Part 2 of 4: What Do I Do? Addressing a Potentially Disclosable Issue
This month’s newsletter resumes our four-part discussion on responsiveness to noncompliance issues as exemplified by specific case studies. The following case is the basis for our continuing analysis, which outlines basic steps for reviewing and investigating a report of noncompliance. In the end, investigators generally are seeking to determine 1) what truly happened, 2) whether what happened is compliant with the law or the terms of the grant agreement, and 3) what measures have been instituted to help ensure that the noncompliance does not recur in the future.
Case Study Reminder
This morning, the in-house general counsel of a national educational nonprofit organization received a report that several employees in its office in Central City, Middle State have allegedly been inflating and/or estimating their time cards on various educational programs. The report includes one name, but indicates that several other persons are involved and provides no specifics on the hours that may have been inflated and/or estimated, or on the number of affected programs. The Central City office of our client has 20 employees who provide both direct and indirect support to four educational programs, two of which are funded exclusively by the U.S. Department of Education (DoEd); one is funded, in part, with DoEd funds and matching funds from the organization; and one is funded solely with private funds.
What should the general counsel do?
What Do I Do? Addressing a Potentially Disclosable Issue
It is important to understand that every organization—no matter how small or sophisticated—will face compliance issues at some point. The mere fact that alleged noncompliance may have occurred is not unusual or worthy of embarrassment. Rather, it is the response of the organization in the face of such allegations that will set the tone regarding the organization’s ethics and integrity. Knowing that some sort of noncompliance is a near certainty, the first step in resolving a report of noncompliance should happen well before the matter arises, by establishing a procedure for reviewing such allegations. To be clear, this is not merely a whistleblower policy that explains how to report an issue; rather, it is a procedure that clearly explains how the organization will respond. This type of procedure demonstrates the organization’s commitment to effectively examining, correcting, and resolving a problem. Moreover, it will help to lay the groundwork for defending an organization against claims made by the U.S. Department of Justice (DOJ) and its Office of Inspectors General (OIG) that the organization is not a responsible steward of federal funds.
Prepare an Investigation Procedure
So what does an investigation procedure look like? As with almost all internal controls, it should be tailored to the needs and specific characteristics of the organization. However, there are hallmark traits that every responsible grantee should consider. The first is determining the right investigative team – deciding who will be the investigator of the issue, and who or what body of the organization will be responsible for particular decisions. Setting out these responsibilities promotes fairness over time and a consistent body of actions and decisions across the organization.
Assembling the Investigation Team
The lead investigator and any other investigator (if there are more than one) should have management’s attention and respect, and be familiar with the day-to-day program operations of the organization. It is critical to choose a person of integrity and good judgment who is free from actual or even apparent bias. Investigators also should have autonomy from the program or business personnel, and have structural (either direct or dotted-line) reporting obligations to the board of directors, audit committee, and/or highest level of management (depending on the circumstances). Making sure that the board of directors is aware of high-risk compliance issues is important, not just in resolving the issue at hand, but in ensuring that the appropriate resources are devoted to reviewing and correcting the problem.
When deciding whether the federal government or outside legal counsel should be part of your team, you need to make an initial assessment of the allegations. Depending on the allegations, for example, you should consider when and how to reach out to the federal government and when to reach out to outside legal counsel. Although some federal government officials prefer to be notified immediately of any noncompliance, you are not legally obligated to do so until you are sure there is a reportable occurrence. However, there are times when the matter is sensitive enough in nature, such as if an employee has violated the Human Trafficking regulations or is discovered committing criminal fraud, to warrant involving the federal government earlier in the investigative process. In the event you contact the federal government, we recommend also contacting outside legal counsel.
Establishing and maintaining attorney-client privilege is also a major consideration in assembling an investigative team. Nonprofits with in-house counsel may be able to do this internally. However, outside counsel often is retained, and in many cases, it is advisable to solidify this protection. Outside counsel can have the advantage of acting as an impartial reviewer, and can provide important industry best practices in developing corrective action plans.
