Crucial Role Of Legal Audit

The fundamental idea lying behind the concept of Legal Audit is that “Prevention is better than cure”. One should work to hinder something erroneous from happening rather than trying to combat it later. Legal Audit is a risk management tool which works on the same principle. Legal audit is a litigation management practice which lays the groundwork for the establishment, of an ongoing legal compliance and prevention program in order to ensure that the company’s goals and/or objectives, structure and ongoing operations are consistent with the latest developments in business and corporate law.

IMPORTANCE OF LEGAL AUDIT V/S OTHER AUDITS

Legal Audit is an examination of many aspects of a company including but not limited to the structure of the shareholders, licenses, assets, and company agreements with the third parties and/or other stakeholders, insurance, etc.

The Company could use the Legal Audit result in determining business strategy for the present or future especially in legal perspective. The distinctive and distinguishing difference between Legal Audit and other Audits like Financial Audit, Tax Audit, Secretarial Audit and Company Audit etc. is that all other audits are conducted after the closure of the financial years for which period the audit is to be undertaken, i.e. it is post audit – whereas, the Legal Audit commences right from the Day One of the commencement of the Project on hand or from the very inception of the Project, so it can be termed as pre-audit. Some of the benefits of Legal Audit are reduced here in below:

a) Legal Audit can significantly reduce the risk of failure to obtain all proper permits and licenses averting situations like payment of fines, penalties, and, in some cases, even closure of the business by governmental agencies. Also, failure to monitor the company’s reporting requirements may put the company into default with lenders or investors and to do away with it…. Hence, Legal Audit is of utmost importance.

b) It assures the owners that those in charge of the management of the company are conducting its affairs in accordance with the requirements of law, and that the owners stake is not being exposed to undue risk. It minimizes the legal risks and legal expenses on account of avoidable and unnecessary litigations and frees one from penalties / fines imposed by Government / Courts for non compliance of the laid down laws / Rules, in force.

c) Assures the Management of a company that those who are entrusted with the duty and responsibility of compliance with the requirements of law are performing their duties competently, effectively and efficiently, so that the people in-charge of the day-to-day management of the company are not likely to be exposed to penal or any other liability (and consequential risk and embarrassment) on account of non-compliance with the law.

d) It assures Independent Directors that the company has complied with the laws and, therefore, they are not likely to be exposed to action by law enforcement agencies for non-compliance by the company. It also assures Legal Compliance Officers that they have done everything required under the law.

e) Legal Audit ensures profitable, efficient and optimum growth of the Company’s operations, objectives, and achievements of its corporate goals within the ambit of the laws of the Company as well as the laws of the land.

f) The significance and implication of Legal Audit is to identify the potential, present and prospective legal problems by the legal audit team, even in the initial stages of the commencement of the Project / Undertaking / Joint Business ventures, Collaboration arrangements, agreements signed mutually between the parties –which is entrusted with the Legal Audit of the Company or Corporate Company as the case may be, for an introspection and thorough review / re-casting the Company’s plans, operations and strategies to reduce if not to eliminate the potential and vulnerable legal risks / dangers the Company is prone to, with comprehensive coverage of the entire procedures, rules, regulations, and covenants, undertakings, agreements signed with proposed and existing buyers / creditors suppliers etc. including the staff employed in the Company.

g) The legal compliance audit being the proactive measure for compliance with a plethora of laws, legal compliance audit will have a salutary effect of substantially lessening the burden of the law-enforcement authorities.

h) Human Resource Legal Audit helps in reviewing company methods to classify employees and independent contractors. It focuses on examining the employment policies regarding federal and state discrimination on the basis of race, religion, national origin, age, sex, sexual orientation, pregnancy, and disability. It reviews the hiring and firing policies, assesses hiring and firing documents including employment applications, evaluate employee handbooks. It helps in determining whether the key employees are signing enforceable non-competition agreements or not.

i) It helps to recover dues from borrowers / customers by proper drafting and execution of agreements with them, without the necessity of approaching the Courts and/or forums to realize the dues.

OUR VIEWS

From the above mentioned crucial points and our understanding of the present business scenario, it can be said that though there is no statutory compulsion for conducting legal audit but it is indispensable for any form of organisation as the legal audit lays the groundwork for the establishment of an ongoing legal compliance and prevention program in order to ensure that the company’s goals and/or objectives structure and ongoing operations are consistent with the latest developments in business and corporate law and maintain an edge over others in the same arena. Legal Audit will enable the organisations to achieve their strategic goals and ultimate success.