Significance of Legal Audit: Post Investment Stage | Corporate Law Attorney in Delhi NCR | Corporate Lawyer in Delhi NCR |
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A legal audit is a risk management tool which determines an organization’s compliance with the law and regulations that apply to it. Legal Audit is a quintessential process as it saves the firm from getting sued or fined, or being prosecuted. It is a process which makes sure that that are no deficiencies in the documents, undertakings, or laws followed by the Company. A legal audit is performed on a periodic basis or may be performed in connection with a specific event, such as a financial audit. It can also be performed in connection with a specific transaction, such as securities offering or an acquisition. Legal audit is not a regulatory requirement. It is of a contractual nature. If the investor has significant stake in the business he may ask for the performance of legal audit.
Procedure of Legal Audit
In the process of legal audit, first a preliminary questionnaire is prepared which consists of few questions for the management of the Company to check and resolve before the attorneys conduct the legal audit. This questionnaire is designed based on the type of the Company. After this the Company pools up certain documents which are required by the legal auditors to conduct the legal audit. These documents are segregated into five dimensions-corporate issues, contractual issues, labor issues, tax issues, authority issues, publicity issues. In the next step, the Company management and other key personnel of the Company conduct a meeting to discuss the working of the Company and note the concern faced by the Company and the problems faced by it. In the next step, the documents acquired in the second step are reviewed. Here the auditors make sure that the documents are in accordance with the laws and are serving the requirements of the Company. The next step is to prepare a detailed audit report on the outcomes of the audit and after this there is a discussion with the management regarding the problems encountered in the audit.
All legal audits follow the same general process but audits of different areas will have different goals. The real value of a legal audit is less in what is discovered in the process and has more to do with what the Company does with the results. As a part of the audit process the audit team will present a list of recommendations. It is in the hands of the board and the management team to decide on how to handle the recommendations. The auditors may be called back to follow up the work as it related to implementation of the recommendations. The management should establish a regular pattern of audits that will help the firm ensure it is taking full advantage of its assets and is doing everything feasible to mitigate risks.
Significance of Legal Audit in Post Investment Stage
Legal audit play a very important role in the post investment stage. It provides comfort to the investors that the Company has been conducting its affairs in accordance with the laws and their investment is safe and is being taken care of. This is necessary as the sole purpose of investors to invest in the business is to gain something out of it and they should not be kept in a state of pressure as to the safety of their money. In a practical sense, the investors, from time to time, need to know the state of their money.
In India, the Foreign Direct Investments (FDI) are covered under the following legislations i.e.
- Foreign Exchange Management Act (FEMA) of 1999
- Foreign Exchange Management (Transfer or Issue of a Security by a Person Resident Outside India) Regulations, 2017
- Competition Act of 2002
- Companies Act of 2013
- Reserve Bank of India (RBI) Circulars, Guidelines, Rules & Regulations
- Guidelines & Policies issued by the Government of India
Examples & Illustrations:
Apart from monitoring the tax and the financials part of a business, it is also important to monitor some legal aspects which include contract/document review, Regulatory Compliances, Litigation matters, intellectual property audits, and audits of other legal functions. Zenefits, a US bases software Company was fined by the California Department of Insurance for $7 million for not complying with the licensing regulations. The department ordered the Company to comply with all California laws and regulation or they will face penalties and sanctions. Because of this happening, the Company may lose a lot of its investors and also lose the confident of their customers. The bottom line here is that the Company should have conducted proper legal audits so that the Company would have found such error earlier and also had the time to fix it without facing such loss.
Thus, legal audit is an inevitable task which needs to be performed every three to five years during the post investment period. The same also help in reducing unnecessary litigation and also keeps the compliances at place.
Authored By: Adv. Anant Sharma & Sanjana Akasam