Regardless, it will be critical for any outside counsel that you do hire or use to have the support of the organization and easy, ready access to facts and information within the organization. Thus, if outside counsel is retained to investigate, the organization should assign an internal team leader who can help coordinate the effort and educate counsel on the ins and outs of the organization and its operations. Depending on the type of issue being reviewed, certain specialist team members (e.g., accountants) may be needed and considered.
Setting out the Scope of Review
Next, the lead investigator should define the scope of the review. Nonprofits do not have unlimited resources to spend on compliance issues; therefore, they should seek to develop an appropriate scope of review. Scattered and ill-defined investigations can cost organizations dearly, while failing to determine the real problem. Defining scope typically contributes to effective marshaling of resources, financial and otherwise.
Another aspect of defining scope is determining who within the organization is involved. Before running to ask the individuals involved about the allegations, it may be worth taking a moment to sketch out the individuals one anticipates as being involved. Nonprofit grantees should think more broadly than the specific individuals who are part of the allegation. For example, in our current case study, who is the potential timekeeper’s supervisor—was the supervisor on notice about the inflated time? Did he/she sign off? In other cases, you may consider, who certified to compliance? Who in finance draws down on the funds? Who reviews performance, financial, or audit reports? Was there a basis for believing the certification or reports that formed the basis of the investigation were inaccurate? If no one was on notice, is there an error in the infrastructure that kept critical information from flowing across departments to the appropriate personnel? Again, as stated above, the objective is to determine what happened in the allegation. “What happened” may be broader than something a specific individual did incorrectly. Rather, it could be that an organizational gap or barrier prevented compliance.
Once individuals are identified as potential witnesses, it also is critical that the investigator give some thought to relationships between all of the witnesses and what conflicts of interest and/or perspectives might arise from such.
A third aspect of defining scope is understanding the color of the money involved. Federal funds versus private funds, and federal contract funds versus federal grant funds, as well as a myriad of other combinations, can all have an impact on how one might approach a review. For example, in this case study, two are funded exclusively by DoEd; one is funded, in part, with DoEd funds and matching funds from the organization; and one is funded solely with private funds. In these instances, it will be critical to review the funding agreements before moving on with your review. Are there statutory, regulatory, and agency rules that apply because of the nature of the funds? From where do the matching funds and private funds derive? Do they have additional requirements? In a situation of mixed funding, when you compare the applicable requirements, do any contradict? If so, determine which requirements take precedence.
Preparing for the Investigation
Having set out the scope of the review, the investigator should develop a preliminary outline that sets out his or her initial thoughts on documents that should be collected for review and analysis. At a minimum, this will likely include most, if not all, of the funding agreement documents, including critical modifications and amendments. In this case the DoEd grant documents and the privately funded agreement should be collected for review.
Furthermore, relevant policies and procedures and other documents should be considered and examined. Again, in this particular case, the investigator should record timekeeping policies and procedures, the organization’s code of conduct and employee handbook, as well as the time cards for all work under the four agreements. At times the amount of documents may be voluminous and cause organizations to shy away from the collection effort; however, in our experience, it is certainly preferred to collect and review all such documents internally in advance of the federal government seeking and reviewing such documents, so that the organization can proactively consider what corrective and prophylactic measures it should take immediately.
Typically, after reviewing the documents, the investigator may begin in-person interviews of personnel. Before getting started, a number of considerations should be taken into account, including, but not limited to:
- Who should be interviewed?
- What areas of inquiry should you have for this individual?
- Are there any interview constraints that should be factored into the order or timing? For example, are any witnesses leaving for an extended period of time or permanently? Can you follow up with an interviewee with a second or third interview if needed?
- Among all of the currently known interviewees and any scheduling realities, in what order should you interview them (i.e., are there some witnesses that will provide information to build toward other interviews)?
