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The Monthly Blend
April 2006
Differences between Governmental and For-Profit Financial Reporting 
From time to time, the question is raised as to why state and local governments cannot apply the same set of accounting standards that for-profit enterprises apply. A white paper released by the Governmental Accounting Standards Board explains why separate standards for governments are needed. It also illustrates some of the differences between standards for governments and those for business enterprises and explains why the process of standards setting for governments is an ongoing process.
According to the white paper, the primary purpose of governments is to enhance or maintain the well-being of citizens by providing services in accordance with public policy goals. In contrast, for-profit business enterprises focus primarily on wealth creation, interacting principally with those segments of society that fulfill their mission of generating a financial return on investment for shareholders. The white paper cites several other crucial differences that generate user demand for unique information:
- Governments serve a broader group of stakeholders, including taxpayers, citizens, elected representatives, oversight groups, bondholders, and others in the financial community.
- Most government revenues are raised through involuntary taxes rather than a willing exchange of comparable value between two parties in a typical business transaction.
- Monitoring actual compliance with budgeted public policy priorities is central to government public accountability reporting.
- Governments exist longer than for-profit businesses and are not typically subject to bankruptcy and dissolution.
The white paper concludes that individuals and organizations who are interested in the financial performance of state and local governments have substantially different information needs than those who follow the financial performance of for-profit entities. The white paper is available in full at http://www.gasb.org/white_paper_full.pdf.
Published in McGladrey & Pullen's Insights which is a biweekly publication and should not be construed as accounting, auditing, consulting or legal advice on any specific facts or circimstances. The contents are intended for general information purposes only.
For more information about this article, please contact Brett Holt, CPA at 256-533-1720 or via email bholt@beasonnalley.com. Employee Releases: A Tool Federal Contractors Can Use To Protect Themselves Against False Claims Act Liability
Submitted by: Courtney Edmonson
False Claims Act Whistleblower or qui tam actions under the False Claims Act pose a continuing concern to federal contractors, with many contractors arguing that the act imposes high penalties for innocent mistakes and provides an incentive to litigation by disgruntled employees or former employees. In some cases, contractors say they retain unsatisfactory employees rather than risk meritless but expensive lawsuits.
However, recent developments in federal case law suggest that requiring terminated employees to sign releases of claims at the time of termination can, at least under some circumstances, provide contractors and other employers some protection.
This analysis discusses two district court cases that cast new light on this issue, and makes recommendations concerning steps contractors might take to reduce liability risk when effecting the separation of an employee who may be a whistleblower.
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*Catherine Kunz is counsel in the Government Contracts Group of Crowell & Moring, Washington, D.C., and Jody Goodman is an associate.
In this age of frequent and extensive employment litigation, employers that are terminating an employee sometimes offer severance packages that include monetary compensation for the terminated employee in exchange for the employee's agreement to release claims he or she might have against the employer. While this tactic might work well for certain types of claims employees have against employers or former employers, it has had only limited effectiveness with respect to qui tam actions brought against employers by former employees under the False Claims Act. However, recent decisions indicate a possible shift in the law that may foretell greater success by federal contractors and other employers in using releases to bar False Claims Act qui tam actions by former employees.
A number of employers have tried to mitigate their potential exposure to claims by former employees by crafting releases from liability as part of a severance deal. A release might read:
[Employee] releases [employer] from all actions, causes of actions, suits, trespasses, damages, judgments, extents, executions, claims, and demands whatsoever, in law, admiralty or equity, known or unknown, that [employee] now has or at any time heretofore had or held against [employer] by reason of any matter, cause or thing whatsoever from the beginning of the world to the day of the date of this release.
Until recently, courts have generally been reluctant to uphold releases of employees' rights to bring False Claims Act actions. Judges voiced public policy concerns that inhibiting the pursuit of qui tam cases would subvert the purpose of the False Claims Act. For example, in United States ex rel. Green v. Northrop Co. , the Ninth Circuit held that if a release were enforceable, the government might never learn about the relator's allegations of fraud.1 Green has served as the guidepost for courts that have held releases invalid over the past ten years.
