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COMMERCIAL LIABILITY -- USING LEGAL AUDITS TO IDENTIFY AND REDUCE RISKS
A legal audit is a form of performance audit that is aimed at
assessing an organization's success and effectiveness in law compliance. The
following materials describe the features of effective performance audits of
organizational law compliance. These materials can be used for developing,
implementing, and evaluating legal audits aimed at any type of law compliance. They
are also appropriate for guiding legal audits and studies of various types of
organizations since they describe general principles which are applicable to all legal
audit programs. In order to translate these principles into legal audit programs for
particular organizations, organizational managers (and legal or auditing experts who
assist them) will need to make adjustments within the principles defined here to define
audit programs that reflect the legal risks likely to be encountered by particular
organizations, the regular methods of operation of those organizations, and the resources
available for auditing.
Legal Audit Guidelines
(excerpted from Louis M.
Brown, Anne O. Kandel, and Richard S. Gruner, The Legal Audit (1994 & Annual Supps.))
Basic Principles
The following principles should govern legal auditing programs:
- Organizational managers are responsible for complying with applicable
laws and regulations. That responsibility encompasses identifying the requirements with
which the entity and corporate personnel must comply and implementing systems designed to
achieve that compliance.
- Organizational managers are responsible for applying organizational
resources efficiently, economically, and effectively to achieve law compliance.
- Organizational managers are responsible for establishing and maintaining
effective controls to ensure that appropriate law compliance goals and objectives are met;
related resources are safeguarded; and reliable data on law compliance performance are
obtained, maintained, and properly disclosed.
- Organizational managers are accountable to superiors for resources
provided to carry out law compliance programs and activities. Consequently, they should
provide appropriate reports to those to whom they are accountable.
- Auditing of law compliance reporting within an organization is an
essential element of control and accountability. Auditing of reporting practices provides
credibility to the information reported by or obtained from management through objectively
acquiring and evaluating evidence.
- Performance auditing regarding law compliance activities and results
contributes to providing accountability because it provides an independent assessment of
this type of organizational performance. The information gathered in this type of auditing
can further the accountability of organizational personnel regarding law compliance and
facilitate decision-making by parties with responsibility to oversee or initiate
corrective actions.
- To ensure law compliance accountability throughout an organization,
organizational directors, senior managers, and other decision makers need information to
assess the integrity, performance, and stewardship of the organization's law compliance
activities. Thus, audit reports should be available to relevant organizational decision
makers.
Characteristics of Legal Audits
A legal audit assesses organizational law compliance
performance through an objective and systematic examination of evidence for the purpose of
providing an independent assessment of this aspect of organizational performance. The dual
objectives of this type of audit are to improve the accountability of organization members
with respect to law compliance and to facilitate decision-making by parties with
responsibility to oversee or initiate corrective action aimed at improving organizational
law compliance. Two types of evaluations can be included in legal audits: assessments of
the effectiveness of organizational efforts in achieving law compliance results and the
economy and efficiency of those efforts.
[a] Evaluations of Law Compliance Results
Legal audit evaluations focusing on law compliance results
will typically examine (1) the extent to which lawful actions or other activities
promoting law compliance are being undertaken in organizational operations and (2) the
effectiveness of particular internal organizations, programs, activities, or functions in
achieving law compliance. These types of results-oriented assessments may be conducted at
various operating levels. For example, legal audits may separately assess law compliance
in particular corporate services, activities, functions or operating units.
Legal audits for evaluating compliance results will
generally:
Assess whether law compliance objectives of new or ongoing
compliance efforts are proper;
Determine the extent to which existing organizational
practices achieve law compliance or compliance-related results;
Assess the effectiveness of a law compliance program and
individual program components;
Identify factors inhibiting satisfactory performance;
Determine whether organizational managers have considered
alternatives for pursuing law compliance that might yield desired results more effectively
or at a lower cost;
Determine whether law compliance efforts complement,
duplicate, overlap, or conflict with other related organizational activities;
Identify ways of making law compliance efforts work better;
and
Assess the adequacy of the management control systems for
measuring, reporting, and monitoring a law compliance program's effectiveness; and
determine whether organizational managers have identified measures of effectiveness for
organizational law compliance efforts that are valid and reliable.
[b] Evaluations of Compliance Program Economy and
Efficiency
By contrast to these aspects of audit evaluations that are
aimed at evaluating law compliance results, audit components aimed at assessing the
economy and efficiency of law compliance efforts will focus on (1) whether an entity is
acquiring, protecting, and using its resources (such as personnel, property, and space) to
pursue law compliance in a manner that is economical and efficient and (2) the causes of
inefficiencies or uneconomical practices.
Economy and efficiency assessments as part of legal audits
may, for example, consider whether an entity is:
Following sound procurement practices in applying external
resources to law compliance tasks;
Acquiring the appropriate type, quality, and amount of law
compliance resources at an appropriate cost;
Properly protecting and maintaining resources applied to
law compliance tasks;
Avoiding duplication of law compliance efforts by employees
and work that serves little or no purpose;
Avoiding idleness and overstaffing in compliance-related
positions;
Using efficient operating procedures for pursuing law
compliance;
Using the optimum amount of resources (staff, equipment,
and facilities) to complete activities needed for law compliance in a timely manner; and
Applying an adequate management control system for
measuring, reporting, and monitoring the economy and efficiency of organizational law
compliance efforts; and has identified measures of economy and efficiency for
organizational law compliance programs that are valid and reliable.
[c] Other Services Provided By Auditors
Legal auditors may provide services aiding organizational
managers beyond the completion of legal audits. These additional services include:
Assisting organizational policy makers in developing
questions for use in evaluating existing organizational activities and in considering
alternatives;
Developing methods and approaches to be applied in
evaluating the law compliance aspects of a new or a proposed organizational activity;
Forecasting potential law compliance problems or issues
under various assumptions about future organizational activities without evaluating
current operations, and
Perform other types of investigative work related to
assessing law compliance or other features of corporate performance.
The
materials at the following links provide more information about legal audits and their use
to prevent liability.
A Business
Owners' Guide to Preventive Law
Legal Audits Can Head off Regulatory
Troubles
Common Targets of Legal Audits
A Sample Checklist for a
Legal Audit
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