Page 24 - Internal Auditor Middle East - December 2017

Challenges

deliver same to their children and This is one of the most important the case for many reasons, the most
grandchildren in a better position than challenges and problems that are important of which is his desire to
making big profits by selling them. experienced by Family Businesses and not lose control over the financial and
For instance, a German family from may have a fundamental impact on operating decisions of the company or
the Bavarian region has an impressive their future course. This problem is not due to the low income that he will obtain
proportion in the German company limited to Family Businesses, but it also after retirement or he is not convinced
(BMW), and such family refused extends to major global companies. of the existence of the right individual to
several offers from international However, this problem is more acute in succeed him.
companies to acquire its share and the Family Businesses for the following Challenges Experienced by Family
preferred to retain its ownership of the reasons:
shares. Businesses’ Auditors:
1- The difference in the method
3) Most of the time preference will be in of work and the strategic vision among 1) The auditor’s role as the agent of
the appointment of employees based on the different generations in the family the shareholders is considered one
personal relationships more than the between those who lead or manage the of the most important roles when
efficiency, i.e. (Trustworthy persons company and its successor, while we the ownership is separated from the
have priority over skillful and qualified believe that the difference in the strategic management. However, in the Family
ones). But preference may also extend vision and the method of work may Businesses as mentioned earlier there is
to giving promotions and opportunities have several advantages and may enrich no clear separation between ownership
that are available in the company to the performance of the company if it and management, and therefore the
family members or close persons. is contained and managed in a proper project owners do not appreciate the
manner. role played by the auditor.
4) Family Businesses may have difficulties
in attracting and retaining employees 2- Due to the family ties that exist 2) The auditor faces more difficulties
who have special experience or those between the members of the family that upon conducting discussion with
who occupy leading managerial owns the company and some of whom the management as to the settlement
positions for the following reasons: are overlapping in the management, the process resulting from his audit, and
family members do not express their also if the report is conservative.
• Family members or their relatives expectations, feelings and need to the
usually hold leading positions. chairman of the company or founder Moreover, the matter may extend
• There is often no career path plan for fearing conflicting with one of the other to nonrenewal of the auditor’s
appointment, if the auditor insists on
those employees. members of the family who is close to the adjustments or his conservative
him and the impact on family relations.
• Low salaries and job benefits if This leads to adopt an indirect and report.
compared to non-family businesses. informal style of communication among 3) The poor internal control system
• Family members interfere with the family members. exists in such Family Businesses which
work of competent staff and solely 3- It is difficult to agree on the right management deviates from the internal
make decisions. person who will succeed the chairman or control systems, if any. This leads the
5) Relative difficulty in obtaining finance, founder. Several discussions often occur auditor to not rely on internal control
as the owners of family businesses on this subject and may sometimes reach systems, which increases the period
are often unable to attract external to wrangles. Family members often and cost of audit.
investors in the company, and the accept decisions of the founder when he
banks don’t finance Family Businesses, is at the head of the company even if it Some suggested recommendations for
especially medium or small-sized ones is inconsistent with those decisions, but addressing the challenges:
compared to other companies. This, the person who heads the company and The existence of the family council
in turn, disables Family Businesses to succeeds the founding president may not
expand, replace and renew their assets. enjoy the same advantage, which may encourages and helps all members of the
create more challenges for subsequent family to deal in a responsible manner
6) The Family Businesses’ decisions are generations of family members who run with regard to their company without the
severally taken by the founder or the company. The problem of choosing introduction of non-economic factors
owners thereof. the right person from the family, in the decisions. The need for the family
especially when the family is a big one
7) Poor Governance System; for example, and there are several sons of several council increases when the size of the
there is often no clear formal regulatory wives, may increase, creating more family becomes large, to the extent that it
structure, policies and procedures sensitivity in choosing the right person is difficult to communicate and meet with
manual, risk management or internal that succeeds the retired president. each other and reach decisions.
audit management.
4- Inability and reluctance of the The International Finance Corporation,
8) There is often no plan to find an founding chairman of the company a member of the World Bank Group, has
alternative or successor to the president in the delivery of the leadership of the defined the Family Council as the body
/ founder upon his retirement or death. company to his successor. This is often to be elected by the Family Assembly for

22 INTERNAL AUDITOR - MIDDLE EAST SEPTEMBER 2017