Due Diligence Audits

In general terms, a due diligence audit involves the thorough examination of a company in order to evaluate its standing as a business.

A due diligence audit assists the procurer of the report to gain a greater understanding of various aspects of a business, such as prospective earning capabilities, business operations, risk management, who the company primarily deals with in regards to customers and suppliers, what assets and liabilities it has, as well as its financial position.

This type of report is most commonly used by individuals or businesses who are considering entering into a significant business transaction, such as a business purchase or merger.

The findings contained within a due diligence audit report provide an assessment of the company in regards to its ability, potential, history, performance, and repute, which can then be used to assist in making a well informed decision regarding the potential agreement or transaction.

Due diligence is essentially a background check to ensure that the parties to a deal have the information they need to proceed with the transaction. It is an examination and risk assessment of an anticipated commercial transaction. A thorough investigation is necessary in order to understand true business position and future potential, as well as to uncover any misrepresentation or fraudulent activity that could have significant impact on the transaction.

Due diligence is the process through which interested parties who are planning to enter into a business deal exchange, review, and evaluate sensitive, legally binding, financial, and other material information. The phrase “due diligence” frequently refers to the thorough investigation and study carried out before signing a contract or starting a business with a party.

There a number of reasons that a due diligence audit may be undertaken. Similarly, there are a number of specific due diligence audits that can be carried out depending on the nature of the situation and the type of information that is being sought to be understood.

Some of the most common types of due diligence audits are detailed below.

Seek Expert Due Diligence Advice

Significant business transactions can bring big rewards, but they can also result in substantial, unnecessary risks and costs if entered into without a detailed understanding of exactly what is being acquired. Hence, a thorough due diligence report is imperative to ensure that you have an accurate representation of the situation.

At The Quinn Group, our team of due diligence auditors can provide expert advice regarding all aspects of due diligence audits. From determining the most appropriate audit for your situation, to undertaking the audit and providing a comprehensive audit report, we can assist with all of your auditing needs. Complete and submit the Express Enquiry form on the top right hand side of this page and we will contact you to discuss your enquiry or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment.

Operational Due Diligence

A buyer’s investigation into a target company’s operations is known as operational due diligence. The business’s operations, in the broadest sense, are how it converts inputs into outputs. In an M&A deal, operational due diligence has the responsibility of evaluating this procedure and its long-term viability for the buyer.

When it comes to due diligence in M&A, people mostly talk about the buy-side. Potential purchasers examine the practical aspects of a company they are interested in acquiring. The question asked is about how to make something work if it belongs to us, which highlights the importance of looking ahead in operational due diligence for potential buyers rather than focusing on past performance like financial due diligence. The focus is not on determining if the target company is viable currently, but rather if it can maintain its operations in the future.

Sell-side operational due diligence is similar to a company’s operations strategy as it involves looking into the future. It is beneficial for companies to conduct their own operational due diligence, regardless of whether they plan to sell their business or not. This involves analysing the functioning of the company’s operations in a critical manner. Asking whether fixed assets need investment, if capacity needs to be increased, and if operations could be more efficient can bring valuable benefits to a company.

Financial Due Diligence

Financial due diligence is an important evaluation of a company’s financial status, analysing its past and present performance to predict future outcomes and identify any potential threats. This process, also referred to as accounting due diligence, is a crucial aspect of mergers and acquisitions, as it provides insight into the target company’s financial position.

In an M&A deal, conducting financial due diligence is crucial for the buyer to have peace of mind. Knowing the target company’s financial status and future prospects can make or break the success of the investment. The typical approach involves examining financial reports, sales predictions, industry and market information, and speaking with important staff members. As this information is delicate, a secure data room must be utilised by both the buyer and seller to exchange documents.

While mergers and acquisitions typically involve the buyer conducting due diligence, it’s crucial for the company being acquired to also perform due diligence. This is because almost half of deals fail due to problems discovered during the process. If the selling company conducts its own due diligence beforehand, issues can be addressed before the buyer becomes involved. Having a seamless transaction can result in a higher value outcome for the seller.

Clients & Services Due Diligence

Clients due diligence (CDD) or Know Your Customer (KYC) is a process conducted by financial institutions to analyse and assess the potential risks of customers or organisations. The main purpose of CDD is for banks to follow anti-money laundering regulations, but it also helps them prevent financing of terrorism, stop criminals from exploiting the financial system, and distance themselves from corrupt practices.

Client due diligence involves obtaining information about potential clients or customers in order to assess the level of risk they pose, particularly in regards to fraud and unethical behaviour. In many countries, it is necessary to carry out this type of due diligence before entering into any business arrangement between two parties.

For example, if Organisation “A” intends to conduct business with Customer “B”, they believe it is appropriate to conduct a thorough investigation on Customer “B”. Organisation “A” must gather accurate information about customer “B” from trustworthy sources. This helps to determine if customer “B” is financially feasible and complying with legal regulations. Customer due diligence is conducted by businesses to assess the level of risk involved in their interactions with customers.

Technical Product & Work Quality Due Diligence

Technical due diligence is a thorough and unbiased evaluation of a product’s technical state, code quality, decision-making processes, and potential risks before securing investments, with a focus on transparency, potential risks, and future prospects. Technical due diligence allows the development team to thoroughly evaluate the product’s strengths and weaknesses, while investors use it to ensure they are making a wise investment decision.

