Imagine you have recently joined a nonprofit board. The organization’s bookkeeper, a long-time employee, approaches you and shares her concern that lately she has entered several checks signed by the Treasurer and made out to “Cash.” The Treasurer has provided no explanation except to tell her to assign the expenses to “Office Supplies” and not to worry. What do you do next?
Assess the Whistleblower Problem
First, identify the problem. The bookkeeper has made a “whistleblower” complaint of official misconduct: she has reported apparently unethical and possibly illegal activity by one of the nonprofit’s leaders. The bookkeeper is looking to you for help, as a director entrusted with fiduciary responsibilities to carefully guard the nonprofit’s charitable resources, legal obligations, and reputation. The IRS, the state Attorney General, and donors likewise all hold you and the other directors accountable for the nonprofit’s well-being.
Next, check to make sure the organization has a whistleblower policy. Better yet – do so now, to be fully prepared! It is now standard “best practice” for responsible nonprofits to have a board-approved whistleblower policy in place. Indeed, the IRS Form 990 information return specifically asks whether such policy exists, as a measure of overall good governance. The whistleblower policy should set forth a high standard for ethical conduct among the organization’s leaders and workers, along with a strong prohibition against any retaliation for whistleblowers. The federal Sarbanes-Oxley Act also contains certain whistleblower protections, as do some state laws.
In addition, assure the whistleblowing bookkeeper of such protections against retaliation, as part of the nonprofit’s “open door” posture toward whistleblower complaints. Anyone should feel welcome and encouraged to report problems and concerns about the organization - with their supervisor, an organizational officer, or a director of the board – as the reporting person may feel most comfortable doing so. Problems may vary widely in nature, scope, and identity of alleged wrongdoers, so flexibility among reporting options is essential.
Investigate the Whistleblower Complaint
The next step is to respond knowledgably to the whistleblower’s complaint. Again, check the policy for procedural safeguards. The whistleblower policy should identify a person or committee that normally handles such matters. In addition, the policy should provide for alternative assignment of responsibilities to other leaders. In this case, for example, it would obviously be inappropriate for the Treasurer to receive the whistleblower’s complaint or to serve on the committee handling the complaint (e.g., the Executive Committee, which is typically composed of the corporate officers and charged with handling sensitive leadership issues such as potential theft by an insider).
Consequently, you likely need to check further with one or more other directors, then undertake investigation through a named committee or as an ad hoc task force. The Treasurer should be excluded from any involvement in his governance or decision-making capacity, in keeping with the organization’s conflict of interest policy (which it should have as well). Instead, only non-conflicted directors should be tasked with undertaking due diligence in fulfillment of their fiduciary duties owed to the organization. These measures may include internal examination of records, interviews with the bookkeeper and Treasurer, retention of an outside investigator, and involvement of legal counsel. Each situation is unique but nevertheless should be handled responsibly by disinterested, independent leaders.
In addition, the whistleblower complaint should be handled confidentially, with disclosure on a strictly “need to know” basis. Should the whistleblower allegation prove to be false, and the Treasurer has in fact done no wrong, any apparent claim of wrongdoing could be devastating to him. Such claim could also subject the nonprofit and its leaders to potential liability for defamation and similar civil wrongs. The organization’s reputation also needs to be carefully guarded throughout the investigatory process, through stringent confidentiality measures.
Should the whistleblower’s allegations prove to be true, appropriate remedial measures must be taken. The Treasurer likely will need to be removed from office, and improved financial protocols may be warranted. Further communication with the whistleblowing bookkeeper also may be needed, particularly to assure her that the matter has been resolved.
In addition, the organization may want to consider filing civil or criminal charges against the Treasurer. Recovery of any lost funds should be pursued. The organization may face Form 990 reporting and related IRS compliance requirements, to the extent that any such misappropriation of funds constitutes an “excess benefit transaction” under applicable law. Legal counsel is strongly recommended to address such serious matters, particularly given the onerous penalties potentially available against both the individual wrongdoer and the directors then in charge.
Last, be well prepared for the next whistleblower complaint – just in case. The nonprofit’s leaders should strive to ensure that all nonprofit workers (employees and volunteers alike) are well aware of the organization’s high ethical standards and open-door policy toward reports of problems, along with a clear understanding how they make a whistleblower report. In addition, the board should conduct a periodic review of the nonprofit’s whistleblower policy, with accompanying training as needed, so that all directors are well equipped for the future.