Prevention is better than suffering in the loss
Legal risk is the potential of losses due to regulatory or legal action that can arise because of an
individual's or corporation's actions, inaction, products, services, or other events. Firms mainly
employ people experienced in litigation risk analysis to identify key areas where the litigation
risk is high and hence undertake appropriate measures to limit or vanish those risks.
Types of legal risk in a business:
- Regulatory risks and Contractual risk - Risks arising from laws and regulations that
drastically affect the business are known as regulatory risks and Risks which are incurred
due to failure or negligence in fulfilment of contractual liabilities are called Contractual
- Compliance risk - Risks due to non-compliance with internal policies, statutes, financial
forfeiture etc applied to any business organisation is Compliance risk.
Firms face trouble when they fail to act according to industry laws and internal policies. It is also
called integrity risk.
- Dispute risk and Reputational risk - Dispute risk is caused when due to interruption by
the stakeholders, partners, customers of the business and Risks arising due to the
involvement of employees or other parties like suppliers is called Reputational Risk.
Frauds and their types in legal risk:
- Assets and Data theft frauds- These frauds are related to the theft of
private data which
may be used for destroying the reputation or goodwill of an organization.
These frauds may put the organisation in a precarious condition that may result
in action against the
the organisation along with penalties.
- Accounting frauds, Bribery and Corruption- Accounting frauds are manipulation of
financial statements intended to create a fake high profile position of the company. A
fabricated statement of finance states the failure of the management causing greed among
the employees. Bribery and corruption also arise out of the unsatisfied needs of the
Litigation in Risk Analysis
Litigation risk is the risk of getting legal action. It analysis the chance or a possibility that legal
action will be taken against the company in the future from a certain contract or a transaction. It
is a method to systematically understand the uncertainties in the litigation process.
Eradication of litigation risk
A litigation risk can arise from a contract or a transaction, necessary measures are taken to
eliminate the litigation risk. It is an ideal practice to leave that particular contract or transaction
to avoid any unnecessary complications.
The accounting of the litigation risk
As per Generally accepted accounting practice (GAAP) and International
Accounting Standards (IAS), it is vital for companies to create a provision for
the litigation risk and incorporate it in their financial statements.
Litigation risk assessment
It provides the management of the company with the timely assessment of the
upcoming risk of a legal action along with future financial problems of the
company because of it. In the litigation risk assessment, these components are
- Course of action of a Litigation
- Case Status
- Legal issues, its assessment and analysis
- Projection of legal budget of the case
- Showcase of Result of the case
Risks arising out of any legal workings are a threat to numerous organisations
and individuals. Hence proper check and precautions are a pre-requisite because
of any legal process.
- The 5 most common legal risks that can impact your
- John Spacy, What is Legal Risk, available at https://simplicable.com/new/legal-risk.
- Insights into fraud risk analytics, available