Good Governance: Whistleblower Policy Wise, If Not Mandatory, For Nonprofits

Following the downfall of Enron in 2001, the corporate misgovernance that had made the company’s implosion possible came under attack by lawmakers. The upshot was the Sarbanes-Oxley Act of 2002 (SOX), which imposed new, more stringent governance and accounting requirements on public corporations. These included protections for whistleblowers: SOX made it a crime (punishable by up to 10 years in prison) to knowingly retaliate against somebody “for providing to a law enforcement officer any truthful information relating to the commission…of any Federal offense.”

Technically, SOX doesn’t apply to nonprofits. However, relevant provisions in the act—such as the whistleblower clause—have become nonprofit best practices. They just make good sense. Whistleblower protections, for instance:

• Protect organizations from employee lawsuits.
• Give organizations the opportunity to find out about illegal conduct and respond to it internally before the media, law enforcement or a regulatory agency gets involved.
• Create a workplace in which all employees are held accountable, fostering a transparent, ethical environment and improving performance.

In addition to simply being a smart idea, formal whistleblower policies are recommended by federal and state agencies. The Panel on the Nonprofit Sector, a group formed by Congress to propose ways to strengthen the transparency, governance and accountability of nonprofit/charitable organizations, advised organizations in its 2007 final report to establish “clear policies and procedures that allow staff, volunteers, or clients of the organization to report suspected wrongdoing within the organization without fear of retribution.” The Internal Revenue Service responded by revising Form 990, which tax-exempt organizations like nonprofits use to report financial information, to include a question about whether the organization has adopted a written whistleblower policy.

The IRS doesn’t require adoption of such a policy—but it does encourage it. Same goes for other federal agencies and most state governments. And that’s the bottom line on whether nonprofits should have a written whistleblower policy: It’s not mandatory—but it is wise.