It is wise for any association to periodically conduct a legal audit of its organization and operations to ensure that its legal affairs are in order. A legal audit serves as a checkup to make sure that your association is in good legal health. Any troublesome issues discovered during the audit can be diagnosed and resolved before they result in problems down the road.

A legal audit is similar to the legal due diligence review undertaken before major transactions, such as an association merger or consolidation. In a transaction, however, each side conducts a review of the other’s legal status, obligations, risks, and compliance. Attorneys conducting legal due diligence will review the other organization’s documents, policies, and procedures for compliance with the law and best practices. This process often uncovers legal issues that need to be addressed before or after the transaction. 

A legal audit performed as a checkup, however, is conducted by the association’s own attorneys and not shared with a third party. The results and accompanying legal advice will be protected by attorney-client privilege.

When considering or undertaking a legal audit of your association, keep in mind the following lessons learned from issues commonly spotted during legal due diligence.

Corporate Governance

Confirm that your governing documents comply with the law and reflect the actual practices of the organization. For instance, an association’s bylaws may allow for proxy voting by board members when prohibited by law, or they may call for quarterly membership meetings when in practice the organization regularly holds only an annual membership meeting.

Also ensure that your governing documents are consistent. In a due diligence review, it is not uncommon to find that an association made a change to its bylaws, such as to the organization’s purposes, but forgot to file a necessary corresponding amendment to its articles of incorporation with its state of incorporation.  

A legal audit performed as a checkup is conducted by the association’s own attorneys and not shared with a third party. The results and accompanying legal advice will be protected by attorney-client privilege.

Employment

Most associations are exposed to the largest potential liability in this area. You may be surprised to find that your employment applications and employee handbooks and manuals have not kept up with new and evolving laws, such as “ban-the-box” laws that prohibit certain questions about past criminal convictions on job applications, or laws regarding mandatory sexual harassment training and prevention.

Among other areas of employment law, also confirm that you are properly classifying your employees and independent contractors and properly classifying your employees as exempt or nonexempt for overtime determinations.

Insurance

Review your insurance policies to determine whether your organization’s operations are adequately covered without substantial gaps or redundancies. The key policies that provide insurance indemnification coverage against the most common association liability claims are a general liability policy and a directors and officers (D&O) liability policy. Some associations may also need an errors and omissions liability policy, depending on the nature of their activities and corresponding risks. Also, look into cybersecurity insurance.

Contracts

Confirm that executed copies of your organization’s contracts are organized and stored with all attachments, statements of work, and amendments. Make sure that you have executed written contracts that memorialize the important terms of all arrangements, including payment and cancellation terms, provisions addressing liability and intellectual property rights, and details of the parties’ obligations, among other important provisions. Monitor auto-renewal and expiration dates to avoid inadvertently continuing under an arrangement without the protections of a valid contract in place.

Your legal audit may lead you to consider developing standard contract templates for similar types of contracts to increase efficiency in your contract review process and to help mitigate regular pushback from parties with whom you are contracting.

Like a due diligence review, a thorough legal audit will cover these and other areas, including intellectual property issues, employee benefits policies, and data protection and information technology operations. Your organization will be stronger after identifying and resolving these legal issues.