As most business owners are aware, an IRS audit is designed to scrutinize the tax return of an individual or business to ensure accurate reporting and compliance. A “legal audit” functions in a similar way, although the purpose is not to scrutinize a suspicious return, but instead to identify potential issues and ultimately prevent costly problems.
A legal audit is ordinarily conducted by a business attorney with training and expertise in business law – particularly business litigation. A legal audit provides a substantial advantage in having a trained pair of eyes to carefully examine a business and assess its legal health. During a legal audit, the attorney will review certain aspects of a business and make assessments regarding compliance, efficiency, and risk.
In this post, we will briefly discuss some of the areas which are most commonly scrutinized in a legal audit, and then discuss a few of the benefits of this procedure for business owners. Keep in mind, this is not meant to be an exhaustive treatment, but a survey of how this process works.
Areas Which May Be Covered by a Legal Audit
Certain areas of a business are more likely to be scrutinized in a legal audit than others. This is due to the fact that certain areas are known to carry larger risks and have more significant ramifications.
Here are a few areas which are commonly examined in an audit: employment policies (including workplace policies, hiring practices, termination practices, etc.), tax reporting and accounting, intellectual property (i.e. trademarks, etc.), vendor contracts, client contracts, employment contracts, and operating or shareholder agreements.
Benefits of a Legal Audit
Minimize Risks in Human Resources / Employment Practices
One area in which a business may be penalized heavily for any sort of legal mishap is human resources. If your business has employees, you need to be certain that your program for hiring, training, terminating, and managing workplace behavior is absolutely sound. Mistakes in this department can lead to very expensive solutions, so prevention is the best approach.
Furthermore, businesses also need to be sure to comply with all state and federal employment regulations, such as those deriving from the Fair Labor Standards Act (FLSA). Non-compliance with employment regulations can likewise be quite costly. Hence, your business can take away a heavy benefit from an audit of your human resources and employment practices.
Identify Accounting Inaccuracies
Another area that is often reviewed is accounting, and in this area, businesses can benefit tremendously. An attorney can review your accounting records to ensure accuracy, and also analyze your situation to determine whether you may need a new tax strategy. During a legal audit, you may be counseled to hire a CPA to perform certain tasks and to correct prior mistakes.
Optimize Insurance Coverage
A legal audit can also help determine whether your current insurance policies are providing adequate coverage, and also whether you have all the necessary policies. There is a possibility that you may need more coverage or would benefit potentially from more coverage. Insurance can make a world of difference in certain situations. Ensuring that your insurance is optimized is a key benefit of an audit.
Discover Contract Weaknesses
Legal audits are often primarily concerned with reviewing company contracts with vendors, clients, employees, and other entities. A business attorney can review your contractual agreements and check for legality, clarity, and quality. All contracts are not made equally. Upon close inspection, your business attorney may notice weaknesses or potential loopholes in certain areas and may suggest remedies.
Some contracts may need to be revised for clarity so as to minimize the possibility of a breach. There may also be a chance that previously executed contracts were improperly developed and may lack validity; your attorney can help clean up this situation.
Identify and Correct Inefficiencies
When an attorney scrutinizes the different components of your business, they will be able to provide insight into the weak points of your company. Your business attorney can make recommendations and suggestions on how to improve inefficiencies in lots of different areas.
For instance, perhaps your auditor learns that your accounting department is using outdated software, and as a consequence, your books have suffered. Your auditor can make the necessary recommendation to improve the situation.
Contact The Frazer Firm to Inquire About a Legal Audit
This is only meant to serve as a helpful introduction to the topic of legal audits. For more information, please contact the experienced business attorneys at The Frazer Firm today by scheduling a consultation or calling 561-295-1551.
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