Legal Audit & Risk Assessment – Help Prevent Legal Issues And Reduce Potential Legal Risk
Our legal audit services can help keep you from being surprised by legal issues down the road and limit your exposure to a variety of different legal risks.
Because we have handled a wide range of different corporate legal matters we have had the opportunity to observe up close what kinds of issues lead to expensive litigation situations when not handled properly up front.
Our firm has years of experience handling complex business litigation. We understand what the most common triggers of commercial litigation are, how to identify them early on, and how to mitigate potential risks.
Our extensive knowledge of business best practices, state corporate law, and federal corporate law allow us to make actionable recommendations that help you avoid potential future legal problems.
What is a Legal Audit?
Just like a financial audit will look beyond your balance sheets and into your accounts and transactional data, a legal audit examines your company’s policies, procedures, filings, and documents to assess your legal health.
A legal audit will focus on a single operational area of your business and deeply analyze your legal position. While a financial audit is designed to make sure you are not leaking money or missing financial opportunities, a legal audit is designed to make sure you do not have any hidden legal risks lurking in your file cabinets that could put your company at legal risk for fines or litigation.
A legal audit goes beyond mere compliance issues. It also makes sure you are taking full advantage of your legal position as it relates to your vendors, customers, and competitors.
Generally, a legal audit will focus on a company’s overall legal health. In which case, they are often compared to physicals for patients or tune-ups for cars.
But, depending on the company, they can also focus on a single specific area of concern. In which case, a legal audit is more like a stress test you might take to make sure your heart and respiratory system are in good shape.
Some companies have regular have legal audits of their most sensitive areas of operation or the parts of their business where there is traditionally a high degree of legal risk.
How Does a Legal Audit Work?
Often when people picture a legal audit they imagine teams of lawyers in suits marching around with boxes of documents. But, a legal audit isn’t a raid. The best legal audits are unobtrusive. They do not interfere with the day-to-day management of your company.
Companies in heavily regulated industries will need legal audits that go into greater depth than lightly regulated industries. By the same token, a company that has grown quickly or has merged with another company will also need a more in-depth legal audit. Additionally, the scope of a legal audit will also depend on the size and complexity of the company.
Smaller Less Complex Companies
For smaller to mid-sized companies whose structure and business operations are fairly straight forward our attorneys will conduct a detailed legal evaluation of:
• Organizational structure
• Company assets
• Human resource policies, employee handbooks, applications,
• Contracts: employment, vendor, sales; as-well-as any other contracts or legal agreements and documentation
• Non-disclosure and non-compete agreements
• Review of trademark and copyright registrations as-well-as licensing agreements
• Shareholder, operating and joint-venture agreements
• Review commercial property and equipment leases
• Review current and past litigation
• Types of insurance and coverage
• Compliance with industry specific regulations
Larger More Complex Companies
For larger, more complex, companies, the first step is determining what area or areas of your operations should be audited. During this step the scope and goals of the audit are identified. The scope of the audit will be based on your industry, past legal issues, and the length of time since your last legal audit.
After the goals and scope of the audit have been agreed upon, the attorney in charge of the audit team will submit an audit plan for your company to review, comment on, and approve. The audit plan will provide a framework that helps you know what to expect and helps focus the efforts of the audit team.
After the plan is approved, the actual legal audit will commence. The audit team will submit questionnaires and Requests for Information (RFI) to specific departments and individuals identified in the plan that may have specific, relevant knowledge or access to key documents. The audit team will also interview some members of the organization.
After collecting all of the requested information, the audit team reviews the documents, questionnaires, and interview responses. Next, the audit team prepares a preliminary report of its findings and presents these to the company.
Sometimes the initial findings will trigger additional questions and may lead to another round of information gathering. This second round is narrower and focused on specific issues.
Lastly, the audit team will present its final report complete with any recommendations for action.
Why Should Your Company Have a Legal Audit?
The most valuable commodity in business is knowledge. The more you know about your company, your competition, and your customers the better poised you are to quickly adapt to changes in the marketplace to capitalize on opportunities.
A legal audit is an incredible source of knowledge. It helps expose hidden risks and unmasks hidden assets or revenue sources. A legal audit helps you better understand the reality of your legal position. Once you have that knowledge you are able to take the appropriate action.
If you decide not to have a legal audit it is like deciding to fly a plane without using radar. You lose an important early warning system and put all of your faith in your ability to react properly in the heat of the moment when there is no room for error.
Identify Compliance Issues Early
For most companies, the biggest benefit of a legal audit is discovering compliance issues before they are discovered by regulators, or exposed by expensive litigation. Once compliance issues have been identified they can be addressed to avoid future penalties.
Occasionally, significant malfeasance or dishonest practices are uncovered that upper levels of management had no clue about. A legal audit can lead to the ending of these practices and the creation of new procedures to safeguard against future recurrences of the same issues.
An audit may also identify actions or issues that put the company at risk for litigation. The most common example of this is in the area of human resources. Employee issues relating to discrimination or harassment that are not dealt with promptly and appropriately could end up costing the company millions of dollars. But, if these issues are discovered as part of a legal audit, the company has an opportunity to make amends to harmed employees privately.
Discover Additional Value
However, audits are not all about risk mitigation. Legal audits can have a positive impact of the revenue side of the business as well. When legal audits focus on contract reviews, procurement policies, or intellectual property, it is not uncommon for an audit team to discover potential revenue streams or assets that the company was unaware of.
For example, the company may have been giving away valuable intellectual property as a matter of routine instead of seeking to license the intellectual property to customers. The company may also have missed some cases of copyright, trademark, or patent infringement that are clearly actionable.
Audits may also uncover settlements from class actions against utilities or carriers that the company has unknowingly failed to collect on.
What Should Be Audited And How Often?
While every business is different, here are the areas that most benefit from legal audits:
• Government contract compliance
• Human resources
• Intellectual property
• Corporate structure
While all legal audits will follow the same general process, audits of different areas will often have different goals. For example, a government contract compliance audit and a human resources audit will be heavily focused on risk mitigation. A securities audit or a litigation audit will often focus on making sure due diligence procedures are in place, and developing processes to make sure existing legal processes are as efficient as possible.
Depending on your size and type of industry, you may also want to conduct regular legal audits of your antitrust compliance, IT and software security and compliance, and environmental compliance.
Most companies should have a legal audit in one or more major areas of their business every three to five years. However, if you have recently encountered a major issue that led to litigation or some type of regulatory action, a legal audit may be needed to make sure there are no other potential landmines hidden in your files or processes.
What Happens After a Legal Audit?
The real value of a legal audit is less in what is discovered, and more in what your company does with the audit results. As part of the audit, the audit team will present a list of findings and recommendations.
It will be up to the board and the management team to decide on how to handle the recommendations. The firm that performed the audit may be called back to perform follow up work as it relates to implantation of the recommendations.
Management should calendar the date of the next audit as part of the post-legal audit workflow. This helps establish a regular pattern of audits that help the firm make sure it is taking full advantage of its assets and is doing everything feasible to mitigate risk.