Due Diligence Audit

In business, a due diligence audit is basically a careful investigation into the complete financial picture of a company. Generally, these audits come before a purchase, merger or other major decision that could negatively influence the finances of one or more businesses. These audits are generally used to ensure that no hidden liabilities exist.

Due diligence can be defined as “investigation by or on behalf of an intended buyer of a business to check that it has the desired assets, turnover, profits, market share positions, technology, customer franchise, patents and brand rights, contracts, and other attributes required by the buyer or claimed by the seller.”

In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party.

In general, a due diligence audit focuses on information outside of what is freely presented. While it is generally expected for a purchasing company to perform these investigations, they are often done discreetly. The hire of private investigators is not uncommon, and seldom are the companies that are being investigated aware of the specific focuses of investigation.

Why do we need due diligence?

The due diligence stage is an essential element to a successful commercial transaction. When purchasing a business, the due diligence stage allows the buyer to assess the value of the business and to verify the information pertaining to the business in order to determine whether to proceed with the purchase.

There are several reasons why due diligence is conducted:

  • To confirm and verify information that was brought up during the deal or investment process
  • To identify potential defects in the deal or investment opportunity and thus avoid a bad business transaction
  • To obtain information that would be useful in valuing the deal
  • To make sure that the deal or investment opportunity complies with the investment or deal criteria

Due diligence helps investors and companies understand the nature of a deal, the risks involved, and whether the deal fits with their portfolio. Essentially, undergoing due diligence is like doing “homework” on a potential deal and is essential to informed investment decisions.

Forensic accounting teams are often the backbone of a due diligence audit. These specialists are trained to thoroughly review the financial records of an organization for any discrepancies. Unlike traditional accountants, forensic accountants are specifically trained to search for fraud and hidden assets and debts.

The due diligence procedure involves: Identifying legal and financial risks associated with investing in a particular business

  • Preparing a report on the legitimacy of a target business and its assets
  • Advice on minimizing investment risks

The work which is performed within the due diligence procedure may be divided into three interconnected parts:

  • Financial Due Diligence: confirmation of net assets, both title and value, checking of the accuracy of accounting, historic and prospective financial analysis, assessment of financial risks
  • Tax Due Diligence: check of accuracy of tax calculations, tax risks evaluation
  • Legal Due Diligence: check of corporate structure, titles to assets, intellectual property rights, commercial liabilities, and legal risks evaluation.