Why Your Business Needs to Embrace Governance & Legal Audits in 2025

In 2014, a KPMG forensic investigation revealed that senior managers at Mumias Sugar Company had conspired to misinform the board, resulting in a loss of over KSh 1.1 billion in a failed sugar import deal. This scandal, part of a broader governance collapse involving ghost farmers, diverted ethanol, and inflated procurement, sparked public outrage and was so atrocious that the Capital Markets Authority (CMA) later commissioned a fresh audit and vowed to pursue prosecutions.

This dramatic episode serves as a stark reminder that ‘Weaker governance and legal oversight aren’t abstract issues, they can obliterate well-established Kenyan firms.’ To prevent a repeat in your own company, embracing both governance and legal audits is no longer optional, it’s essential.

What Are Governance & Legal Audits?

• Governance Audits assess how well an organization’s board and management adhere to governance standards—focused on areas like board composition, committee effectiveness, ethical conduct, stakeholder engagement, and transparency.

• Legal Audits review a company’s adherence to statutory obligations such as filings with the Registrar, beneficial ownership disclosures, licensing, contracts, data protection, finance and employment laws.

Why Kenyan Businesses Need Them Now

1. Mitigate Regulatory Risk
   Governance audits uncover non-compliance that can trigger penalties or deregistration. Legal audits ensure filings for annual returns, beneficial ownership, tax, data protection, licensing, and employment are up to date.

2. Strengthen Board Effectiveness & Oversight
   Companies with audit committees and periodic governance reviews, aligned with frameworks like Mwongozo and CMA, improve their decision-making, transparency, and accountability.

3. Protect Reputation & Operational Integrity
   Poor governance can lead to fraud, mismanagement, or collapse, as seen in Kenyan examples such as Mumias Sugar, where forensic audits uncovered significant losses . Regular audits act as early warning systems.

4. Boost Investor and Stakeholder Confidence
   External stakeholders look for evidence of strong governance and legal diligence. Audited governance and legal practices help build trust and secure investment.

5. Drive Internal Efficiency
   Audits highlight gaps in governance structures, policies, contracts, and statutory records, leading to faster processes, reduced costs, and stronger internal controls.

Which Businesses Should Prioritize These Audits?

• Publicly Listed Companies or Issuers should conduct annual governance audits to remain compliant with CMA codes.

• State-owned Enterprises (SOEs) and parastatals must align with Mwongozo requirements and face growing calls for governance audits.

• Financial, Data-heavy, and Regulated Businesses (e.g., banks, fintech, telecoms) require legal audits to avoid breaches under sector-specific laws and new data regulations.

• Growing SMEs and Family Businesses benefit from early audits to professionalize governance, improve compliance, and prepare for future scale.

How to Conduct Governance & Legal Audits with Your Company Secretary

1. Prepare a Detailed Audit Plan
   Company secretaries help to design audit frameworks based on governance codes, statutory requirements, and business needs, therefore covering board practices, statutory records, beneficial ownership, filings, and contracts.

2. Review Governance Structures
   Evaluate board composition, committee charters, director independence, board meeting frequency, and stakeholder communication practices.

3. Test Statutory Compliance
   Verify annual returns, beneficial ownership registers, tax filings, permits, data filings, commercial contracts, and labour compliance, flagging missed deadlines or inconsistencies.

4. Analyze Policies & Contracts
   Ensure board charters, codes of conduct, whistle-blowing procedures, confidentiality agreements, and legal contracts are current and governance-focused.

5. Conduct Risk-Based Outcome Review
   Align audits with identified governance and legal risks e.g., conflict of interest, privacy breaches, non-compliant reporting, and assess internal controls.

6. Report to the Board/Audit Committee
   Company secretaries submit findings to the audit committee or board, maintaining objectivity and ensuring independence. They recommend corrective actions and monitor follow-through.

7. Follow Up and Re-Audit
   Establish timelines for implementation, assign accountable persons, and schedule follow-up governance and legal audits, typically semi-annually or annually.

Benefits of a Proactive Audit Culture

1. Competitive Edge: Demonstrates maturity in governance to investors and partners.

2. Scalability: Clean compliance, controlled legal frameworks, and board readiness are fundamental for expansion or fundraising.

3. Resilience: Enterprise-wide controls and governance strengthen the organization against shocks, regulatory change, and stakeholder pressure.

Conclusion

In today's Kenyan business environment, governance and legal audits are essential for ensuring compliance and building trustworthy, resilient companies. With deep expertise, company secretaries are uniquely positioned to lead audits, ensuring your board complies with statutory requirements, industry standards, and strategic goals. By institutionalizing audits, companies not only meet regulatory demands but also build stronger foundations for future success.

For tailored governance and legal audit services, contact Azali Certified Public Secretaries LLP, your partner in creating compliant, transparent, and growth-ready businesses.