The Failure of Expected Protections (Part 2)

The Failure of Expected Protections (Part 2)

With all these state protections, what results do whistleblowers achieve?  In cases of public policy exceptions to the employment-at-will rule, it is impossible to say because there is no central database (even within states) of the results from these cases and settlements are typically hidden by nondisclosure agreements.  The U.S. Department of Labor reports on complaints it receives regarding about 17 federal statutes, but the outcomes are not encouraging.  Of the 26,421 complaints that resulted in determinations from 2006 through 2015, the DoL figured that 24% of the outcomes were favorable to the complainants, including settlements and referrals to different agencies. 

The New Hampshire Department of Labor’s 2011-2013 Biennial Report (the most recent available) on its Whistleblowers’ Protection Act activity said that of 61 cases that were closed, just one was found valid[1].  The whistleblower success rate in New York is about 21%[2], including settlements. 

California’s Department of Industrial Relations, which ignored my minimum wage complaint involving HomeFirst and which oversees whistleblower complaints, issues annual reports concerning the outcomes of all complaints filed with it.  About 85% of the cases submitted to the DIR are settled or withdrawn before a decision is rendered, which may not be surprising since the average time-to-decision is about two years.  Of cases that resulted in decisions, just 17% of complaints were found valid, amounting to about 3% of the cases submitted from 2006 through 2014[3].

These results were not what I expected when I began my whistleblowing project.  I was sure that I would be vindicated, if not about each of the violations then certainly about my termination.  Corporations and some writers, such as Sisella Bok[4], begin with a suspicion that the whistleblower has impure motives; HomeFirst claimed that of me.  It appears that the legal system works with that suspicion in mind.

Corporations that retaliate against whistleblowers benefit from the difficulty in proving white-collar crimes: three crucial determinants of a guilty finding – (a) intent to do harm or willful negligence that caused harm; (b) a direct causal link between action (or inaction) and harm; and (c) the time frame for the harmful activity – can be difficult to establish[5].  For each of the HomeFirst issues that I raised, management denied any intent to cause harm; it pointed to its compliance system as proof of its honorable motives.  Time frames were smudged as actions once considered innocent were subsequently challenged as wrong, and actions initially wrong were forgiven by authorities.  If improper actions were committed, the company claimed it was on its way to repairing them.

Retaliation against the whistleblower must, nearly always, be based on circumstantial evidence that is subjected to conflicting interpretations.  A whistle is blown, and the whistleblower is fired.  Directly proving a causal connection is impossible for most whistleblowers.  Facts are introduced or manufactured by the company to justify its actions: the whistleblower was the wrongdoer.  When evidence is presented in the form of emails and private communications of the company decision makers, it may be challenged as “unclean” and improperly obtained, as my attorney considered the files I brought forward.  Then the whistleblower is caught in a Catch-22 situation where having proof of the company’s malicious intent means that the company is innocent.

In all but a few jurisdictions, resolution of a whistleblower’s claim that retaliation occurred must resolved through the civil court system.  Seldom do authorities have the power impose a binding decision on the parties.  As a result, most claims end in settlements, which the DoL, for one, considers a successful outcome for the claimants.  But I can attest that a settlement, even if negotiated by one’s attorney, is not necessarily a successful outcome for the whistleblower.

The results that become public are the larger, more newsworthy qui tam suits – federal cases in which the government joins in the whistleblower suit and settlements are in the millions of dollars – and not the small complaints settled in secret, dismissed, or simply abandoned after they dragged on for years.  State regulations provide a framework for whistleblower protection that mostly fails those who expect that right will win in the end.

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[1] https://www.nh.gov/labor/documents/biennial-report-2012-2013.pdf

[2] http://www.dhr.ny.gov/ for years 2010, 2011, 2012, 2015

[3] http://www.dir.ca.gov/dlse/DLSEReports.htm

[4] Bok, Sisella. “Whistleblowing and Professional Responsibility.” New York University Education Quarterly 11.4 (1980): 2-10

[5] Friedrichs, David O. Trusted Criminals: White Collar Crime in Contemporary Society. 3^rd ed. Belmont, Cal.: Thomson Higher Education. 2007

The Failure of Expected Protections (Part 1)

The Failure of Expected Protections (Part 1)

All states but Montana mandate an employment-at-will policy that enables both the employee and employer to terminate an employment arrangement (that is not bound by contract or collective bargaining agreement) whenever they choose[1].  This policy can threaten whistleblowers, among others, so most states have concluded that decisions based on employment-at-will may be barred if they act against the public good.

