Economically Disadvantaged Woman-Owned, Veteran-Owned Small Business

Welcome to the CLEAResources ComplianceCommando™ Blog!  Today we recount our interview with fraud expert Kelly Paxton, CFE, PI, and review her superb recent book “Embezzlement: How to Prevent, Detect, and Investigate Pink Collar Crime” – a must-read for any business owner and available on Amazon. Paxton’s book is an easy read packed with stunning statistics, a peek into the minds of pink collar embezzlers, and practical prevention tips for businesses of all sizes.

 

We are fascinated by the concept of pink collar crime and Paxton’s exploration of what she calls the “relatable crime.” Most are familiar with the concept of white collar crime – crime that happens at the top of an organization by executives or senior managers, although most of us do not personally know someone who has committed or been victimized directly by white collar crime.

 

However, as CLEAResources’ President Amy McDougal always says, “there’s no caboose on the fraud train.” Fraud doesn’t always arise in the engine of a business – it can be many cars back and so removed from executive oversight that it is often not caught for years. Unlike with white collar crime, most of us are only one or two degrees away from pink collar embezzlement from a PTA, swim club, medical practice, or church. In fact, according to Paxton’s research, ecclesiastical crime is estimated to reach $70 billion by 2025 – and that is just for funds in the custody of Christian entities, and 80% of that fraud will go unreported. 

 

The term “pink collar crime” was popularized by Kathleen Daly, PhD in 1989 to describe non-violent, financially-motivated crimes committed by employees in positions of limited power.  “Pink collar crime” describes fraud committed by the level of employee, not the employee’s gender. Paxton shared that according to federal labor statistics, 88.5% of bookkeeping and accounting clerk positions are filled by women. These employees usually have direct access to cash, minimal supervision, and are usually underpaid. They are also universally well-liked and trusted by the business owners, sometimes even being considered as extended family. Think “Margie,” the trusted office manager for a dental practice, or “Sharon,” a treasurer for the PTA. 

 

As Paxton puts it, “embezzlement is everywhere there is trust.” She notes the personal betrayal is often the most difficult aspect of pink collar crime. The overwhelming majority of white collar crime is committed at a distance from the victims. Take Bernie Madoff, who didn’t have to look into the eyes of the people he defrauded. Whereas, pink collar criminals are beloved, trusted, and seemingly devoted employees who never take a vacation day. 

 

Therein lies a “pink flag,” as Paxton describes them. Of the three points of the fraud triangle: pressure, rationalization, and opportunity, the last is the one that a business owner has the most control over. Paxton offers prevention tips throughout the book to reduce the opportunity for pink collar crime, including ensuring that all employees take at least one full week’s vacation per year. History has shown that employees who just cannot be away from work are ones whose schemes may be discovered in their absence. 

 

Paxton also explores how pink collar crimes are commonly rationalized. A poor tone at the top, such as executives and senior managers padding expense reports or otherwise using corporate funds to pay personal expenses may send the message that lower level employees can do the same. Employees who are treated poorly, including being harassed, discriminated, against, overlooked for advancement, or underpaid more easily rationalize stealing from their employers. 

 

When we hire employees, we believe they are good, honest people – otherwise, why would we hire them? An employer may conduct criminal or credit background checks to the extent permitted by local law. However, because only 15% of pink collar crime is reported and there is no national database of convictions, background checks are not likely to be helpful indicators of a trustworthy applicant. 

 

Paxton raises an excellent point in exploring whether we are asking all of the right questions when we interview employees. She recommends casually asking applicants about how they spend their vacation time to gather information about how they feel about gambling. Gambling has proven to be a major pink flag. According to the 2013 Marquet Report on Embezzlement, gambling was a pressure in 24% of cases. Paxton also dives into other personal life situations giving rise to increased pressure for financial crimes including debt arising from addiction (employee or family member) and divorce – as studies show many women commit pink collar crime when thrust into the primary breadwinner role while raising children.

 

Paxton also addresses how embezzlement is a grossly under-reported crime. According to Paxton’s research, only 15% of pink collar crime is reported. She explains there are several reasons for this. First, by reporting a financial crime, a business must “open kimono” on its financials, which business owners may be reluctant to do if they themselves have cooked the books or paid personal expenses out of the business. 

 

Second, business owners may rightfully be concerned about losing public trust and patronage if the business is associated with criminal activity. In this age of social media, news travels fast – way fast  – and losing even a small percentage of customers or clients can kill a small business. 

 

Third is the emotional component: embarrassment and betrayal. Many victims of fraud are embarrassed to report because they fear victim-shaming: “how did you not notice this?” “you shouldn’t have trusted her” “why did you not look closer at the books?” This type of victim-shaming is all too common, and has no place regardless of the crime. Business owners also feel intensely betrayed by this type of crime because of the personal trust placed in these employees. Paxton further notes that prosecution is lengthy, taxing, and likely to prolong the ability for either party to emotionally move on. Yet, lack of justice and accountability can lead to employees becoming “serial embezzlers.” 

 

We highly recommend every business owner read and heed “Embezzlement: How to Prevent, Detect, and Investigate Pink Collar Crime” by Kelly Paxton, CFE, PI. COVID-19 has forced dramatic changes to the “pressure” and “rationalization” points of the fraud triangle. Businesses can control “opportunity,” and Paxton offers great tips on how to do that to reduce the risk of pink collar crime affecting your business. 

 

CLEAResources provides businesses full-spectrum advice and guidance on their compliance and ethics programs including internal controls, policies, and improvements to culture that can help a company mitigate legal risk including fraud.