Internal audits help evaluate a company’s internal controls, such as its corporate governance and accounting processes. Audits ensure compliance with laws and regulations and help to maintain accurate and timely financial reporting and data collection. Internal audits are also meant to provide management with the tools necessary to attain operational efficiency by identifying problems and correcting lapses before they are discovered in external audits[1]. 

Internal audit services are more holistic in their approach and tend to cover all matters relating to the firm’s operations. An internal auditor will look into aspects that affect the company’s performance. Whereas external audit services are more specific and relate to only the company’s financial statements, external auditors are concerned with only finance, taxes, and accounting statements[2].

The main difference between Internal Audit and External Audit is that the former is done by the employees of the company (Hence the term internal). On the other hand, external audit is done by auditors working for an external audit firm.  These auditors are hired by the company specifically for this purpose[3].

Many find internal audits dreadful processes but if conducted well they can improve businesses greatly. Breaking audits down for law firms may help them prepare well for their next one as well as finding them just a little easier: 

When managing a law firm:

• Identify and define the policies and procedures that you have and those that you need. Clear policies to govern situations should be written, so that it will be more likely that employers will be more engaged in the business when they know exactly what it is expected of them.

• Determine how often audits should occur. To improve efficiency, it could be useful to create an audit calendar to allow proper preparation to prevent poor performance. To have both the department and the auditor prepared is the most efficient, and least time and money consuming scenario.

• Make reporting clear and easy. Reporting audit findings shouldn’t require endless spreadsheets or difficult-to-read notes. Make use of technology, bullet-points and social media to make the entire process efficient and easily accessible from everyone[4].

In order to be fully prepared, it might be necessary to explore the issues that could come up during an audit:

Legal Interpretation

Audit work may require application of legal standards. 

An audit may cover not only compliance with internal standards, but also compliance with current legal standards, which may sometimes be complex or the interpretation thereof may have minimal or outdated guidance. 

Sometimes, a company’s internal legal position may be different from the position it would take in an adversarial action or investigation. Therefore, auditors should be careful not to reach legal conclusions which may differ from the firm’s conclusion or be entirely incorrect.

Questions about Compliance 

Audits often result in findings that raise questions about legal compliance. For example, findings that a company is not in compliance with legal requirements could trigger mandatory disclosures or self-reporting. Or, if provided to the government, audit findings that raise questions about legal compliance could be used as the basis of enforcement actions, particularly if remedial steps have not been taken. When audits reveal deficiencies in compliance programs, those need to be addressed as the adequacy of a compliance program is a significant topic in government investigations and enforcement actions. 

Audits concerning investigations and remedial actions

Audits may also implicate topics that are currently in the government’s focus, such as matters under investigation, that may include confidential topics not known outside of the legal department. Audits of such topics could implicate witnesses or subjects of the investigation or may even concern government-mandated remedial actions.

If such actions are being taken pursuant to stipulated penalty provisions, audit findings could result in financial liability[5].

There could be many reasons for auditing law firms but there are several key questions that internal auditors should consider, which could be particularly useful for law firms to know whilst they are preparing for auditing:

• What are the goals and objectives of the law firm?
• Does the legal function interface effectively with other control functions like compliance, risk, and internal audit?
• Can the efficiency and effectiveness of the legal processes be improved[6]?

While it is rare that the work of a law firm might be considered risky unto itself, the legal function can expose companies to various hazards, and therefore failure to help mitigate risks exposures in companies or the poor handling or litigation, may create significant liability.

So one item that law firms should really prepare for is the capacity of their departments to manage activities that are believed to pose significant legal risk to the entire company.

Legal Costs

Law firms’ focuses are also financial responsibilities such as monitoring budgets and reporting on expenses, so internal audits should be evaluating controls that can reduce legal costs and improve the firm’s efficiency. The auditor may decide to conduct a preliminary walk-through of legal operations to get a feel for how legal services are requested and processed. Problems can result when request for services is informal, without clear parameters. At this point, the internal auditor should assess the inventory of legal services performed for the organization. 

Questions that the internal auditor may consider when evaluating legal processes include:

• Does the legal department review agreements and contracts, and advise management on the implications of new contracts and relationships?
• Does the legal function stay up to date on regulatory risks and emerging requirements?
• Does the legal department have set processes and procedures for case handling, quality assurance, and documentation?

Analyses of legal operations may involve detailed testing on case files and interviews about case file content[7].

Conclusion: Improving legal services

The internal auditor must always remember that an audit report on a law firm can potentially be a source of legal liability for the business. Information gathered and reported should emphasize descriptive data and only allow limited personal observations, particularly conjectures or opinions. Nonetheless, if regulated well, law firms’ audits can lead to meaningful change within the legal system. Internal auditors can make meaningful recommendations regarding the quality of legal work performed. The operational review of legal services can lead to recommendations that result in a reduction in costs and efficiency improvement. A skillful audit team has the opportunity to provide valuable insight into ways to improve current legal processes, leading to eventually resulting in a more reliable justice for everyone[8].

References

[1] Alicia Tuovila ‘Internal Audit’, Investopedia, 12 October 2021

[2] Antonio Ghaleb,  The difference between Internal and External Audits’ Antonio Ghaleb &Partners CPA’

[3] Sandeep Bandary, ‘Difference between internal Audit and External Audit’, askanydifference.com, January 2022

[4] Alex Getsburg, ‘How and When to Conduct and Internal Audit’, Getsburg Licata, 5 April 2017

[5] Gibson Dunn, Managing Internal Audit and Investigations (Gibson Dunn 2020) 

[6] Reeciprocity, ‘A Guide to Completing an Internal Audit for Compliance Management’, Reciprocity.com, 3 May 2021

[7] Jose Tabuena ‘Key Steps for Auditing the Legal Department’, Compliance Week, 7 July 2010

[8] Id