Because the violation of federal or state law wrongs the public, an employee who resists committing a criminal act is protected as an exception to the employment-at-will policy.  Another exception is the reporting of a criminal act by one’s employer.  States apply this public policy protection in different ways: for example, a Texas employee is protected only when the sole reason for termination was his or her refusal to perform an illegal act that carries criminal penalties; in Louisiana, the employee must be certain that the company’s behavior was illegal – a reasonable belief is not sufficient. 

The public policy exception is commonly not extended when the employee acts in his or her personal interest (including spite) or to harm, or benefit, the employer.  HomeFirst’s claim that I hoped to damage the company would, for example, undercut a claim I made under this public policy exception to employment-at-will.

In most states, the public policy exception is available only if the violation is reported to a public official, rather than to a company supervisor.  If the employee is fired before reporting the issue to a public person, then the claim of retaliation becomes more problematic.

The uncertain protection provided through this common law mechanism led many states to provide two sorts of statutory protections.  The first is embedded in the specific legislation – for example, laws concerning residential licensing or minimum wages – that the whistleblower alleges has been violated.  This approach to protection results in a wide variety of rules, procedures, and deadlines that are created over years to satisfy the demands of different constituencies and sensitivities.

The second is the general whistleblower protection laws offered by about a third of the states.  These laws vary widely in their protections and procedures.  Deadlines vary: Michigan allows public employees just 90 days from the retaliatory action, but six months is common for administrative actions and two years for lawsuits.  New Hampshire requires the employee to inform the employer and give it a reasonable opportunity to correct its violation, which opens the door to the extended correction periods that HomeFirst said it deserved.  New York’s law only covers conduct that presents a substantial and specific danger to public health and safety, which would have given HomeFirst a free ride.  Tennessee assures its whistleblowers that they will be protected when their actions provided the sole reason for their termination – in Delaware it must be the primary reason – although most employers will, as HomeFirst did, come up with additional reasons.  North Carolina warns whistleblowers whose suits are frivolous that they will be liable for their employer’s defense costs, encouraging every employer to claim that every whistleblower’s claim is frivolous – as HomeFirst claimed mine was only a way to get a richer retirement. 

The California law may provide the most attractive protections for whistleblowers.  Possible violations include those of local, state, or federal laws and regulations.  The violations may be actual or reasonably believed by the whistleblower.  They may, but need not, be identified in the course of the employee’s job activities.  Reports may be made to company or public officials.  The potential $10,000 fine is unlikely to deter many companies from retaliation, but it is, at least, more than Michigan’s $500 per incident and Maine’s $10 a day.

The law first requires the whistleblower-plaintiff to demonstrate by “a preponderance of the evidence” – that it is more likely the case than not[2] – that the whistleblowing was a contributing factor in the retaliation – not the primary or sole factor.  Then the employer-defendant must demonstrate that the alleged retaliation would have, more likely than not, occurred for legitimate, independent reasons in the absence of any whistleblowing.

My understanding of the law combined with my evidence of the wrongdoing gave me hope for a successful outcome from my complaint to California’s Department of Industrial Relations despite two years of disappointing experience with my other complaints.

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[1] General sources include http://www.workplacefairness.org/whistleblower-claim , http://www.ncsl.org/research/labor-and-employment/state-whistleblower-laws.aspx , and http://www.whistleblowers.org/index.php?option=com_content&task=view&id=742&Itemid=161

[2] https://www.justia.com/trials-litigation/docs/caci/200/200.html

A Volunteer-Run Organization, Missteps, and Whistleblowing (Part 2)

A Volunteer-Run Organization, Missteps, and Whistleblowing (Part 2)

Like HomeFirst, the St. Vincent de Paul group in East Palo Alto had potential issues in its relationships with donors and volunteers. 

