What to do when you’re under the government’s microscope
What to do when you’re under the government’s microscope
Virtually no non-profit executive welcomes an audit or investigation with open arms. If you’ve dedicated your life to bettering the world by fighting for a social cause, you might react to the snooping of a government agent with natural outrage and indignance. That irritation could morph into downright anger if (and when), in the course of responding to the governmental agency, you are compelled to slow down your vital work just to explain basic elements of that charitable work to a government employee.
Yet, if a government auditor or investigator comes a-knocking, it’s best to hold back that anger and tamp down any altruistic sense of fairness. For one thing, every not-for-profit’s mission implicitly includes the task of cooperating with governmental authorities seeking to ensure the probity and integrity of the non-profit’s work. For another thing, good faith responsiveness, lawfully and deftly managed, can limit the havoc that an audit or investigation might otherwise cause. Indeed, the scope of a governmental review may even be narrowed if the organization conveys to the auditor or investigator that the nonprofit’s mission is critical, that it is doing its best to comply with governmental requests, and that an unnecessarily broad probe will actually interfere with the charitable mission and hurt the public interest.
Thus, when faced with an audit or investigation, nonprofits should resist the temptation to reorient the entire organization towards fighting the government, and calmly develop an effective responsive strategy. Here are some of the elements that you should consider in developing the organization’s response:
- Get a lawyer: An experienced attorney can help an organization mitigate its risks and free its executives up to minimize their distraction. If possible, engage a lawyer experienced with audits, investigations, and government contracts; and, ideally, counsel familiar with the particular government agencies involved. A lawyer can evaluate legal options and do the heavy lifting of interacting with the government, negotiating the scope of the inquiry, reviewing documents (to protect attorney-client privilege and identify responsive materials), and coordinating the overall response. Outside counsel’s involvement may help ensure that communications with auditors and investigators remain calm, composed, and professional. A lawyer can also help the organization ensure that its responses to governmental inquiries are clear, accurate and understandable to those outside the non-profit’s field.
- Check your insurance policies: Some insurance policies cover the legal expenses of responding to certain government investigations. For example, an insurance carrier might cover fees incurred in complying with a judicial or administrative subpoena (sometimes called civil investigative demands, or CIDs, when an agency is investigating potential violations of a statute, like the federal False Claims Act. New York State and New York City have their own false claims acts, and the costs of responding to state and local agencies might be insured.
- Determine the nature and scope of the inquiry: Much will depend on understanding the government’s goals. The nonprofit may simply be one of many entities under routine audit; or, the organization may be the target of a criminal investigation. The government’s intentions may also evolve; and those intentions may be kept secret. A routine audit may mushroom into a civil or criminal enforcement proceeding. Similarly, the breadth of the inquiry may widen or narrow over time. A narrower investigation may sometimes be more manageable as the distractions might be more limited, but it may sometimes signal a high degree of tightly-focused law enforcement interest. With that caveat, the organization will often benefit if the scope of the review can be whittled down to a discrete set of issues pertaining to a small time period.
- Circulate a document retention notice: As soon as you learn of a governmental inquiry, you should instruct all potentially affected employees to preserve relevant records and suspend any document destruction systems. In many cases, the organization will already be subject to contractual document-retention obligations. Even if that’s the case, a written document retention notice (sometimes called a “litigation hold”) will reduce the risk that the organization will be accused of destroying evidence and help to illustrate that the nonprofit has nothing to hide.
- Notify the board and external auditors: In most cases, the not-for-profit’s chief executive should inform the organization’s board of any governmental audit or investigation. Executives typically initiate that process by contacting the chair of the board’s audit committee. It’s usually also wise to notify external auditors, such as a firm performing the “single audit” that may be required under federal law, and to keep in mind the governmental inquiries and any related allegations or findings when signing the “management letter” requested by the private, external auditors.
- Consider internal reviews and remedial actions: When the government begins asking questions, introspection can be useful. It’s often wise to seize the moment to review whether the organization has sufficient integrity measures in place. With the guidance of counsel, the nonprofit should consider the risks and benefits of engaging a third party to conduct an operations review or internal investigation. Often, this can lead to the implementation of remedial measures that strengthen the institution and prove to the government that its leaders strive to act in the public interest.
- Watch out for disclosure requirements: Once you know that your organization is under audit or investigation, be particularly vigilant in reviewing the disclosure forms that you might have to submit to government contracting agencies, lenders, and business partners. Many disclosure systems, such as the City of New York’s Procurement and Sourcing Solutions Portal (PASSPort) and the State of New York’s VendRep System, include questions about certain investigations. Draft disclosures with care to ensure accuracy and, where possible, control the narrative to truthfully reveal positive steps taken by the nonprofit to strengthen its internal controls and integrity.
- Evaluate subpoena risks and benefits: It’s usually better to work out a positive, cooperative relationship with the government employees who are asking for documents and information. If you force the government to issue subpoenas, you’ll likely face even broader inquiries, and even inadvertent non-compliance with a subpoena can be dangerous. Of course, there might be benefits to producing documents in response to a subpoena, such as where the information sought is highly confidential.
- Identify witnesses and consider getting them counsel: If an investigation will involve government interviews of the nonprofits’ employees or former employees, it will usually benefit the organization to ensure that those witnesses testify truthfully and accurately. Typically, this can best be achieved by ensuring that they have counsel, since a lawyer will usually advise witnesses to tell the truth and avoid the careless, inaccurate speculation that can lead to misunderstandings and incorrect conclusions. It’s often best for the organization to work with the government to identify the witnesses, connect the investigators to the witnesses’ counsel (whose fees are often paid for by the nonprofit), and help ensure that each employee witness gets the paid time off needed to prepare for and attend the government interview.
- Review your contract: As soon as an audit or investigation pertaining to a government contract begins, the organization should read the contract, and repeatedly return to its language as the governmental review proceeds. Counsel should run through the contract with a fine-tooth comb so that the nonprofit can clear things up for the government if there are misunderstandings about the scope of the organization’s contractual duties.
- Beware of questionable contract payments: If the organization determines that it has received or is receiving payments to which it may not be entitled, it is generally wise to take remedial actions to protect its institutional integrity. Indeed, in some instances, the nonprofit may have a legal obligation to return improperly-received funds to the government. The organization should consider reviewing its accounts and returning or (if lawful) segregating suspected overpayments.
- Don’t obstruct the investigation: Most importantly, a nonprofit should avoid actions that might be interpreted as “obstruction.” While governmental reviews, which are often protracted, can be devastating to a nonprofit’s operations, the best response is usually carefully-managed cooperation. The obstruction of an investigation will likely lead to disastrous results.
In most instances, nonprofits can minimize the burden of a government audit or investigation by remaining professional and working with counsel to cooperate with the government. In some situations, the shift in organizational focus triggered by the government’s intrusion may even lead to positive, self-directed internal reviews and improvements. You don’t have to celebrate the arrival of government auditors or investigators, but their knock on the door need not derail your mission.