Why You Need a Legal Audit

By: Eileen Morgan Johnson, CAE

Are you as diligent in monitoring your organization's legal health as you are in looking out for its financial well-being? Put a legal audit on your regular to-do list to ensure your organization is meeting all its obligations under the law.

Most associations have a financial audit conducted each year to ensure that their financial affairs are in order, but very few consider taking the same step to review their legal affairs.

The requirement to conduct an annual financial audit is imposed externally, by state regulatory agencies or grant requirements. While no external authority requires a legal audit, getting one from time to time is a good idea.

Just what is a legal audit? It's like a checkup to review your organization's legal health and diagnose any problems that need attention. The closest analogy is conducting due diligence when your association is considering a merger with another association. Attorneys conducting a legal audit review association documents, policies, and procedures for compliance with current law. The scope of work can be adjusted depending on the association's needs.

A legal audit does not need to be conducted every year. The most likely time for a legal audit is when there is a change in the CEO. New CEOs should consider having a legal audit conducted to discover if there are any irregularities or areas that might have been overlooked by the previous CEO. Thereafter, a legal audit is advisable from time to time to ensure that the association's legal affairs are in order.

Like a financial audit, a legal audit can take time. The auditing attorneys will review and analyze the documents the association provides, interview management, and prepare a report that will identify areas of concern and recommended actions. The report should prioritize the necessary corrective actions so the CEO knows where to focus the staff's efforts.

The attorneys might recommend that the association hire consultants to assist the staff in implementing certain changes. If the audit report does not provide suggested timetables for action, the association should request this information.

The legal audit report and management's plans to address any issues it raises should be shared with the board of directors since they have fiduciary responsibility for the association. If many issues were raised in the audit report, the association should consider having the audit repeated in a few years to confirm that all of the areas of concern have been addressed and no new ones have arisen.

Eileen Morgan Johnson is a partner at Whiteford Taylor & Preston LLP in Falls Church, Virginia. Email: [email protected]

[This article was originally published in the Associations Now print edition, titled "Legal Checkup."]

Eileen Morgan Johnson, CAE

Eileen Morgan Johnson, CAE, is a partner with Whiteford, Taylor & Preston L.L.P.