An Insight into Due Diligence

“Due diligence is an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations” – Wikipedia

Due Diligence in simple terms refers to the careful appraisal of any Business transaction, offer or proposition with utmost care, responsibility and prudence so as to eliminate or avoid any potential harm or discrepancy.

Due Diligence process is commonly performed before an acquiring company initiates the taking over of a target company

It aims at evaluation of a business proposition from all the relevant angles so as to assess the risks involved at the initial stage itself and confirm the existence of conditions and particulars agreed upon beforehand. It is generally outsourced or done by a third party to avoid any hindsight bias.

Audit is an integral part of the Due Diligence framework.

The Due Diligence framework(process) can be divided into the following areas -

1. Compatibility Audit –

   Answers the Question : “Whether there is going to be any Synergy Gain”

2. Financial Audit –

   Gives details about the financials of the company

3. Macro-Environment Audit –

   Gives the details about the Sector/Industry in which the company operates

4. Legal/Environmental Audit –

   Provides an insight about the legal framework of company

5. Marketing Audit –

   Details about the marketing aspects of the (target) company

6. Prod Audit –

   Audit relating to the production process of the target company

7. Management Audit –

   Audit concerning the shareholding pattern and ownership details

8. IS Audit –

   A very important part of the process related to  IT infrastructure of the company

9. Reconciliation Audit –

   It is done to ensure that two sets of records of the target company are in sync, in agreement