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Due diligence reports contain information regarding the stability of a company or organization. They are typically required when a company is analyzing another company for possible acquisition. The buying company needs to know all the details of the stability of the selling company before making an informed decision on whether or not to purchase. Due diligence reports may be produced by an outside accounting firm or might be the result of an internal audit.
Verifying the accuracy of financial information is usually the goal of due diligence reports. These reports will double-check the numbers related to financial statements such as a balance sheet and profit and loss report. Especially large assets such as machinery and accounts receivable will need to be verified before a company purchase is made.
While due diligence reports usually focus on the financial aspects of a company, there are other topics that can be covered as well. For example, is the company currently the target of any lawsuits? Does the company have a secure network and up-to-date IT software and hardware? Are there any problems with the manufacturing process? All of these questions are examples of due diligence reports that are non-financial but could have a huge impact on a company’s solvency.
Analyzing a company’s stability can be an exhaustive process, so due diligence reports can help break the process down into categories for evaluation. These categories include, but are not limited to, financial audits, environmental impact studies, marketing analyses, information systems audits and management evaluations. By breaking a company down into smaller sections, it becomes easier to evaluate.
Legal obligations can be tied to due diligence as well. Potential investors have a reasonable expectation that their broker exercises due diligence when advising for or against certain investments. The term due diligence, used in this manner, dates back to 1933 and the United States’ Securities Act. In that piece of legislation, law-makers needed to establish the level of liability of investors who advise others to buy shares in a company. The law states that as long as the investors exercised due diligence, or a proper amount of investigation, they cannot be held liable if or when those investments turn bad.
The term due diligence does not always have to be related to legal or financial matters. Nowadays, a person can be said to exercise due diligence when making a complex decision by conducting extensive research.