How would you rate the efficiency of the business model in the absence of an advisory team?
Of course, zero or below five! In the absence of an advisory team who assist the businessmen to keep plans on the right course, the effect of business model and attainment of business goals become quite dubious.
When the business model and its validity goes through periodic checks and reality evaluation, to ensure that the company’s target, framework and working are inconsistency with the latest amendments in business and corporate law, the efficiency of business multiplies and this whole process of evaluation refers to as Legal Audit process.
The whole process of discussion of business’s strategic agenda & aims among the company’s management team and corporate counsel, followed by reviewing of important documents & records and finally analyzing & identifying the current and estimated legal requirement of the company, is termed as Legal Audit.
Legal audit aids managers recognise the legal issues germinated by alterations in strategies, aims and objectives. Besides, it is also helpful in planning the legal tasks which must be executed to resolve the legal issues found.
Process of Legal Audit
Preliminary Questionnaire is the first step on Legal audit process that involves a comprehensive array of questions for the management team of the company to check & resolve the issues before the team of attorneys arrives to conduct the legal audit.
The questionnaire is formulated considering the type of company to save the efforts & time. For example, a questionnaire for a real estate company will be different from that of a pharmaceutical company. For small companies, a simple checklist of issues serves the purpose.
After preliminary identification of problematic areas, the documents, reports and related data as solicited in the questionnaire is assembled together for the Legal Audit Process. These documents can be classified into 5-6 categories which are as follows:
(I) Corporate-related documents such as registries for stockholders, minutes, permits, Business licenses and registration.
(II) Labour-related documents such as applications, employment documents, agreements, documents concerned with training & disciplinary measures, terminations policies.
(III) Contract-based documents such as Partnership Deed, Equipment Lease, Order agreements, Warranty & Sales Policies, employment agreement.
(IV) Tax-related documents like documents concerned with asset structures, debt, loan, etc.
(V) Publicity & Promotion-related documents such as website content, trademarks, copyrights, marketing documents, press release.
(VI) Governance related documents such as documents concerned with the company’s operation, Internal manuals.
After the accumulation of important documents, a meeting is conducted between audit counsel and the company’s designated officers who have proficiency in the different departments of business operations. Presence of outside accountants and other experts in the management team is recommended in the audit process which is related to the field of their proficiency.
Review of documents and on-site observation
Next step includes the examination of a company’s financial statements and documents gathered in the second step to confirm the company’s adherence to legal laws and rules. Besides, the audit team conducts on-site observation to check the company’s operations that are performed on a daily basis.
Application of the Post-Audit Suggestion
Once the post-audit evaluation is issued by the legal audit team to the management team, Post-Audit recommendations of the report can be implemented by the entrepreneur. The recommendations can be altered on the basis of the company’s growth strategies and particular identifications of the report.
What makes the Legal Audit an inevitable need?
The Reserve Bank of India has made it mandatory to conduct legal audit and re-verification of title deeds in case of loans more than Rs 5 crore to avert the risks of fraud.
Legal Audit is very crucial for Corporates, Companies, Individuals, Partnership Firms, Borrowers and Financial Corporations to combat litigations going on in Consumer Redressal Forums, Courts and Tribunals.
Legal Audit knocks off the uncertainties of lacunae, anomalies and legal abnormalities in the documentation, bye-laws, agreements, and covenants.
Legal Audit Vs Financial Audit, Tax Audit, Company Audit
Legal Audit is Pre-Audit
Legal Audit is Pre-Audit, it starts as soon as the project starts or on the first day of the project.
Audits like Company Audit, Financial Audit, Tax Audit, are audits which are conducted after the end of the fiscal year.
Legal Audit takes place in the starting phase
The Legal Audit is conducted to evaluate the prevailing legal issues in the starting phase of Collaboration arrangements, Joint Business ventures, Undertaking, Project, mutually agreed agreements etc. Other audits take place in the ending phase when the financial year ends.
Ongoing & Upcoming FY is considered
Legal Audit ensures the company’s operations, plans, strategies and agenda in compliance with legal rules in the ongoing final year.
Benefits of Legal Audit
Determines Efficiency & Profitability
Legal Audit determines efficiency, profitability and optimum growth of the business under the prevailing corporate & business laws. It checks how much a business can earn by executing operations while adhering to legal norms.
Reduces legal risks and expenditure
Legal audit shuns avoidable litigations which result in the imposition of heavy fines and penalties for not adhering to the rules. When you are compliant with laws, the unnecessary legal expenses and risks become negligible.
Eliminates the legal defects of agreements and written undertakings
Legal audits confirm the lawfulness of the documents such as agreements, covenants and written agreements. Besides, the records, licenses and registrations are regularly revised according to the latest norms and notifications by the government.
Reduces the tax liabilities & financial commitments
When the entrepreneurs work in compliance with legal rules and under the suggestions of experts, they find out methods to reduce their tax liabilities and financial commitments made by them to the creditors.