A well-known non-profit listserv recently received a question about record-retention policies for “small” non-profits. One consultant responded with the solution she offers to her clients: Each year put all your documents in a box on a shelf in your store room. At the end of the first seven years, throw out the contents of the oldest box. Repeat the process annually, sliding the boxes down the shelf.
While well-intentioned, charitably speaking, this advise is...
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addresses question of document destruction under Sarbanes-Oxley. You should buy
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“unwise.” It is rooted in the incorrect notion that “small” organizations should be excused from burdensome and expensive administrative procedures because there is no value to that wasted effort. The far more appropriate response: If an organization is unable to take actions that are legally required or sound from a control standpoint, it should seek a merger partner or transfer its assets to another charity.
Back to document retention policies. Everybody is looking for that magic number—in the consultant's case, seven years. Here are some reasons there isn’t a magic number.
A. As we were just reminded in this week’s Supreme Court decision in the document destruction case involving Arthur Andersen, there are obstruction of justice statutes. While Arthur Andersen’s criminal conviction was overturned by the Supreme Court, this statute is still on the books and is still good law. Sarbanes-Oxley added a new document destruction statute to the obstruction of justice arsenal. It is in some respects broader than the statute involved in the Andersen case. Moreover, while there may be debate as to when exactly an organization must cease destruction in the case of a criminal investigation, there is no question that if an organization receives a subpoena, document destruction activities need to cease. The consultant’s policy, at least as stated on the listserv, does not adequately take into account obstruction of justice issues. And people do go to jail for violating these statutes.
B. There are also sanctions in civil proceedings for destruction of documents once there is some indication that the documents may be relevant to the litigation. For example, the judge may instruct the jury that they are allowed to draw unfavorable inferences from the destruction.
C. Setting aside court proceedings, documents have value to organizations. Is this consultant advising her clients to:
- Dispose of real property deeds?
- Dispose of satisfactions and releases of mortgages, which may be good things to have when properties are sold?
- Dispose of records that OSHA requires to be maintained for thirty years, documenting employee exposure to toxic chemicals? That requirement might not be relevant for many non-profits, but it certainly could be relevant to a medical research organization.
- Dispose of basic contracts that may include extended warranties or which may be subject to a ten-year statute of limitations? What about construction contracts, where the law might provide rights for latent design defects discovered many years after construction is complete?
- Dispose of asset purchase records for depreciable property used in an unrelated trade or business?
- Dispose of the organization’s Form 1023, which the organization is required by law to furnish to members of the public on request?
- Dispose of information that supports its entire accounting system?
- Dispose of insurance policies written on an occurrences basis?
- Dispose of client medical or treatment records?
- Dispose of board meeting minutes or articles of incorporation?
We hope this list of examples makes the point.
D. An organization can dispose of documents not required to be held beyond a certain period of time if the organization has a document retention policy that is applied on a regular and consistent basis (subject, of course, to a litigation suspension policy). Given the prevalence of employment practices litigation, why wouldn’t an organization want to avail itself of the opportunity to dispose of employment-related records that are not required to be held seven years?
E. The consultant’s document-retention policy is much too paper-centric. What about information on hard drives? What about all those e-mails stored on computer-storage tapes and servers?
F. The consultant’s document-retention policy assumes that only one copy of a document exists. What about the copies that Fred made? If your are routinely disposing of documents pursuant to a bona fide record retention program, you need to address copies that others may have made.
Of course, this consultant is going to claim that she only advises small social services agencies, such as organizations serving children. True, these agencies may not have UBIT problems. But in 14 years, how is her client going to respond when a former seven-year old brings an action in tort against the agency alleging that the agency did not take adequate precautions when it hired that counselor who raped or molested the kid? Where are the background checks? Where are the checklists and timesheets that show counselor monitoring? Where are the counselor's reviews? Where is there proof that the seven-year old was even enrolled in the agency's programs? All that stuff was in Box Number 2, the contents of which have since been discarded twice as part of the seven-year cylce.
The consultant’s entire concept of records assumes records are a costly nuisance, with no value to the organization. The consultant may want to review a number of publications put out by the Association of Record Managers and Administrators (ARMA) which provide an excellent framework for assessing the value of particular classes of documents to an organization.
We simply disagree with this “back of the envelope” approach to document retention. And we are tired of hearing about the “small” non-profit. A charity , its officers, and its board—big or small—have oversight duties with respect to the organization’s assets and mission. If the charity and the people involved with it are unable to exercise this oversight because of limited resources, then they need to get out of the charity business. We have no doubt that this consultant will disagree with us on this point, arguing that ours is a theoretical response. It isn’t. Document retention policies pose very real and difficult legal issues that are best addressed by someone with legal training.
Nobody has a right to take charitable dollars without having some minimum level of internal controls in place. In short, everybody is for good governance and internal control when the scandals hit the front page of the newspaper, but far fewer are actually willing to step up to the plate and pay the price of good governance and controls.
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THE
FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL
ADVICE IS REQUIRED, THE NON-PROFIT OR OTHER PARTY IN QUESTION SHOULD
SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
