The Checks and Balances of Legal Audits

Yesterday’s Leadership Daily Advisor introduced the value of the legal audit. Today, we continue with a deeper look into evaluating and improving your organization’s legal process, outcomes, and cost effectiveness.

Where will your focus lie? The extent of your checkup will depend on your company size and stage of growth, of course, as well as whether you do business in a heavily regulated industry or not.

Generally, however, among the things to include on the topic list are structure of the company; recent acts and decisions of the board; protection of intellectual property; distribution and marketing; pending and threatened litigation; insurance coverage; hiring and firing practices; employment agreements; ethics and law compliance; antitrust and related trade regulations; product liability and environmental law; and a review of sales and collection procedures.

Ask, Compare, and Benchmark

Surrounding all of these issues is the overall question of how well your firm’s legal needs are being met. A good legal audit should first assess the range of legal services performed for your organization—in other words, the internal and external workload.

For instance, does the legal department review all business and employment agreements and contracts, and advise management on the implications of those new relationships? Does the legal function stay fully updated on regulatory risks and changing compliance rules? Who cooperates in financial statement disclosures, such as ongoing litigation or certain accounting transactions? Who has the authority to hire outside counsel? And how does the general counsel report to the board?

Next, it can be useful to evaluate how you compare to others. Benchmarking your company’s legal performance with that of others of similar size or industry isn’t always easy and direct, but internal auditors increasingly have such types of metrics at hand to use as a point of comparison.

For example, U.S. legal departments generally have three to seven lawyers per billion dollars of revenue, depending on the industry; internal legal expenditures tend to make up about 40% of total spending, while 60% goes to external legal help. Working toward an ideal mix of legal spend can return greater value to the company.

Lastly, to drill down on outside costs, your audit can examine trending legal expenses from month to month and year to year. Focus in on spikes and dips, as well as hours billed over time, sorted by lawyer, and type of service. Doing so can help identify opportunities for either better projections or future savings.