Technical product and work quality due diligence is to be conducted prior to a merger or acquisition, or receiving an investment, it is common practice for venture funds to conduct due diligence on early-stage start-ups, even before providing pre-seed funding.

The reasons for performing technology due diligence can differ, but in general, investors want to make sure that they are investing in a trustworthy and secure product, such as an investment platform. This requires them to take certain steps. Entrepreneurs should have a good understanding of their abilities, evaluate all potential risks, thoroughly research the technical aspects and potential of their product, test their workload, and predict its financial return. Investors are particularly interested in identifying technology-related risks and expenses in start-ups and software products, so owners should focus on identifying and improving any weaknesses. To put it differently, a thorough tech due diligence can serve as your ticket to gain the interest of investors.

Risk Management Due Diligence

A risk assessment is an evaluation that organisations conduct to determine the potential risks they may face in their activities and to ensure that their policies and procedures are effective in mitigating those risks to an acceptable level. The assessment covers various risks, such as financial, commercial, political, technical, safety, quality, environmental, and corruption. For example, the assessment of corruption risk defines an acceptable level of risk as one in which the risk of corruption is sufficiently low to allow the business relationship, transaction, or project to proceed or continue.

The objective of the corruption risk assessment and the accompanying due diligence is not to completely eradicate every single potential risk of corruption. Rather, it aims to determine, after conducting thorough and proportional investigations and carefully considering the matter, whether the risk of corruption is low enough to justify allowing the business relationship, transaction or project to proceed or continue.

Legal Due Diligence

Legal due diligence involves examining all legal information and documents related to a company before a deal is closed. This allows both the buyer and seller to evaluate any legal risks, such as lawsuits or intellectual property issues, and make an informed decision about the transaction. The review may include contracts, leases, potential lawsuits, intellectual property, taxes, and organisational documents.

Legal due diligence is important for both buyers and sellers. For sellers, it helps them assess the value of their company and prepare it for sale. This is important as many deals fail due to issues that come up during due diligence. If sellers conduct due diligence on their own company, they can fix any issues before a potential buyer or investor gets involved. The buyer will experience a smoother and less annoying process, while the seller may receive a better deal.

Legal due diligence on the buyer’s side has four benefits. It helps the buyer understand the target company and its operations, which is useful in setting a fair purchase price and drafting a solid M&A contract. It is essential to have a comprehensive knowledge of the legal dangers and responsibilities associated with a target to make a well-informed decision and prevent any future problems.

Information Technology (IT) & Cyber Security Due Diligence

Cybersecurity due diligence involves examining the measures in place to secure information assets and identifying and protecting against cyber risks from third-party vendors. Cybersecurity companies gather information on a company’s third-party vendors and IT security measures during due diligence. This helps the client understand the potential risks and vulnerabilities associated with these vendors and take appropriate action. Security measures for cyber issues are crucial when it comes to mergers and acquisitions. They can uncover problems that need to be addressed, which might affect the deal’s terms or price. Any discovered risks should be fixed to ensure compliance and reduce cyber threats.

Conducting cybersecurity due diligence is important for organisations as it helps them accurately assess risks before entering into mergers or acquisitions, identify any issues that may require restructuring, and understand the cyber threat landscape. It also allows for the quantification and identification of a company’s entire cybersecurity posture. Cybersecurity due diligence involves examining the cybersecurity posture, ability to address cyberattacks, and compliance status of third-party vendors or acquisition targets.

Environmental, Social & Governance (ESG) Due Diligence

ESG due diligence refers to the identification and resolution of environmental, social, and governance risks. The term “ESG” was introduced to help investors in recognising areas where companies may face significant ESG risk, with the objective of creating a sustainable world. Reading through an ESG audit or a company’s latest sustainability report is an excellent way to conduct due diligence. A company’s ESG profile is determined by how well it adheres to international standards for human rights, labour rights, anti-corruption, environmental protection, and sustainable use of resources. Poor ESG scores can lead to higher costs, lower returns, and less value for stakeholders, potentially resulting in insolvency during market volatility or declining demand.

ESG due diligence is necessary for companies to identify and address risks that could impact investor returns and to improve their sustainability profile. Investors and shareholders are increasingly focused on sustainability as a key factor in generating long-term returns. Therefore, ongoing monitoring is essential to manage ESG risks and enhance company performance in this area. ESG has gained significance as it combines financial performance, environmental and social responsibility. Investors who prioritise long-term value creation consider ESG important. While certain industries have greater exposure to ESG issues, most companies face such issues. A company’s capacity to sustainably boost sales and profits hinges on its proficiency in all aspects, including governance, social and environmental policies.

Expert Due Diligence Audit Advice

At The Quinn Group, our team of due diligence auditors can provide expert advice regarding all aspects of due diligence audits. From determining the most appropriate audit for your situation, to undertaking the audit and providing a comprehensive audit report, we can assist with all of your auditing needs. Complete and submit the Express Enquiry form on the top right hand side of this page and we will contact you to discuss your enquiry or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment. We look forward to speaking with you.