Operational risk represents the risk that comes due to uncertainties and hazards in a company’s operations. Operational risk is a type of business risk and can impact a company’s profits adversely. This risk exists for every business and company. There are various operational risks that companies may face, one of which is a legal risk.
What is Legal Risk?
Legal risk consists of any uncertainties that companies may face due to fraudulent activities. It has various definitions. However, legal risks usually refer to any loss that companies may face due to their activities that may cause issues. For example, companies face legal risk due to defective transactions. Similarly, failing to take appropriate measures to protect its owned assets can cause legal risks.
Legal risks may also refer to any risks that companies face due to changes in the laws. Legal risk is usually associated with operational risks as it may come as a result of fraudulent activity. Therefore, it can impact a company’s operations and result in operational losses. Identifying different types of legal and operational risks is crucial for companies. It is because they will need to customize their responses to each risk.
What are the various types of Legal Risk?
Legal risks come from various sources. Usually, it comes as a result of the laws the apply to a company. For example, these may include employment laws, safety laws, tax laws, etc. Therefore, each type of legal risk may have a different impact on a company and its operations. Some of the types of legal risk include the following.
Assets
As mentioned, legal risks stem from a company’s failure to protect its assets, whether tangible or intangible. Companies need to identify all their assets to identify and manage any risks associated with them. Once they do so, they can protect the rights and obligations related to all the legal assets owned by them.
Regulations
Regulatory risks refer to any risks that companies face due to changes in regulations. For every company, identifying the applicable rules and complying with them is crucial. Regulatory risk is a type of legal risk and can impact a company’s operations. Any changes in the legal implications and regulations can affect a company’s operations and are, therefore, a part of legal risks.
Contracts
Contract risk refers to the risks related to the contracts that companies undertake. These arise due to the failure of any of the two parties in an agreement to meet their obligations. Likewise, contract risks lead to legal implications for companies. Since it relates to a company’s operations and legal matters, contract risks are a part of legal risks.
Disputes
Working in a business environment gives rise to many duties. Due to these, companies may face various disputes. The risk of facing a legal dispute which also disrupts a company’s operations is a part of legal risks. Even those that don’t result in legal repercussions can lead to other risks such as reputational risk.
Conclusion
Legal risk refers to the uncertainties that companies face due to legal matters. Usually, it may relate to fraudulent activities within a company. Therefore, these are usually part of operational risks. Legal risks may come from various sources. These include assets, regulations, contracts, and disputes. Identifying the sources of legal risk is crucial in controlling and managing them.
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