What is Legal Audit:
‘ LEGAL AUDIT ’ – the word itself speaks a lot about the process. ‘Legal’ here means related to law and ‘Audit’ means inspection. In short, the process determines that the company is duly abiding by the overall guidelines and billing standards set by the government of India.
‘Economy is a wider term and is made with the contribution of every single business unit/company operative in the country no matter it is a private or public entity and therefore it is crucial for every single company residing in the country to go through legal audit so that the economy is healthy and there are no un-necessary bugs in the system.
How Legal Audit Process Works:
Below is the process for Legal Audit:
#1. Foremost is that the personnel hired by the company has to fill the questionnaire that includes general details. This, in turn, will help the auditors to modify the audit process as per their requirements saving time and resources. For instance, the audit process for a construction company is way different from the audit process of an IT firm ad depending on the type of the business, the audit process will be different for both.
#2. Secondly, the company needs to pool up all the relevant documents that are required by the auditors while they carry on with the process of Legal Audit. Documents are segregated into five categories. A business can further divide these categories as per the requirements and nature of business.
- Corporate Issues – The section consists of company charters examination by registries of administrators, regulatory body, stockholders and obligations such as permits, business registrations, and licenses.
- Contractual Issues – Here there are examinations of Employment, Partnership, Distributors, Licensing, Facility, Equipment, Leasing, Order Agreements, Warranty and Sales.
- Labor Issues – Here the authorized conducts examination of employment documents, agreements, disciplinary measures, termination statements, training, etc.
- Tax Issues – The required documents include asset structures, loan, and debt.
- Authority Issues – Here company’s functioning documents and updated internal documents are needed.
- Publicity Issues – Here promotion-related documents are examined like sales aid, website content, press releases, trademarks, marketing documents, copyrights, product descriptions and so on.
#3. In the third step, there has to be a meeting of company management and other key personnel of the company to discuss the working of the company and also note the concerns faced by the company. Noting down of concerns will surely help in the 5th step.
#4. As we move ahead, in the fourth step, there is a proper reviewing of information/documents that were acquired in step 1. The concerned officers will check whether the information provided is in line with the practices, local laws, regulations and serving the requirements of the company. Any discrepancy occurring thereon needs to be noted and rectified.
#5. Heading towards the fifth step of Legal Audit, it involves the preparation of detailed reports on the outcomes of the audit, noting down of errors (if any), payment related issues or other related discrepancies.
#6. The sixth and final step includes discussion of problems encountered in the audit with the management. The management needs to clarify that they were prior aware of the errors or not and that they are in favor of it.
Lastly, the reports prepared and management’s explanations are discussed and the needful is done on that basis.
Why Legal Audit is Recommended?
One of the prominent reasons for conducting the legal audit is that it saves the company from getting fined, sued or prosecuted due to non-adherence to government laws. A company hereby comes to know that what all laws of government it is violating unknowingly.
Legal Audit directly/indirectly eliminates the chances of legal actions taken by the government due to deficiencies in the documents, undertakings or laws followed by the companies.
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Why Legal Audit is Recommended?
The Legal Audit is very prudent in order to prevent laws generated with copious and serious discretion and aware to divide with any legal actions.
Arising in upcoming future and resultantly may end in getting fined, sued, penalty imposition and prosecuted in evadable legal actions due to lacunae or deficiencies residing in the agreements, statutes, undertakings, documents and laws accomplished by the companies, partnerships, individuals, Corporate Undertakings, Governmental Undertakings and banks Undertakings.
In outstep of the laws and provisions of the Governmental Enterprises, Organization, Company, for instance, moving from the Articles of Association of the Private Limited Company and the laid down Memorandum and laws relying on certain acts and enactments in force.
Legal Audit Importance Against Financial Audit, Tax Audit, Company Audit
Unlike Financial Audit, Company Audit or Tax Audit, the Legal Audit is held prior to starting a project in a company and therefore it is also popular with the name pre-audit. Whereas all the other audits happen at the end of the Financial Year.
Legal Audit focuses more on the legal domain of a company. Whether the company is abiding by the current norms of the government or is facing any legal issue or is into any legal dispute. The company along with all its operative outlets is audited in a legal audit.
A legal audit is needed to judge the legal problems in the starting phase of the Joint Business ventures, Undertaking, Project, Collaboration arrangements, mutually agreed agreements. Also, a company becomes aware of the legal risks that might come while proceeding with any project, collaboration or venture.
Significance And Vitalness Of Legal Audit
Various litigations are running in Consumer Redressal Forums, Tribunals, Courts make the Legal Audit very important for Companies, Partnership Firms, Corporates, Individuals, Borrowers, Guarantors and Financial Corporations.
It minimizes the risk of anomalies, lacunae, and deficiencies in the documentation, written papers, by-laws, agreements, and covenants performed. Legal Audit helps to reduce tension, legal expenses, worries at the time of ceaseless litigations.
The Checklist or formal agenda of Legal Audit contains the overall documentation or financing policies or operational areas or objectives or trademarks or copyrights or assets formulated by the company comprising the press release and Companies’ policies, objectives and programmes under the view of legal laws.
How a Legal Audit will Benefit the Company?
Legal Audit, if done efficiently, gives a clean chit to the company and safeguards it from any sort of clashes with the government of the country.
Legal Audit reduces the risk of a company getting penalized, prosecuted or barred due to any drawback in the documents, policies or operations. It will give an insight into how much a company is following the company laws set by the government and is it safe from any legal allegation.
It helps the company to revise the records, licenses, registrations so that the company escapes from the risks of inaccuracy in the documents, helps claim compensations (if any).
Let the company become aware of the changing laws of the government related to land acquisition, documents, employee management and lot more.
Legal Audit is also beneficial when it comes to clearing the dues of the borrowers. The audit helps in clearing the dues without any visit to court.
Several issues of employees related to legal compliance can be sorted, monetary grants for overtime, compensation claims, reimbursements, unfair labor practices, salary issues and lot more.
Eliminates other issues related to Wills, Trusts, payment of compensations, legal proceedings in case of death, divorce, cancellation of partnership in the company, winding up of company and lot more.
2 Replies to “How Legal Audit Can Help Business Become More Effective”
June 18, 2020
Thanks for sharing this post! I hope you will share more information in the future!!
May 24, 2018
CA Portal, thanks! And thanks for sharing your great posts every week!