Few nonprofits report the results of their activities[1].  HomeFirst and its competitors told stories about what they did, but they left out any systematic descriptions of impacts.  HomeFirst had staff who could have reported its program results, but it chose not to do so.  On the other hand, the company made available on its website several years of audited financial statements and income tax filings.  Those financial reports did not clarify how money was spent in its various programs, but the mandated reports were present.

In contrast, SVdP made no public reports at all of its activities.  No stories, no results.  It did not broadcast the number of clients it served; most volunteers were unsure even of how often deliveries were made.  As a program of the regional SVdP organization, whose tax identification number granted its donors tax deductibility for their contributions, the group did not provide financial reports.  SVdP in East Palo Alto had no paid staff, who might have the time for such reports.  It was up to the volunteers to decide based on what they saw whether the organization was still worth their time and whatever monetary contributions they made to it. 

Like HomeFirst, SVdP relied on its reputation and its donors’ faith that it was doing good work with the resources they contributed.  One method for projecting that nonprofit reputation is the for-profit marketing technique of branding[2].  HomeFirst changed its name from Emergency Housing Consortium and EHC LifeBuilders in hopes of achieving a successful rebranding.  The SVdP brand, though, is well-established and needed no revision; it was good enough to draw donations from local Catholics.

I had joined and contributed money to both HomeFirst and SVdP based on my faith in the good I supposed they did.  I lost my faith in HomeFirst over a number of years as it resisted examining its results, it failed to address the compliance issues I raised, it avoided facing its financial situation, and it fired me for disclosing what I believed were legal violations.  My disillusionment with HomeFirst bled into a cynicism about all charities, now including SVdP.

HomeFirst employees, SVdP volunteers, and those of us who gave money to either organization offered our resources despite the absence of information and the signs of something amiss.  At HomeFirst, I jumped off the team when I perceived mounting problems, but most others stayed the course.  At SVdP, I finally cut my contributions, but I remain a volunteer who gently suggests to George, our leader, that maybe we should rethink some things.  The group does enough good, I figure, and my cost in retirement is not so great.

The SVdP case raises a third question: when should a charity go out of business?  Charities sometimes shut down because their violations of the public trust are especially egregious.   They may fail because they run out of money or volunteer energy.   And they may, if rarely, go out of business because their services are no longer needed.  SVdP holds so much money that it seeks new ways to use it responsibly, and its errors are not egregious. 

The group has volunteers willing to deliver, but its energy to resolve the problem of decreased activities seems to be missing.  The falling number of deliveries and the ample supply of other nonprofits who can do what SVdP has done for years argue that the group should consider going out of business at some point. 

One charity can effectively shut down by merging into another charity.  HomeFirst’s competitor Innvision escaped financial distress with its 2012 merger into a San Mateo County homeless services provider, Shelter Network.  In mid-2013 while we were having trouble getting to a balanced budget, HomeFirst CEO Jenny suggested that we consider a merger.  I argued that the idea seemed like admitting failure, but by the end of the year I also recommended merger.  HomeFirst has, though, survived so far without folding into another company.

The East Palo Alto conference of SVdP might let another charity take over its activities, but merger is impossible because the group is not a separate legal entity.  All of its assets legally belong to the $12 million San Mateo County SVdP, which is likely to find little reason to surrender cash and other assets to a more successful East Palo Alto nonprofit and report a loss from doing so.  Closing the East Palo Alto SVdP would, consequently, mean the loss of resources in its community, regardless of whether those resources are well used.  There appears to be no easy exit from this charitable mediocrity.

HomeFirst’s merger or dissolution – in response to insolvency or failure to perform effectively, for example – could be achieved through the transfer of assets, contracts, and employees more easily that our little SVdP operation could do.  But HomeFirst’s management, directors, major donors, and supporters in the City of San Jose and Santa Clara County would be embarrassed by its surrender and some might suffer political consequences.  HomeFirst’s situation proves as sticky as that of our little SVdP operation.

  

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[1] Stern, Ken. With Charity for All. New York: Doubleday. 2013

[2] Kylander, Nathalie and Christopher Stone.  “The Role of Brand in the Nonprofit Sector.” Stanford Social Innovation Review.  Spring 2012.

