Internal Control in Family Businesses

In the development of family businesses, it is important to review the complexities involved, beyond family desires, which can cover the business’s own concerns, needs, and interests, which must be based on three important pillars in society, such as family, ownership, and business. Although the family is the most important pillar, since it is there where all the feelings of each of its members converge, and that in most of them are superimposed to the other elements that make up a family.

Before talking about control in family businesses, it is necessary to define what a family business, or a family business is. According to the Office 220-16368 of March 21, 1997 “for a company to have the nature of a family, there must be between two or more partners a relationship of consanguinity up to the second degree (father, mother or children and siblings) or only civil (adoptive father or mother or adopted child), or be united among themselves in marriage, provided that the partners so related, exercise, over the company, an economic, financial or administrative control “(Office 220-16368 of March 21, 1997)”.

Based on the above, it is necessary to consider some criteria that directly affect internal control in family businesses, such as capital control, the participation of family members in organizational management, and the close bond that exists between all members. To this must be added that the administrative control of family businesses is mostly in the hands of the first generation and very little until its third generation, since they do not have adequate procedures or mechanisms that allow for the timely succession of these responsibilities, and also of the changes that arise of a regulatory and compliance nature for societies in general.

Family businesses face several problems due to the lack of formal internal control mechanisms, which has become the subject of study for their evolutionary process, where it guarantees the family’s assets and economic security. The internal control system must ensure that it allows the family business to anticipate possible losses, where the most significant risks can be mitigated and that affect the interests of each of its members.

Although the implementation of an internal control system within a family business must guarantee that good business practices are followed, it must be capable of receiving the different questions that might be made regarding the policies of the management team, and the decisions that can be taken around the interests of both the family business and each member of the family.

For further information please contact:

Sindy Lorena Vargas, Audit Supervisor, ECOVIS Colombia, Bogotá, Colombia
Jahir Macias, Senior Auditor , ECOVIS Colombia, Bogotá, Colombia