Trumpeting The Call For A Whistleblower Policy
| Posted in Legal on Feb 7, 2011 by |
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Our nonprofit clients frequently ask whether they should adopt a “whistleblower policy.”
A “whistleblower” is a company-insider who reports illegal or improper conduct of the company. Although whistle blowing is not a new concept, it has received added attention following the Enron and WorldCom scandals. The federal government responded to these scandals by passing the Sarbanes Oxley Act of 2002 (SOX), which imposes many corporate governance and accounting requirements upon publicly-traded corporations. Generally, SOX is not intended for the nonprofit world. However, certain provisions are indeed applicable to nonprofit organizations. Section 1107 of SOX imposes criminal liability against anyone who knowingly interferes with one’s employment or livelihood in retaliation for bringing truthful information about the commission of a federal offense to the attention of a law enforcement officer.
This part of SOX does not specifically require a nonprofit organization to adopt a whistleblower policy. But for those nonprofits that found shelter under this technicality, we suggest it is time to revisit your internal policies.
The prevailing sentiment is that the legal requirements imposed upon publicly-traded companies also should serve as the benchmarks of “good governance” for nonprofit organizations. As the public has become more demanding of nonprofits to operate as responsible businesses, it has come to expect nonprofits to adopt many of the same standards imposed upon their for-profit brethren.
In In Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations, The Panel on the Nonprofit Sector recommends the following:
VA charitable organization should establish and implement policies and procedures that enable individuals to come forward with information on illegal practices or violations of organizational policies. This “whistleblower” policy should specify that the organization will not retaliate against, and will protect the confidentiality of individuals who make good-faith efforts.
The Panel’s report makes it clear that this is an essential policy that should be adopted by organizations “regardless of size” and should be articulated in “clear policies and procedures that allow staff, volunteers, or clients of the organization to report suspected wrongdoing . . . without fear of retribution.”
The new Form 990 now specifically asks whether the nonprofit organization has adopted a written whistleblower policy. Adoption of such a policy is not a requirement for tax exemption, however, the IRS “encourages boards of directors to adopt an effective policy for handling employee complaints and to establish procedures for employees to report in confidence any suspected financial impropriety or misuse of the charity’s resources.” Further, the IRS lists the objectives that a whistleblower policy should accomplish: (i) encourage staff and volunteers to come forward to report suspect activities, (ii) articulate a “no retaliation” message for those who do come forward, and (iii) provide a roadmap to who individuals should report suspect activities. (See page 22 of Form 990 Instructions)
In Report To The Nations On Occupational Fraud And Abuse, the Association of Certified Fraud Examiners reports that approximately 10% of all “occupational fraud” (meaning “asset misappropriation”) occurs within nonprofit organizations, with an average annual total loss of $90,000. This statistic alone provides ample encouragement for nonprofits to implement as many strategies as possible to prevent a loss of assets.
From a best-practices standpoint, nonprofit organizations should consider establishing procedures to handle the receipt, retention, and treatment of confidential, anonymous complaints by employees, which involve the employer’s accounting, internal control, or auditing practices. Ideally, the procedures should be in writing and should provide for thorough investigation while still preserving the confidentiality of the complaint and the anonymity of the employee. The policy should forbid an employer from discharging, demoting, suspending, threatening, harassing, or discriminating against the complaining employee.
In a 2007 case, Kozloski v. American Tissue Services Foundation, several terminated employees filed whistleblowing claims against their former nonprofit employer. The United States District Court of Minnesota found that one of the employees who was terminated and re-hired the same day suffered a sufficient adverse employment action to maintain a whistleblowing claim against his employer. In Collins v. Beazer Homes USA, Inc., the employer argued that it terminated the employee not because of her reports of suspicious accounting, but because of personality conflicts, inadequate performance, and the employee’s complaints to the employer that she was unhappy with her job. The United States District Court of Northern Georgia held that because the employee’s supervisors never met with the employee to discuss her job performance or personality conflicts, the employer could not prove that the termination was not retaliatory.
Recent court actions, such as the ones listed above, shed light on practices an employer should implement to protect itself in the event of a whistleblowing claim. Employers should carefully document performance problems and be forthcoming with employees regarding any issues that arise concerning the employer’s dissatisfaction. And, a clear and visible complaint policy is crucial. Regular communication and consistent application of the complaint procedures will not only provide protection to the nonprofit organization in the wake of litigation, but it will signal to its donors and the public at large that the organization maintains high standards. This is a double benefit without a huge expenditure of effort.
If you have questions or other topics you would like Mr. Krauss and Ms. Bardon to cover on 5O1CONNECT, please email DJK@stolarlaw.com or comment below.
David Krauss (DJK@stolarlaw.com) and
(EBardon@stolarlaw.com) are part of the Nonprofit Law Practice Group of The Stolar Partnership LLP located in St. Louis, Missouri. www.StolarLaw.com
Tags:
Governance Whistleblower Sarbanes Oxley SOX Fraud Internal Controls Nonprofit
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