The business environment is getting more complex by the day with regard to the legal implications of transactions and relationships between companies and other stakeholders in the society. The emergence of an integrated global economy and international trade have in turn increased the rights and duties owed by the company to those more traditional ones. The responsibilities of a company and its leadership have widened from the traditional one to shareholders to a more diverse duty to the employees, consumers, suppliers and distributers, to the government and to the foreign governments in countries where the company operates or its products are sold.
The emergence of labor relations, environmental protection issues, consumer protection regime and the intergovernmental relations have brought about consciousness of rights and regulation of businesses compliance of which is required in most cases as a matter of law. This has resulted in a more complex legal regime in which the regulators in the society impose heavy fines and stringent measures, such as criminal prosecution, for non-compliance with the laws and regulations in place to the financial detriment of the company.
These transactional and contractual complexities require qualified, well-balanced and focused legal input so as to come up with remedies and preventive mechanisms to shield the company from possible legal conundrums by maintaining its legal health. Therefore, it is vital that the companies conduct legal audits to ensure the compliance with the laws and policies so as to prevent or minimize the risk of litigation.
What is a Legal Audit?
A legal Audit is a systematic review of the company’s transactions, contracts and practices to establish its legal status, identify potential legal problems and help minimize its legal liability. It involves inspections of the company’s activities to establish their compliance to its constitution, the national and the international laws as the case may be. A legal Audit seeks to establish the adherence to all laws, rules and regulations that are applicable to the company in undertaking its objectives.
Who does it?
A legal audit is done by a lawyer who may be an in house counsel or an external lawyer. The benefits of it being done by an in house counsel is that he already knows the internal processes and therefore will save time. However, it is more advisable to have an external lawyer to do the audit so as to bring in a new perspective of the processes.
It is also advisable to bring in a lawyer who is a qualified advocate so as to be covered under the advocate-client privilege and also so that incase there is an additional transaction or litigation work to be pursued he has the capacity to undertake it without putting the company in a further legal abyss. The advocate-client privilege will be vital in safeguarding the company’s information, documents and communication revealed to the lawyer so as to avoid their being used in litigation against the company.
When is it done?
The instances or intervals within which a legal audit ought to be done will depend on the particular company concerned. Several factors will guide the decision such as the size and structure of the company, the complexity of the industry or the transactions and the frequency in the change of laws and policies in the sector. However, the audit should be done periodically and with guidance as to the company’s last audit.
It is also advisable for a company to order a legal audit immediately a board or a management team is dismissed and a new one is appointed. This should be done especially if the previous board is accused of past legal improprieties or questions have been raised on the company’s legal position.
What does it involve?
The conduct of a legal audit is normally focused on compliance to existing laws and policies. This may be with regard to the whole company, especially if a legal audit has never been done before, or it may be focused on a certain set of transactions, law or policy as the management will decide or focused on the company’s potential problem areas with the lawyer’s advice.
Every audit is usually unique based on the company, the transaction or subject to be audited or the lawyer undertaking the audit. However, one thing that stands out is that thelegal audit is usually required to evaluate the company’s current andfuture legal issues in light of the company’sneeds and industry standards and to come up with effective solutions for the organization.
Generally, the lawyer comes up with an Audit Plan which is discussed with the management and approved. Once approval has been obtained, the lawyer comes up with a questionnaire which is submitted to the company’s employees with the relevant knowledge for answers and also requests for documents to be submitted for review. The Lawyer then reviews the company’s transaction files and processes either randomly selected as is done in the accounting audits or the whole files with regard to the subject which is normally based on the complexity of the audit.
The Audit may focus on various subjects including the form of business organization that is most suitable, review of taxation law compliance, review of Intellectual Property issues and use of internet, Human resources and employee benefits, ongoing and threatened lawsuitsand Corporate Governance which is currently an important requirement when dealing with international investors and doing business in some of the developed countries among others.
If the Lawyer requires any clarification as to the documents submitted or answers given he may interview the employees either by phone or in person. The Lawyer will thereafter come up with an initial list of findings which will be submitted to the management for their feedback. After this the lawyer will analyze the findings and come up with recommendations which will be included in an Audit Report stating whether the company is compliant or not.
A written Audit Report is then issued and personal training sessions with the relevant employee carried out, if possible, with the aim of addressing the specific issues uncovered and promoting the best possible practices within the company.
Why is it important?
The main benefit of carrying out a legal audit is to identify the company’s legal liabilities and risks beforehand and come up with a way of averting potential lawsuits and penalties. This is a sure way of saving the company’s money in litigation costs and other unnecessary expenses. The audit also examines the company’s contractual position with its employees, customers and other players such as insurance and proposes possible remedies if potential problems are identified. In such a case it will go a long way in averting personnel problems as the lawyer conducting the audit can review and suggest updates in the company’s contract and policies so as to avoid issues such as unfair labor practices, discrimination and sexual harassment.
It also helps the company become or remain compliant with the laws and policies in place as it exposes the laws that have not been complied with and provides for ways of complying with them thus safeguarding the company’s legal position. It fosters observance of rules and regulations in place, especially in a regulated industry, thus saving the company money that would be spent on the settlement of hefty fines imposed as a result of their breach.An example is with regard to the burgeoning environmental laws and policies coupled with strict regulators where such an audit will help the company to be steadfast in complying with the complex area of law. This also results in enhanced compliance reputation which is a sign of quality.
A legal audit is also an opportunity to update the company’s records, registrations, and licenses with a view to promotingits rights and legal position.Once the employees and the management have been trained on the compliance issues it will lead to improved internal processes and systems. It can also focus on such issues as the company’s tax requirements with a view to establishing the company’s position and finding ways of lessening its tax liabilities.
It also demonstrates that the company’s directors and management have carried out due diligence with regard to the activities undertaken thereby minimizing their exposure to personal liability.
The consequences of failing to comply with the laws and policies are grave and costly. Some of them include the revocation of licenses, legal action against directors for breach of trust, fines being imposed against the company, losing existing tenders and the company being involved in ultra vires transactions which may occasion the directors being personally liable.
A legal audit is vital for any company and will go a long way in helping to avoid unnecessary losses and penalties that might lead to the business suffering unnecessary costs or at the extreme closing up. It will enable a company to achieve its objectives with minimal risk to its management, employees and shareholders. Kenyan businesses should, therefore, embrace the idea of a legal audit as it is a sure way of minimizing the potential exposure of the company to lawsuits and penalties.
Collins Bush Wanjala
Sudi & Associates