Understanding legal risk and compliance audits: A complete guide
Written by Melissa Danks from 43Legal
A legal risk and compliance audit identifies weaknesses in your company’s legal and operational systems before they cause real problems or disputes.
The process includes a review of contracts, governance, HR policies, data protection, and regulatory compliance.
Solicitors tailor the procedure to your industry, risk profile, and business model.
Risk and data breach registers are essential compliance tools that will help you manage risks.
Regular reviews build investor and consumer confidence and protect against regulatory action and costly legal disputes.
Let’s be honest: legal compliance doesn’t top many business owners’ to-do lists.
But if you run a business in England or Wales, a legal risk and compliance audit is one of the most cost-effective ways to avoid fines, minimise the risk of commercial disputes, and impress investors.
It’s not just about ticking boxes. Done properly, this process builds a legal infrastructure that supports long-term growth, protects your reputation, and ensures you’re always ready when opportunity knocks or the regulator calls.
What is a legal risk and compliance audit?
A legal risk and compliance audit is a structured, solicitor-led review and analysis of your organisation’s key legal and regulatory touchpoints. It identifies gaps, risks, and outdated practices across areas such as:
- Corporate governance
- Contracts and commercial agreements
- Employment practices and HR policies
- Data protection and privacy compliance
- Intellectual property protection
- Dispute handling
- Regulatory filings and licensing
- Insurance cover
This procedure is particularly valuable before major events such as investment rounds, mergers, board changes, or expanding into regulated sectors.
Let’s take a practical example.
Your business may be a few years old and have doubled in size since you first took out your insurance policies for your premises and stock.
Chances are, like most successful owner/operators, you have been too busy growing your enterprise to check whether your insurance cover is effective and adequate.
One night, disaster strikes and one of your warehouses burns down. You contact your insurer, only to discover that your policy nowhere near covers your stock losses. Disputes and insolvency swiftly follow.
This type of situation could be avoided by investing in a regular legal risk and compliance audit.
The Solicitor in charge would quickly identify the underinsurance and make an action point to rectify the situation.
What sort of questions will a Solicitor ask to find out more about my business?
No two businesses are alike. That’s why the best Risk and Compliance Solicitors don’t just work from a template checklist.
Instead, they start with a consultation designed to understand the DNA of your company, including:
- Structure: Are you a limited company, LLP, or group structure with multiple entities?
- Sector: Do you operate in a regulated industry (e.g. finance, health, energy) or a fast-moving one like tech?
- Growth plans: Are you seeking funding, scaling, or preparing for sale or succession?
- Operational model: How do you serve customers? What systems and platforms do you rely on?
- Contracting approach: Do you have standard terms, negotiated agreements, or legacy contracts in play?
- Risk appetite: Are you risk-averse and compliance-heavy, or agile and lean with higher exposure?
By building a clear picture of your commercial and regulatory environment, your Solicitor can tailor the legal risk and compliance analysis and report to your unique position.
This ensures the procedure delivers useful, practical recommendations, rather than generic waffle that adds little or no value to your company.
A step-by-step guide to a legal risk and compliance audit
Here’s how the process works
1 Corporate governance review
A thorough governance review includes:
- Articles of association and Shareholders’ Agreements
- Companies House filings
- Board minutes and director appointments
- Statutory registers
This ensures your documents reflect how the business actually operates, and that directors understand their legal obligations.