- Are there any other sensitivities with any of the interviewees or issues that need to be planned around?
While a good deal of planning should go into any investigation before conducting interviews, it is critical that the investigators remain open-minded and flexible as they prepare their outline, review documents, and certainly as they interview witnesses. Indeed, the investigation outline should be viewed as a living document that evolves with the investigation, and the inquiry itself should not be predisposed toward an outcome, but rather should follow the facts to the supported conclusion.
Interviewing Witnesses
Once meeting with individuals, ideally in person, the investigator (if an attorney) should begin with Upjohn warnings. If performed by an attorney, these warnings put the witness on notice that 1) they are being interviewed by an attorney; 2) the attorney represents the organization’s interests and not that of the individual personally; 3) because an attorney is speaking with them, attorney-client privilege attaches to the conversation and that privilege is held by the organization; 4) since the organization holds the privilege, to ensure the preservation of attorney-client privilege and the integrity of the investigation, it is critical that the interviewee keep the conversation confidential; 5) the organization may choose to disclose the findings of the interview and/or the investigation to outside parties, including federal government officials; and 6) it is important that they understand these concepts, and, if they wish to speak to an attorney for themselves at any time, they must inform the interviewer.
After having delivered Upjohn warnings, investigators should select an interview style most comfortable for them, keeping in mind any sensitivies or characteristics of the interviewee. Typically, it may be most comfortable for the interviewee that the inquiry begin with simple factual items relating to the interviewee’s background and experience. As the interviewee becomes more comfortable, the investigator can begin to build the foundation to the heart of the inquiry. Sometimes having copies of documents may be useful; at other times, you may want the interviewee to draw upon their memory. There are a host of tactics and styles one may employ, but at bottom, the investigator should not be untruthful or deceitful or cause the interviewee to feel as though they have been detained against their will.
Making Judgments
Following the investigation (and often as the investigation unfolds), it is crucial for the investigator to assemble all of the information learned and attempt to put together the most logical and credible story. Often certain pieces or recounts may not fit together. It will be the job of the investigator to determine whether this is happening because someone misremembered, forgot, or lied about key facts or information, or there is a loose end that needs to be examined further. Ultimately, every fact of the story may be difficult to surmise with certainty, but at the conclusion of an investigation, a good sense of what actually happened should arise.
In addition to developing the story of what occurred, the investigator must keep in mind steps that can be taken to ensure that noncompliance is not repeated (or at least is mitigated) and that the organization is able to learn and grow from the experience. In other words, what actions or procedures would have prevented the discovered misconduct from occurring again? Are the individuals involved deserving of discipline? Should policies and procedures be revised or new ones developed altogether? Would additional training for staff and others help?
Notwithstanding these considerations, the organization must be mindful that anything it does in advance of informing federal government officials, if warranted, should be done extremely carefully, to ensure that federal government officials do not view any action as destroying information, tainting witnesses, or otherwise interfering with what may ultimately become a federal government investigation.
Case Study: What Was Learned
Having applied the above principles and guidance, in our case study, it was determined that while timekeeping noncompliance occurred, it was limited to three individuals, but applied to all four funding instruments. Perhaps most fortunate, it appears that these individuals were not purposefully inflating their time, but rather were rounding it up and sometimes estimating their time because they did not understand the importance of accurate timekeeping. Furthermore, because all three of the individuals at issue were relatively new to the organization, the noncompliance dated back only eight months.
In response, the organization has taken immediate steps to train these individuals on the importance of timekeeping policies and has reviewed and updated its new hiring training program to better emphasize accurate timekeeping. The organization has maintained all of the documents it collected in the course of the investigation.
To Be Continued…
Notwithstanding the fact that these timekeeping infractions were not intentional, they did result in an overcharge to the federal government on three grants. Next month, given this information, we will discuss next steps.
To view our prior publications on nonprofit government grant and contract issues, please click here.