A Volunteer-Run Organization, Missteps and Whistleblowing (Part 1)

A Volunteer-Run Organization, Missteps and Whistleblowing (Part 1)

I started volunteering for St. Vincent de Paul in 1998, nine months after I ended twenty years in the for-profit world and a few months after I began working in the nonprofit world.  We say “St. Vincent de Paul,” but we really mean a group of volunteers who receive food from Second Harvest of Santa Clara and San Mateo Counties, a farmers’ market, and a few businesses and deliver it to poor families living in East Palo Alto and east Menlo Park, California.  And we really, really mean a group of volunteers organized for the past twenty-five years or more by George, a retired engineer now in his eighties.

At the nadir of the Great Recession, the group was delivering two boxes of food, weighing a total of about 50 pounds, to about five different families three times a week.  George used individual contributions to help families with rent and utilities money; we provided some with vouchers for furniture. 

New charities continually entered to serve the community's expansive needs.  By 2016 thirty charities received and distributed free food from Second Harvest to the 28,000 residents of East Palo Alto and additional families in east Menlo Park.  That works out to about one Second Harvest partner agency per 200 persons below the poverty level – three times the number of agencies per person in poverty in Second Harvest’s entire region. 

Then the economy began to improve.  Housing was becoming so expensive in Palo Alto and adjoining cities that tech workers and others began to move into new homes in East Palo Alto.  While still poor, the City’s demographics shifted: blacks, who made up 61% of East Palo Alto in 1980, were displaced by Latinos, who comprised 64% in 2010.  New construction, hotel taxes, and retail sales helped increase the City government’s operating revenue by 42% from 2011 to 2015.  The City’s violent crime rate dropped from two-and-a-half times the overall California rate in the late 1980s and early 1990s – East Palo Alto had the highest murder rate in the country in 1992 – to just over the California rate in 2014[1].

Over the years our small SVdP changed, too.  We received more and healthier food from Second Harvest; the number of families we served dropped to less than half the peak number; and, as a result, the amount we delivered per family increased.  The aging, mostly white volunteers from outside the City were replaced by mostly Latino local volunteers, some of whom were beneficiaries as well as volunteers.  Beyond the view of nearly all volunteers, the group’s bank account swelled to over $100,000 following receipt of a bequest and other contributions.

As a nonprofit charity, the East Palo Alto conference of SVdP confronts challenges similar to those of HomeFirst.  Although far smaller than HomeFirst, its issues shed light on HomeFirst’s situation, and experience at one helps understand, I think, realities at the other.

First, the question of organizational mistakes and whistleblowing.  The wrongs at SVdP, so small that they hardly compared to HomeFirst’s issues, were of two sorts.  First, food was wasted when it was given to clients who did not want or need it.  Food was generally distributed based on understandings about the ethnicity and size of families, but unless they made clear their preferences each family was likely to receive a jar of peanut butter, x cans of green beans, y pounds of dry pasta, and so on regardless of whether they would be eaten or discarded.  On other occasions, the number of families on our lists were so few and food inventories were so great that we delivered quantities in excess of what a family could reasonably consume – think five pound cabbage balls, for example.  Second, volunteers, who took food home after completing their deliveries, might not have qualified for assistance, and they generally did not sign the required forms documenting the assistance.

The SVdP volunteers were aware when their actions made little sense, in the same way that HomeFirst employees were aware of their missteps.  But we controlled only a small portion of the process of recruiting families to receive food, ordering food from Second Harvest, receiving food from donors, and delivering portions on our scheduled evenings.  Although HomeFirst’s issues were possibly far more egregious, HomeFirst was also fifty times the size of our little operation so you would expect theirs to be larger.  Raising problems internally meant telling George, but in a volunteer organization his control was not absolute, either. 

SVdP lacked HomeFirst’s management and oversight structure, so whistleblowing procedures were undefined and seemed unnecessary.  Although George was in charge, he and the other volunteers were close to being peers.  No formal board oversaw the group’s activities.  Our volunteer involvement was not an economic transaction as was employment by HomeFirst.  Loyalty – to George and to the group’s mission – felt more natural at SVdP, but the cost to exit the group was small compared to the loss of salary for leaving HomeFirst. 

SVdP was not restricted by government grant agreements as HomeFirst was, but like HomeFirst it was obliged to comply with Second Harvest’s rules.  SVdP was one of more than 300 charities distributing Second Harvest food from more than 650 locations, and its problems were small, if existent at all.  The food was kept safe and was not being sold or stolen in volume; we did not merit much attention.