2 Contract and commercial agreement audit
Outdated or poorly drafted contracts can expose the business to unnecessary risk. The audit reviews:
- Customer and supplier agreements
- Key service contracts
- Terms of business and warranties
- Indemnity and limitation clauses
- Guarantees
3 Employment and HR compliance
Staff handbooks and employment contracts must reflect current law and practice. Your Solicitor will assess:
- Employment contracts and offer letters
- Disciplinary and grievance procedures
- Equality and anti-discrimination policies
- Right to work documentation
4 Regulatory obligations
Whether you’re FCA-authorised or subject to niche licensing rules, your obligations must be reviewed. This stage covers:
- Regulatory filings
- Statutory returns
- Industry-specific licences
- Insurance arrangements
5 Data protection and privacy
Considering the UK GDPR and the Data Protection Act 2018, as well as other relevant legislation such as the Online Safety Act 2023, your Solicitor will look at:
- Privacy policies
- Data processing agreements
- Security measures
- Procedures for reporting and recording breaches
They will also help you with creating a data breach register UK GDPR compliance, a legal requirement for all businesses that process personal data.
6 Intellectual Property (IP)
IP assets are often overlooked until there’s a dispute. This review will cover:
- Trademark and domain registrations
- Copyright and IP assignments
- Licence agreements
- Ownership of code, content, or branding
7 Dispute resolution mechanisms
This involves checking dispute history and contract clauses dealing with resolution. Poorly handled disputes can spiral, especially when adequate processes for resolving them are not in place.
8 Property and leasehold
Your Solicitor will examine your:
- Leases and rental agreements
- Break clauses and obligations such as repairs
- Title documents (if you own property)
9 Tax and financial records
A basic review of financial compliance covers:
- Corporation Tax filings
- VAT registration and returns
- HMRC correspondence
- Audit trails and financial record-keeping
10 Succession and continuity planning
Lastly, who runs the company if the current leadership suddenly can’t? Planning for unexpected events includes:
- Powers of attorney
- Share transfer provisions
- Business continuity documentation
Why is it Important to create and maintain a risk register?
Part of the legal and compliance audit process is to set up a risk register so risks can be identified and dealt with. You can expect a Risk and Compliance Solicitor to help you:
- Setup risk registers
- Assign Red-Amber-Green (RAG) ratings
- Document actions and review timelines
What is a data breach register?
Under UK GDPR, all businesses must keep a Data Breach Register, even if you’ve never had a breach. It should record:
- What happened
- What data was involved
- The details of any data subjects affected
- When and how it was discovered
- Who was notified
Keeping this up to date demonstrates compliance with the UK GDPR accountability principle.
What type of reporting and action planning are included in a legal risk and compliance audit?
Your Solicitor will produce a tailored report that includes:
- An overview of key risks
- Urgent, material, and non-material issues
- Recommended next steps
- Remediation checklists and follow-up dates
The final report isn’t just for your desk drawer. It can support funding rounds, reassure directors, and demonstrate good governance during audits.
Wrapping up
Let’s face it. No one sets up a business for the sheer thrill of compliance paperwork.
But ignoring your legal risk and compliance duties is a little like ignoring that knocking sound in your car engine, at some point, it will become very expensive.
A well-run legal risk and compliance audit won’t just help you sleep at night.
It will demonstrate professionalism to your board, credibility to your investors, and accountability to your regulator.
Best of all, it may just save you from the three most expensive words in business: “We missed that.”
FAQs
What is the purpose of a legal risk and compliance audit?
It identifies legal and regulatory risks in your business and offers a practical roadmap for fixing them, protecting you from penalties and reputational damage.
Is this just for large companies or PLCs?
No. SMEs benefit significantly from Solicitor-led risk and compliance audits, especially when preparing for funding, hiring, or expansion.
Do I need a risk register and a data breach register?
Yes. Risk registers help manage all types of risk, while data breach registers are required by UK GDPR to document actual incidents.
How often should a legal risk and compliance audit be carried out?
At least annually. Some businesses conduct a light-touch review quarterly with a full audit every 12 months.
What happens if a regulator finds gaps in compliance?
You may face fines, enforcement action, reputational harm, or restrictions on trading. Being proactive shows good faith and can reduce penalties.
To find out more about how our Non-Executive Director service can provide a Legal Risk and Compliance Procedure, please email us at [email protected] or phone 0121 249 2400.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article, please contact 43Legal.