Is it time for your legal audit?

January 31, 2015
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Standard maintenance is something we all experience. Our cars need an oil change every three months, and the tires should be rotated every 12,000 miles. In our homes, the furnace filter needs to be changed every couple of months, and the lawn needs to be mowed every week or so. However, the concept of standard maintenance does not stop with our cars or homes.

For business owners and managers, it is also important to consider the areas in which the business may need a “tune-up.” One tool managers can use to assess the health of their businesses and ensure the business is being properly maintained is a legal audit.

What is a Legal Audit?

Broadly speaking, an audit is a third-party examination of an entity’s data, processes or records. A legal audit involves a review of a business’s corporate documents and records, operations and management procedures and strategic plans and goals.

The goal of a legal audit is to identify unseen or potential legal risks and liabilities and establish an action plan to mitigate or temper those risks. A legal audit generally starts with a questionnaire or form that management completes, detailing basic information about the business and its structure. Next, an audit team meets with management to discuss the questionnaire, gain an understanding of management’s goals and strategic plans for the business, and determine an appropriate scope for the audit activities.

The audit team then works with management to complete the audit and generates a report detailing risk areas and potential liabilities for the company and an action plan for management with steps to ensure identified risks are reduced or mitigated.

Areas of Review

Every legal audit is tailored to meet the individual needs of the particular business being audited. However, the following is a list of the areas typically assessed during a legal audit:

Organizational Structure: Analysis of the business’s entity and review of its corporate documents including by-laws/operating agreements, articles, shareholder/member resolutions, etc.

Human Resources Documents: Review of employment policies, handbooks, and contracts to ensure compliance with federal and state employment laws.

Contracts: Analysis of common business contracts, including vendor agreements, licensing agreements, equipment and real estate leases.

Safety and Environmental Concerns: Review of workplace safety and environmental compliance policies.

Intellectual Property: Analysis of the business’s trademarks, copyrights, patents, trade secrets, etc. to ensure the assets are properly registered and protected from infringers

Additional Topics: Auditors may also analyze pending litigation, marketing methods, hiring and firing practices, product liability issues, collection practices, securities law compliance, etc.

Why Should this be Done?

There are a number of reasons a business should consider a legal audit.

First, a legal audit can help ensure that a business is in compliance with state and federal laws and regulations. The regulatory environment is increasingly complex and can be challenging for even the most seasoned managers to navigate. A legal audit can ensure that a business avoids penalties and other costs arising from non-compliance by addressing areas of non-compliance before the business is penalized.

Second, a legal audit can assist a business in identifying operational risks that, if left unchecked, lead to detrimental contract terms, expensive litigation, or personal liability for directors or managers.

Finally, a legal audit can help a business clean up or update its internal operating structure and procedures. Business owners and managers often get bogged down managing the day-to-day issues and challenges. The result is that some of the simplest tasks get overlooked.

One of the ways a legal audit team can help is by knocking off some of these tasks from the “to-do” list, like organizing annual meetings, preparing shareholder resolutions, or assisting in updating the employee handbook.

A legal audit is a tool designed to help managers ensure the business is in good health and operating with as little risk as possible.

If it has been some time since someone has reviewed your corporate documents, revised your standard order forms or contracts, or analyzed your operational procedures for potential risks, then this may be a great time for you to schedule a legal audit for your business.

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