The SVdP issues were similar to the minor wrongs and deceptions that we all commit on a daily basis[2].  They were far from the serious harms that 

whistleblowers are expected to disclose.  Revealing them would make no one a hero.  The response, then, seemed to be: as with any friendship, if you don’t like the way they behave, there is no reason to make a big stink; just leave.  But that is, more or less, what HomeFirst told me before I was fired.

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[1] Lawrence, Sarah and Gregory Shapiro, “Crime Trends in the City of East Palo Alto,” UC Berkley School of Law,  November 2010; and Federal Bureau of Investigation, Uniform Crime Reports.

[2] DePaulo, Bella M. “The Many Faces of Lies.” In The Social Psychology of Good and Evil. Arthur G. Miller (ed.) New York: The Guilford Press. 2004

More Payroll Tax and Minimum Wage Issues

More Payroll Tax and Minimum Wage Issues

My interest in HomeFirst’s payroll tax and minimum wage problems (9^th and 10^th Issues) were sparked by its smaller competitor Downtown Streets, whose program strategy had inspired HomeFirst’s New Start program.  

After Eileen Richardson, ended her brief stint as Napster’s first CEO, she wandered past the Palo Alto Food Closet, which distributed food to the community’s homeless and very poor.  Soon she was volunteering for the operation, and after that she moved beyond handing out food to trying to help individuals into jobs and housing.  She started Downtown Streets in 2005, engaging its clients to clean the streets and parking lots of Palo Alto.  In time, services grew to include government and private projects in four Bay Area cities.

 

Revenues come mostly from government grants and private fees for its maintenance services and about a third from charitable contributions.  The clients, wearing yellow, green, blue, or black t-shirts to indicate their rank, are compensated with vouchers from Safeway, Target, and other stores at a rate of $5 per hour of service for yellow-shirted team members.  In addition, they receive advice on housing and employment.  As in a regular job, if they miss required meetings or job shifts, they are kicked off the team.

Downtown Streets team members receive no benefits.  Not only do they not receive health benefits, they do not participate in the social security system, they do not enjoy unemployment benefits, and they lack long term disability insurance.  On the other hand, the arrangement helps both Downtown Streets and team members avoid payroll taxes.

Since the vouchers are under-the-table, team members are not forced to declare the income to anyone.  If they live in subsidized housing, where rent may be a function of tenant income, the vouchers do not cause their rent to increase.  Any payments for past taxes or child support would also be unaffected.  As long as the difference between the voucher rate and the minimum wage rate is small, members may benefit along with Downtown Streets.

As was the case with HomeFirst’s New Start clients, much hinges on whether Downtown Streets’ team members are employees under the law.  Downtown Streets describes them as volunteers who receive non-cash stipends.  For California’s purposes, anyone who renders service for another (except as an independent contractor) is an employee.  But someone who performs services in return for aid or sustenance only received from a nonprofit is not an employee.  Nor is someone who volunteers for a nonprofit.  The matter could be ambiguous.

To my mind, the case was clear enough: Downtown Streets was paying vulnerable individuals less than they should to perform the maintenance services that were the company’s business.  In the mind of Downtown Streets, it might also be clear: their clients were volunteers without any employment agreement, and they received aid in the form of stipends for volunteering.

Because Downtown Streets appeared to me to be in the wrong, I complained.  In June 2014, I mailed a complaint to the California Labor Commissioner that the company was violating minimum wage laws.  In July 2014, I reported the suspected payroll tax fraud to the California Economic Development Department website.  I never received a response from either agency.  Later I sent the information to a reporter at a widely-read free local newspaper; no reply.

A year later, I emailed a complaint to the Palo Alto City Attorney because the City contracted with Downtown Streets to clean its public spaces.  He never replied.  I copied that email to the local free newspaper without receiving a response.  I sent an email to Palo Alto Council members, but never received a reply there either.