New Possibilities for Enforcing Releases
However, several district courts have recently taken notable steps away from the Green holding and dictum, which open up possibilities for enforcing releases, at least under certain circumstances, to prevent former employees from bringing qui tam suits. One recent case, United States ex rel. Whitten v. Triad Hospitals, Inc. ,8 went a step further than Hall, affirmatively stating that where the government has declined to intervene in a False Claims Act action, public policy favors the enforcement of release agreements. Another recent district court case, United States ex rel. Jimenez v. Health Net Inc., 9 held that when an employee signs a release stating that he or she has not filed an FCA claim, and that statement is false, the release may be upheld, since the employee breached the terms of the agreement.
Considerations for Contractors Using Releases
While releases are still not guaranteed to prevent former employees from bringing qui tam actions, employers that wish to use releases should consider the following information when crafting the language of the release:
- A departing employee should be required to represent in writing that he/she is not aware of any violations of the law by the employer, or to specifically state in writing any possible violations of which he/she is aware.
- The language of a release should expressly articulate that it covers False Claims Act actions.
- The release language should also require the employee to state whether he or she has already filed a False Claims Act action against the employer.
- The release should contain a provision that nothing contained therein shall prohibit the employee from reporting misconduct to the appropriate governmental authorities.
If a qui tam action is subsequently brought by a former employee who has signed a release, the government will almost certainly argue that any such release is void for public policy reasons. If the government has chosen not to intervene, the employer may respond that the government's decision not to intervene negates the government's argument and constitutes grounds to enforce the release. Releases will be more difficult to enforce in cases where the government has not had the opportunity to investigate the relator's claims.
When confronted with an unhappy employee who may be a qui tam relator, employers should bear in mind that most qui tam relators are not driven by personal financial interests; they are driven mainly by moral outrage at a perceived wrong. Potential relators are often very loyal to their employer, and will therefore be willing to execute a release if the employer's allegedly fraudulent conduct is cured. Indeed, employers might consider asking an employee to release his or claim to monetary compensation - either directly or indirectly - from a qui tam suit, rather than releasing the employer from the claim itself. This would relieve the employer of some financial exposure, though of course the government would still be free to pursue financial recovery from the company.
Though qui tam litigation is always a concern for employers, well-written releases and thoughtful handling of employees' complaints should minimize liability risks. Companies should ensure that they have effective compliance programs in place, and should respond in a meaningful way to employees' reported concerns. If an unhappy employee ends up leaving the company, a well-written release should probably be part of the severance picture.
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1 59 F.3d 953, 962-69 (9th Cir. 1994).
2 1995 WL 626514 (M.D. Tenn. Sept. 14, 1995) ("This Court agrees with the Ninth Circuit [in Green ] that enforcement of release agreements that include claims against an employer under the FCA would subvert the purposes of the Act.").
3 937 F. Supp. 1039 (S.D.N.Y. 1996) (citing Green for the proposition that if the release were enforceable, Congress's intent to deter fraudulent activity would be effectively diluted).
4 183 F. Supp. 2d 1272 (D. Colo. 2002) ("[E]ven if the release encompasses Bahrani's qui tam claims, it is unenforceable for the public policy reasons stated in Green .").
5 104 F.3d 230 (9th Cir. 1997).
6 104 F.3d at 233.
7 Id.
8 2005 U.S. Dist. LEXIS 26208 (S.D. Ga. Oct. 27, 2005).
9 2005 WL 2002435 (D. Col. Aug. 19, 2005).
10 2005 U.S. Dist. LEXIS 26208 at *8.
11 Id. at *9.
12 Id.
13 Id. at *15
14 Id.
15 2005 WL 2002435 at *2 (emphasis in original).
Written by: Catherine Kunz and Jody Goodman
For more information about this article, please contact Courtney Edmonson at 256-533-1720 or via email at cedmonson@beasonnalley.com.
Coffee Talk
Welcome to Suzanne Williams who has joined our Administrative Team. Suzanne will be assisting in the areas of Individual Financial Services and Business Valuations.
Darryl Walker and Scott Butler are scheduled to present "Can Your Accounting System Pass a Government Audit?" to NCMA members in Atlanta, Georgia on April 12, 2006.
Beason & Nalley will be an exhibitor at the NCMA World Congress Exhibit in Atlanta, Georgia from April 9, 2006 through April 11, 2006.
Beason & Nalley has been nominated for the Annual Family Friendly Award which is sponsored by the Huntsville Chamber of Commerce.
Beason & Nalley will host the introductory session on Tuesday, April 18, 2006 for the Financial Planning Certificate Program. The UAB School of Business will offer this instructor-led program in Huntsville beginning on May 2, 2006.
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