What is 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.
If you are not regularly looking at your legal situation in the key operational areas of your business, you could be unnecessarily exposing yourself to legal risk and missing major threats to your financial security or major assets that you were unaware you had.
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 on the front end.
Our firm has years of experience handling complex business matters. 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, as well as state and federal corporate law allows us to make actionable recommendations that help you avoid potential future legal problems.
A legal audit is an incredible source of knowledge. It helps expose hidden risks and unmasks hidden assets or revenue sources. Avoiding a legal audit before you attempt to sell your business can have disastrous consequences on your sale during the due diligence period. 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.
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.