My complaints about HomeFirst’s compensation for its New Start workers (Issues 9 and 10) were based on inside information about those affected and my responsibility for legal compliance.  As an officer of HomeFirst I also had an obligation attempt to work with CEO Jenny and the Board to correct the company’s behavior.  By contrast, I made no attempt to communicate with Downtown Streets on this issue, my knowledge of the matter was limited, and I was not a Palo Alto resident who could claim to be harmed by the situation.  The team members with whom I talked about their pay expressed no special concern.

With no skin in this game, why complain at all?  In a threatening letter, HomeFirst accused me of being obsessive and bizarre in continuing to pursue my complaints nine months after they fired me.  Were my complaints about Downtown Streets any less obsessive and bizarre?  Because whistleblowing is a long affair, anyone on that adventure is vulnerable to such criticism. 

Viewed differently, the Downtown Streets and HomeFirst behaviors may demand continuing complaints: others will be harmed if I do not act, I am able to act, I am in a position to act, no one else is likely to act, and the act may not be entirely futile[1].  And the usual excuses for failing to complain – loyalty to the employer and fellow employees, fear of retaliation – are absent.

So, bizarrely or not, I act as well as I can until it proves pointless.

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[1] Duska, Ronald, Brenda Shay Duska and Julia Regatz. Accounting Ethics. Malden, Mass.: Wiley-Blackwell. 2011

What a whistleblower must expect

Much has been written about the trials whistleblowers face, their general situations, and the specifics of some cases.   My situation was unique in several respects.  HomeFirst’s nonprofit status involved special issues of nonprofit accountability and nonprofit-government relations.  I was able to judge several problems, rather than just one, and I dealt with numerous government agencies charged with investigating the allegations.  My position in the company gave me access to information that would not be available to most employees.  Being near the end of my career made the costs I paid less than those others suffer, and it allowed me freedom to pursue my complaints and reflect on the issues more than some others might be able to do.

Despite the uniqueness of my situation, lessons from my experiences may be useful to others faced with the decision whether to disclose a wrong within their organizations or to external authorities.  When you consider what to do after you witness a wrongdoing in your company, you can anticipate the following possibilities:

1.       Blowing the whistle will lead to your termination.  You may be fired, or the retaliations you experience will make working in your job so uncomfortable that you may feel forced to quit.  If you are fired, the reasons given will relate to your job performance, your attitude, your fit in the organization, or anything else but your whistleblowing.  Whatever the cause of your departure, you will not be able to count on good references from your employer.  Especially if your industry is tightly knit, finding another job may be very difficult.

2.       As long as you remain in the company, you will be retaliated against.  Management will not forget that you betrayed them.  Retaliations will come despite laws that prohibit them.  The acts will appear in many different forms, and no one will admit having committed them.  Some acts will be mildly irritating, others more painful, but some you might not notice as retaliatory until days or weeks later.

3.       You will not be supported by people in the organization whom you thought you could trust.  Your peers will become wary of you; some superiors may listen, but you will find their allegiance is to those acting against you.  Anyone who voices support will be overwhelmed by critics and will yield to them.  The people closest to you among your family and friends will discourage you from acting.

4.       Apparently robust systems to protect the whistleblower – the policies, special corporate and board functionaries, hotlines, and the rest – will not help you.  They exist to protect the company and its allies.

5.       No matter how much you work on your complaints, gathering evidence, and setting down the story, none of that will matter.

6.       Your complaints will not be understood or believed by others.  Not by those in the company, not by friends or family, and not by the authorities to whom you complain.  As a result, you may become uncertain.  The violation will become debatable for you, too, and you will have doubts.

7.       The authorities charged with adjudicating your complaint will ignore you, or they will support the company you accuse.  They will consider the company more valuable and more trustworthy than you.  They will accept the company’s word, its rendition of facts, and its proclaimed intentions and plans, rather than the facts you present.  The company will receive the benefit of doubt even if you present conflicting facts.

8.       Nothing will be achieved by your complaints – no correction of behavior, no punishment of the wrongdoer, and no fair compensation for you.  Your effort will prove to have been a waste of time.

9.       If you engage an attorney, you will become dissatisfied with the legal process.  Your attorney will run your case based on his or her business objectives, not on an admiration for your sacrifice.  An attorney who takes only plaintiffs as clients pursues a marketing strategy that does not guarantee diligent, competent performance.

