Legal Audits are Valuable for Successful Businesses

What is a Legal Audit

Audits examine chosen issues, processes or areas. The company’s documents, practices, and activities in these areas are thoroughly, inspected to determine if the business operations are in compliance with existing local, state, central, and international laws and regulations.

The legal audit and subsequent analysis will evaluate the company’s current and future legal issues in light of the company’s needs and industry standards.

The complexity of the audit will depend on your company culture, your industry, and your growth objectives and lifecycle, the number of shareholders, employee population, and other factors.

Each audit is unique and must be based on the factors unique to the company and the audit subject. After the audit is complete, an Audit Report will produce specific recommendations. Some or all of the recommendations can be quickly, implemented.

How a Legal Audit Works

The scope of legal audit is based on past company legal issues, your regulatory environment, the operational area involved, possible future legal issues, and common legal problems in your industry.

The attorney will create a draft Audit Plan for review and comment by the company. The attorney and senior management representatives should then discuss the draft Plan.

After the Plan is agreed, the attorney will create a questionnaire and Request for Information (RFI) and distribute these to people knowledgeable of the involved area.

The Questionnaire will cover a myriad of topics and will request that documents be submitted for review by the audit team. The documents and responses will then be reviewed by the audit team.

Next, the attorney will analyze the information. The initial findings will be presented to company executives and your advisors (e.g., your accountants). The company’s first responses may lead to another round of inquiries.

However, if the answers are fairly straightforward, only one round of inquires can be satisfactory. After the review is complete, the attorney will analyze the findings and generate recommendations. This will be contained in an Audit Report.

The Report will state whether (and how) the company is out of compliance with the laws. Important consideration will be given to how the audit team describes the problems in the Audit Report.

After the Audit is Complete

After the audit, please maintain your improved procedures and compliance systems. To do this effectively, you need to ensure the new systems are ingrained in your company’s operations. You will also need to periodically review these systems.

Benefits of a Legal Audit

The most important benefit of a legal audit is to reduce the company’s potential legal liabilities. A successful audit will show companies how to fix procedures and policies before their practices result in lawsuits or even criminal penalties.

Successfully implemented audits will improve the functioning of the area which was audited.

A legal audit helps companies remain compliant with existing laws. Both central and state governments heavily regulate modern businesses and can impose heavy, Draconian penalties for non-compliance.

Finding these noncompliance problems and fixing them early will reduce your company’s losses. The audit also sets the stage for an environment of ongoing compliance.

When Should You Conduct an Audit

The earlier problems are discovered, the less costly it is to resolve problems. Your last audit can give you guidance as to when you will need your next audit. If
you have never conducted a legal audit, now is a good time for an audit.

The risks of legal non-compliance are that undiscovered problems can have a significant adverse impact on the company and its owners. These risks include:

  • Possibly resulting in owners having personal liability for debts of the company.
  • Losing intellectual property and competitive advantage if employees or vendors/suppliers do not sign Confidentiality Agreements or if customer lists aren’t protected.
  • Fines, penalties or even closure of the business on failure to obtain or maintain permits or licenses.
  • Contested proceedings with agencies
  • Liability from the Central and State government or from ex-employees
  • Litigation can become more costly and less easy to settle.
  • The company could be debarred from providing goods or services to Central or state governments

Key Operational Areas to Audit

Legal audits can address many different areas:

  • Contract Compliance
  • Human Resources/Employment
  • Intellectual Property


A legal audit is good business practice and the risks of not conducting an audit are too high to ignore. Conducting an audit is more than beneficial- it is necessary. Not only can future legal costs be reduced, but a legal audit can also reveal unknown business opportunities.

Overall, a legal audit can help a business achieve its goals with the least risk to its owners or shareholders.

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