After ISO quality certification the buzzword amongst domestic corporates is legal compliance certification / legal audit.
Quality standard certification, statutory / internal / cost and even secretarial audits are well known terms as are due diligence audits - normally done at the time of mergers and acquisitions. But, legal compliance certification / audit ?
Says V V Sivakumar, partner, Kochhar & Co a law firm, "It is putting a stethoscope to a company's legal health. Normally companies are compliant with substantive law and legal audit tells whether they comply with the procedural law as well."
Simply put, legal audit is combing through the entire business practices (production, accounting, human resources, etc,) of a company to see whether they conform to laws applicable to that transaction / industry / company. The whistle is blown when deviations are found, drawing the managements' attention. A team of professionals from the legal, accounting and management professions is entrusted with the combing process.
Legal compliance certification is like a quality certification issued by the legal auditor stating that the company is complying with all the applicable laws. The certification process has a wider ambit though it might be similar to legal audit in parts.
In India, there are only handful of law firms / corporates that issue this certificate. One among them is the Chennai-based Chess Management Services Pvt Ltd.
Given the multiplicity of laws in India - several of them archaic - with penal provisions for contravention, it could even be said that India is a dangerous place to do business.
"On an average, around 120 laws (central, state and municipal) apply to an Indian manufacturing company," says Sai Chandravadhan, general manager, Chess Management Services. And the dictum, ignorantia legis non exusat, (ignorance of the law is no excuse) is the sword that dangles dangerously over businesses.
Nevertheless, corporates in general perceive legal compliance, substantive and procedural, as mundane activity involving costs without any tangible benefits. What they fail to realise is that the cost of non compliance is also huge like cancellation of business licenses / huge fines or even jail terms, which could cripple a company.
According to Chandravadhan, non-compliance is largely due to lack of awareness of two issues viz (a) the need to comply and (b) impact of non-compliance.
"The emphasis of the legal compliance-management service is on enabling companies acquire the skill-sets and systems to ensure continued adherence of law," he explains.
Chandravadhan has an experience to share: "A RBI directive put a pecuniary ceiling in trading in relation to certain instruments. However, the software of our client, through which the trading was carried out, did not contain a mechanism to curb dealings over the prescribed limit."
This could have ended in manipulation of systems by the users and / or errors that could lead to serious repercussions for the company's board of directors and possible revocation of the company's licenses.
"Our findings resulted in redoing the software and derisking the activity," he says.
According Dorothy Thomas, partner, Kochhar & Co, "In any legal audit around 10-15 items would pop-up as non-conformities. Some of them might be very crucial ones."
In one instance, Kochhar's client, a tea plantation, continued to participate in the tea auctions without renewing it's licence. "This was detected during the legal audit and the company escaped with minor penalties," she recalls.
Unlike statutory and cost audits, legal audit is not compulsory, though it is safer to have one than risk the consequences of even unintended infractions. In some cases, it helps to have top-down knowledge of compliance levels, especially, in multi location organisations. In other cases it checks the gaps in the existing systems.
"It is also carried out to satisfy external clients, especially international clients, who need to adhere to certain procedures for transacting business," explains Chandravadhan.
International retail chains that source from India insist that vendors go through the legal compliance audit and produce a certificate of compliance. International retail chains are touchy about child labour and do not want to be seen as felicitating child labour.
Adds Vinod Surana, partner, Surana & Surana, a leading firm of international attorneys in south India, "Manufacturing companies, (domestic and multi national companies) IT and business process outsourcing (BPO) units, exporters and corporates that plan public issues are the ones who currently opt for legal audits."
Also companies that have got into legal problems with the authorities, hire these service providers to clean up the mess and help them start afresh. "It is the manufacturing companies that largely go for legal audits as they have to comply with a plethora of laws - factory laws, pollution control, labour, municipal, land rules, etc," remarks Surana.
Adds Karti P Chidambaram, director, Chess Management Services, "Legal compliance is one of the steps in corporate governance initiatives since governance is a strategy while legal compliance is an operational plan of action."
Legal consultants, assisted by a team of professionals who are well-versed in accountancy and management, not only blow the whistle when deviations are found, but also internalise the compliance activity, suggesting commercially viable solutions.
As the reasons that trigger-off the legal audit are business-sensitive, these legal advisors do not identify clients as that would violate client confidentiality. However, they do disclose that an increasing number of businesses are now adopting legal compliance audits.
For law firms, this consultancy yields better billings than court appearances. However, the experience in handling and arguing cases in courts gives Indian law firms an edge vis-a-vis the foreign legal consultancies.
These legal auditors adopt flexible billings terms, charging on an hourly or a consolidated basis depending on the client's convenience. "We are now mining and encashing on our expertise, often accumulated over decades," remarks Surana. His firm offers this service as a package under the brand name 'Alarms'..
"Corporates with US-parentage are comfortable with hourly billing while Indian companies prefer to negotiate a consolidated fee. On the other hand the Korean companies prefer a mix of hourly rates and a consolidated fee," says Surana.
The downside - corporates generally have this as a one-time affair to clean the mess and then follow the due procedures. However there are companies that have made legal audit an annual requirement.
also see : Legal
compliance cornerstone of corporate governance