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Tools for nonprofit leaders: Conducting a legal audit

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As part of their risk management strategy, many high performance not-for-profit organizations have outside legal council conduct a legal audit every three to four years.  A legal audit is a review of key legal documents:

  • Letters Patent
  • By-laws
  • Registers: directors, members, officers
  • Policies
  • Minute book
  • Annual meeting procedures

The purpose of the legal audit is to identify areas where the organization is not in compliance with the law and/or good practices. Usually unintentionally, organizations deviate from their objects as a result of introducing new programs or procedures or misguided management/leadership decisions.

Lawyer Bill Pashby, a partner in the firm Borden Ladner Gervais, who has completed dozens of legal audits, cites the following examples of issues that have been uncovered in not-for-profit organization legal audits:

  • Deviation from objects: actions that were not in compliance with their objects as set out in their Letters Patent and therefore illegal actions
  • Bylaw non-compliance with current legal practices
  • Lack of quorum
  • Directors not properly elected
  • Required member meetings not held
  • Proper minute books not kept

You may be surprised to learn that hard copy minute books are a legal requirement; e-files don’t count. You may also be surprised to learn that e-voting is not legally authorized.

While prices vary, a typical price for a legal audit is in the range of $2,000 - $3,000.

It is a good idea to complete a legal audit now and correct identified problems before someone else discovers them. This will prevent a challenge by a third party or a dissatisfied member or director (or their lawyer), which could lead to legal actions, termination of employment of the CEO, or a confused, discouraged board, bad publicity and reduced funding.

To learn more about legal obligations of not-for-profit organizations click here to view Industry Canada’s resources.

Paulette in President of Solution Studio Inc., a consulting practice that serves the not-for-profit association community. Paulette co-authored two manuscripts on risk management & not-for-profit organizations. She can be reached at 1-877-787-7714 or Paulette@solutionstudioinc.com.

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