10.   If you settle with the company, you will be required to be quiet and conceal everything about your case and the company; you will not be able to disparage your former employer despite its unjust behavior.  Even if you do not settle, you will be threatened with lawsuit if you describe the events in ways that the company considers disparaging.  If official indifference has not succeeded in silencing you, then fear may.

11.   Others will soon lose interest in your problems – your complaints, the retaliation, your legal case, and the costs you have paid.  You will be urged directly or indirectly to move on, to get on with your life.  They will believe that there are two sides to the story, and they will not be in a position to judge the accuracy of yours.

12.   You will not be a hero in the mind of anyone at the end of it all.  People will not consider the wrong you disclosed as especially significant compared to problems in their lives and in the world.  If numerous complaints indicate a systemic problem in the company, adjudicators will see them as distinct complaints and will not consider them in combination.  The wrong you describe will be too ambiguous, your motivations too mixed, the social or moral good you seek too dubious.  Others will find redeeming qualities in those you complain about.  You will be considered foolish for suffering as you did.  People will see other actions that you should have done instead, including simply resigning.

13.   Everything that happens, you will find unfair.

14.   You will become cynical in ways you were not previously – about the company, the work you did there, your previous dedication, your former colleagues, the people who refused to believe you, and the industry and career you once valued.  All of it will turn your stomach.

15.   Despite all of the problems that you will face and the penalties you will pay, you must become a whistleblower. 

You will not be able to protest every wrong you witness because the consequences would be severe.  You must, after all, care for yourself and your family.  There will be many, many occasions on which you see wrongs and remain silent, and they will weigh on you, more and more over time.  But be wary: life is short and unpredictable; if you fail to stand on an occasion, another opportunity to recover may not come to you.  Not objecting to wrong is a failure of heart.  It is a display of cowardice that may be understandable and even tolerated, but it creates a hole that you must eventually fill.

Best wishes and good luck on your own adventures!

Compliance Systems That Fail (Part 2)

Compliance Systems That Fail (Part 2)

External Auditors

In the years following the 2007 engagement of Burr Pilger & Mayer (BPM) engagement as its new auditors, HomeFirst’s risks decreased, contracts continued, and communications with the auditors were reasonably transparent.  In our annual management representation letter, Jenny and I attested that we had discussed with the auditors everything that we should have done.  A comfortable relationship developed between BPM and management, audits ran smoothly, and the fees we paid decreased.  But that comfortable arrangement also increased the possibility that BPM would not investigate matters as closely as others might.

Fear of losing revenue can sometimes lead auditors to yield where they should not, intentionally or as a result of unconscious moral slippage.   Aware of that risk, audit committees often request that the audit partner in charge rotate periodically, or they may replace the firm itself.  BPM, however, was too small to easily accommodate the rotation of the audit partner.  After five years together, the Audit Committee requested bids from competing audit firms, all of whom were more expensive, and we renewed our comfortable relationship with BPM.

In the standard language suggested by the AICPA, management is responsible for preparing financial statements consistent with generally accepted accounting principles and for maintaining a system of controls to ensure the accuracy of the statements.  The auditor’s responsibility is to express an opinion on the statements based on testing standards, but it declines to opine on the effectiveness of the company’s controls.  Despite these intended responsibilities, a critical question for financial and operating management is “will the auditors find it?” or, as Jenny asked about compliance issues, “did someone else bring this up?” 

Nonprofits that receive significant federal funding – more than $500,000 in years through 2014 and $750,000 afterward – must have an audit compliant with OMB Circular A-133, “Audits of State, Local Governments and Non-Profit Organizations.”   For readers of BPM’s A-133 audit report, the absence of findings of material weaknesses or significant deficiencies in its controls and of questioned costs implied that the company complied with whatever it needed to be compliant. 

The reality of A-133 audits was less compelling.  BPM reduced its charges to HomeFirst by conducting risk-based audits, meaning that it focused on areas that were identified as risky in past audits or in discussions with the Audit Committee or management.  Further, BPM was required to perform testing only on selected major grants in excess of $300,000.  In the 2014 audit, BPM’s two-person team reviewed sampled client files and transactions with respect to 9 grants with total revenue of $2.2 million, as representative of 30 government grants and total revenue of $10.8 million.  The three days of field work were deemed sufficient under the circumstances.

