By Bitesh Solanky
In many organisations, it is the CFO’s responsibility to manage and mitigate potential legal risks. Failure to do so can have catastrophic consequences. So, in this blog, I will give you a brief outline of the top ten legal risks and some high-level tips about what you can do to offset them.
Remember, the idea of risk management is not to stop you from doing business, but to keep you focused on doing business in the right way. If you’ve got the right team and structure in place, risks can be managed and with the help of external advisors like us, you can create a framework that will be sustainable for the business.
This is necessarily only a brief synopsis. If you would like more specific guidance, please do not hesitate to email me on bitesh.solanky@thelegaldirector.co.uk. You can also explore all the downloadable guides on our website’s Approach page, which give more detailed guidance on many of these various issues. You can access my recent Legal Live webinar on the same topic here.
1/ Financial Planning
Robust financial planning is the cornerstone of any successful business. It helps in managing cash flow, securing investments, and ensuring compliance with financial regulations. Poor financial planning can lead to regulatory penalties, financial instability, and loss of stakeholder confidence.
What you should do…
- Manage internal controls.
- Undertake regular audits and internal reviews.
- Ensure compliance with regulations (GAAP, IFRS).
- Implement proactive forecasting and scenario planning.
2/ Corporate Governance
Corporate governance impacts businesses of all sizes. Though SMEs are not subject to the prescriptive requirements faced by large companies, they can be just as vulnerable to exposure to risk and just as likely to benefit from good governance, processes, and risk management. There is also a marked increase in expectations of all businesses from a range of stakeholders, like investors and potential buyers, customers, suppliers, insurers and employees.
What you should do…
- Align to codes like the UK Corporate Governance code, Wates Principles.
- Undertake regular reviews and ensure strong communication channels between the board and management.
- Ensure board oversight and accountability is clear.
- Promote diversity and inclusion at board level.
3/ Fraud
Fraud is criminal and disappointingly common. There will always be people trying to defraud businesses – and you can be tricked by such seemingly innocuous operations as paying a supplier invoice. So, it’s important to keep the risk of fraud at the forefront of your mind and to foster an ethical corporate culture.
What you should do…
- Implement fraud detection systems (polices, reviews, technology).
- Undertake regular internal reviews of controls to ensure they are robust and tweak where necessary.
- Train staff to recognise signs of fraud.
4/ Data Privacy & Cyber Security
Every business faces the risk of cyber-attacks, and every business handles personal information. So, this will always be an area of risk for organisations. Failing to adhere to data privacy legislation can lead to regulatory fines and loss of customer trust. And mishandling the personal data you hold can exacerbate the expense and time that businesses must spend dealing with DSARs. The increased use of AI only complicates this already tricky area.
What you should do…
- Stay compliant with data privacy legislation, undertake an audit of systems and processes, keep a ‘Record of Processing Activities’.
- Ensure IT and compliance teams work together to prevent breaches.
- Develop a crisis response plan to handle potential breaches and safeguard customer/client data.
- Provide regular staff training on data privacy and cyber security.
5/ Contract Management
Contract management can regularly get neglected in businesses. It is not uncommon for people to sign off on contracts that have not been properly reviewed which can throw up legal challenges and financial losses that can seriously derail operations.
What you should do…
- Implement a clear approval and sign off process, making sure contracts are reviewed and approved by only a few key people.
- Conduct training to ensure that anybody negotiating terms is aware of risk tolerances applicable to your business.
- Centralise contract management.
- Ensure all contracts align with legal obligations and business requirements.
- Periodically review contracts, processes and polices to account for legal changes and business needs.
6/ Insolvency
Insolvency poses significant risks, including legal actions, loss of assets, and damage to reputation. Understanding the early signs of financial distress can help in taking corrective actions before it’s too late. Insolvency can also lead to personal liabilities for directors if not managed properly.
What you should do…
- Undertake a financial health check on a regular basis.
- Comply with regulations to mitigate risks.
- Engage early with professional advisors when an insolvency risk arises.
- Understand directors’ duties when operating in an insolvency situation.
7/ Employment Law
Employing people involves many ramifications which require careful thought. How do you retain staff? How do you train staff? How do you handle disputes? How do you manage benefits if you’ve got high staff turnover? Are you employing consultants? If so, are they inside or outside IR35? With Labour’s new Employment Rights Bill, it is more important than ever to review your contracts and policies to check you are not inadvertently putting the business at risk.
What you should do…
- Conduct regular reviews of employment contracts and HR policies.
- Stay up to date with employment law changes.
- Make sure HR, finance and legal work together to mitigate any risks.
- Use employee engagement surveys to get feedback from employees.
8/ Environmental and Social Governance (ESG)
It is now essential to take ESG seriously. Investors, regulators and consumers are all placing a greater importance on sustainability and ethical practices. Failing to address ESG can damage your reputation, put off investors and put you out of the running for preferential financial rates.
What you should do…
- Align financial planning with ESG goals.
- Ensure transparency in ESG reporting.
- Audit ESG practices to maintain credibility with key stakeholders.
- Ensure a balanced approach to all ESG components, not just environmental factors.
- Set measurable ESG targets and report progress transparently.
9/ Tax
Navigating the complexities of tax regulations is crucial for any business. Non-compliance can result in significant penalties, legal action, and reputational harm. Tax laws are continually evolving, and businesses must stay informed to manage liabilities effectively.
What you should do…
- Conduct regular reviews of tax planning strategies.
- Stay up to date on evolving tax regulations.
- Work closely with tax advisors and legal teams to stay abreast of regulatory changes.
- Consider international tax implications if operating cross borders.
10/ Anti-Bribery and Corruption
Anti bribery and corruption applies to every single business without fail. As we see time and again in government, you must be careful when you’re being gifted something because it may come with expectations.
What you should do…
- Have robust polices aligned with the UK Bribery Act. (Every business should have a Gifts and Hospitality policy.)
- Undertake regular training for employees.
- Perform annual audits to identify and prevent bribery and corruption.
- Establish a whistleblowing policy to encourage reporting of unethical practices.
How we can help
The legal risk that CFOs must contend with are all connected. Robust financial reporting will help you identify discrepancies that may indicate fraud, for example. So, businesses need a proactive, holistic, integrated approach to risk management.
At TLD, we’re not just lawyers – we’re businesspeople. We understand how businesses operate and the risks they face because we’ve faced those risks in many other organisations. A TLD Client Legal Director coming into your business would immediately engage with the key stakeholders to understand where the risks lie. They would prepare a heat map to prioritise the areas that must be looked at and develop a risk register and compliance framework to mitigate inherent and emerging risks on an ongoing, sustainable basis.
Available to work on a flexible, part-time, retained basis, they can take work off a CFO’s desk and contribute to the sustainable growth of your company. If you’d like to chat with me to find out more about how I could support your business, please message me on bitesh.solanky@thelegaldirector.co.uk or give me a call on 07837 849187.
