Due diligence is defined as the process of systematically researching and verifying the accuracy of a statement.
Conducting due diligence greatly enhances informed decision making. By improving the amount and quality of information available to decision makers, and by properly utilizing that data, the chances of success become greater, risks are reduced, and a higher level of comfort can be taken in correct decisions being made.
Due diligence can be applied in a business acquisition or sale, capital expenditure, business restructuring, forming business’s processes and policies, or any material matter. Without this important practice money can be wasted, jobs lost, retirements spent and lives ruined. Sometimes people use due diligence in their life outside of finance, such as the diligence parents put into choosing the right school for their children.
An audit is often included in Due Diligence. Financial, compliance, legal, environmental, IT and software are some audit forms which can be utilized in performing proper due diligence. It is important to determine what type of audit(s) are called for, if any, and will depend on the transaction taking place. Software audits can determine if a business has all of the proper licensing in secured for the software they are utilizing in operating their business. An environmental audit can show whether a company is or is not in compliance with any EPA or other governmental regulations that apply to their industry. I have seen instances where either of these two audits could have exposed potential fines and penalties that would have immediately halted the sale or acquisition of a business. Many businesses perform due diligence on behalf of their shareholders each year in the form of a financial audit completed by their CPA firm. The audit report gives the shareholders reasonable assurance management is conducting its financial business according to a set of accounting standards or principles appropriate for the business, one of the most common is General Accepted Accounting Principles or GAAP.
The Directors and Management of a corporation can be held legally responsible for performing proper due diligence before completing major acquisitions, mergers, expansions and other major business transactions that carry substantial risks or transform the company.
Many times it is necessary to bring in outside expertise to perform the required due diligence. Some of this outside expertise can take the form of tax, financial or legal experts. A B2B CFO® partner can be utilized to manage the due diligence process for a company who does not have the internal expertise or cannot apply the proper attention this process requires. B2B CFO® Partners have a high level of experience and can draw from the knowledge of the other 237 partners of the firm to elevate the process and ensure a higher level of success for your required due diligence.
Taryl Enderson, Partner