Despite the oversight structure mandated by the California Nonprofit Integrity Act, HomeFirst committed its $1.2 million over-billing of HUD grants after the law was passed, the Audit Committee was established, and an external auditor was hired.  That egregious error arose from management’s failure to correctly bill its contracts, HUD’s failure to effectively monitor the company’s billings, and the auditors’ failure to effectively audit the company’s accounts until the problem became clear during the 2006 audit.

Most of the HomeFirst wrongs that I alleged fell into a class of violations that are not easily detected without a whistleblower’s assistance.  They were wrongs that escaped detection by BPM’s audit procedures, on which readers of the financial statements relied to judge our performance.  Limitations inherent in the external audit and the other layers of formal compliance oversight can enable corporate culture to dominate the ethical practices of the organization[1].

Corporate Culture

Even more than its formal policies and reporting structures, an organization’s culture determines how it responds to ethical challenges.  Company culture is reflected in the ways employees are recruited and trained, how they dress and present themselves, how they interact with each other, and how business is conducted and decisions are made[2].  More than just a set of behaviors, culture represents “the way we do things around here” in order to solve problems and meet organizational goals[3].   An organization’s ethical culture transcends the personal values of its managers and the operational goals of growth and profitability.  Absent a culture of positive ethical values, the organization can become unhinged during periods of stress[4], like the stress that afflicted HomeFirst in 2014. 

In some company cultures, an apparently well-developed compliance program is viewed as a get-out-of-jail card that reduces the risk of indictment and minimizes the legal consequences of wrongdoing that is caught[5].  In the absence of agreed metrics for determining the effectiveness of corporate compliance programs, managers and board members can contend that they are highly ethical despite evidence to the contrary.  For a company that endeavors to do good in the community, faith in its ethical purpose bleeds into a confidence that its compliance initiatives are honestly implemented.

The presence of a compliance system can actually lead to the occurrence of more unethical behavior[6].   Company managers may view penalties for violations simply as another set of costs that is weighed against the cost of compliance[7].  HomeFirst’s compliance program assured managers they would always have an opportunity to fix their files prior to my visits, they would be never disciplined for violations, and violations were immaterial unless an external authority brought them forward.  By doing so, it may have fostered violations rather than compliance.

Like more than 90% of similarly sized nonprofits[8], HomeFirst possessed key governance policies.  It did not have a whistleblower hotline or an independent party to evaluate complaints of complaints, but neither did many other small and medium sized companies.  Despite an impressive compliance structure and an honorable passion to serve the needs of the poor and change the world, HomeFirst, I believe, committed acts that should have been handled much better and allowed its several reinforcing controls to fail under the weight of its culture.

Whistleblowers attempt to work within a system of official rules and with designated authorities.  They are defeated by multiple systemic failures, by people who do not play fair, and by cultures that overwhelm control systems.

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[1] Bazerman, Max H. and Ann E. Tenbrunsel. Blind Spots: Why We Fail to Do What’s Right and What to Do about It. Princeton, N.J.: Princeton University Press. 2011

[2] Sims, Ronald R. and William I. Sauser. “Toward a Better Understanding of the Relationships among Received Wisdom, Groupthink, and Organizational Ethical Culture.” Journal of Management Policy and Practice 14.4 (August 2013): 75-90

[3] Martin, M. Jason. ’’That’s the Way We Do Things Around Here’: An Overview of Organizational Culture.”  Electronic Journal of Academic and Special Librarianship.  7.1 (Spring 2006)

[4] McCoy, Bowen H. “The Parable of the Sadhu .” In Ethics in Practice: Managing the Moral Corporation. Kenneth R. Andrews (ed.). Boston: Harvard Business School Press. 1989

[5] Laufer, William S.  Corporate Bodies and Guilty Minds: The Failure of Corporate Criminal Liability.  Chicago: The University of Chicago Press. 2006

[6] Ibid

[7] Tenbrunsel, Ann E. and Kristin Smith-Crowe. “Ethical Decision Making: Where We’ve Been and Where We’re Going.” The Academy of Management Annals. 2.1 (2008): 545–607

[8] BoardSource. “Leading with Intent: A National Index of Nonprofit Board Practices.” BoardSource 2015