example can give you a good picture of how this problem might develop. Assume “Owen” is the manager of the purchasing department at a manufacturing business. He’s also a co-owner of the company that provides supplies to the manufacturer, which he hasn’t disclosed to his boss. To make matters worse, Owen has personally benefited from his company’s lucrative long-term relationship with his employer.

The fact that Owen has profited from his position doesn’t make it conflict of interest, but the fact that his employer is unaware of the relationship does. When employers are made aware of their employees’ outside business interests, they can take steps to prevent certain employees, vendors, or customers from participating in transactions where a conflict of interest may exist. Alternatively, they can choose to enable parties to continue participating in transactions, even if it goes against what many perceive to be ethical best practices. However, that choice must be made by the employer, not the employee.

Create and Communicate a Conflict-of-Interest Policy

Employees may fail to notify their employers about potential conflicts of interest because they do not recognize them as such. In other instances, employees may go to extremes to conceal known conflicts. Perhaps they are concerned that a conflict will land them in legal trouble or jeopardize their jobs. Or, they may be making so much money from artificially inflated pricing that they don’t want to give up the income, even if it results in a conflict.

Prevention is the best approach in this situation. Create a conflict-of-interest policy and communicate it to all workers. Give specific examples of conflicts and explain why you believe the activities are unethical, dishonest, or even unlawful. Don’t forget to include the repercussions of conflict nondisclosure, such as immediate termination.

Complete Transparency

You might also request that employees file an annual disclosure statement in which they provide the names and addresses of their family members, their family’s employers and business interests, and whether the employees have an interest in those businesses. To help ensure truthful statements, provide employees with a hotline to call if they have questions about the policy, are unsure how it applies to their situation, or wish to report someone else who appears to be in conflict.

In addition, protect your company from conflicted vendors and customers. Compare the names and addresses on your employee disclosure statements to the ownership information provided by prospective company partners before entering into new agreements.

Who Stands to Gain?

Some unreported conflicts of interest might be completely innocent. Others, though, may signal that an employee is benefiting at the expense of your firm. Contact us to examine suspicious activity and for assistance with implementing internal controls.