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What Is a Due Diligence Audit?

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  • Written By: Melissa Barrett
  • Edited By: Lauren Fritsky
  • Last Modified Date: 16 April 2014
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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 compared to an employee background check on a corporate scale. Like perspective employees, companies wishing to be purchased are often trying to make the most positive impression possible. The strengths of the company are often highly stressed and the weakness are downplayed. A due diligence audit is the equivalent of checking references before hiring.

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.

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.

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Often, clients and employees of the investigated company are interviewed. Frequently, auditors specifically seek out those who may be unhappy with the performance of the company. Any legal actions against the company should be thoroughly reviewed. In cases where a claim is repeated, such as several employee harassment suits or product liability claims, attorneys are often assigned to review the records of the litigation.

In extreme cases, private investigators may go undercover into an organization. Often, by posing as new employees, they are freely given information on the negatives of a company that workers may not give in formal interviews. The use of “secret shoppers” may be similarly used in companies that provide goods or services to the public. In these cases, individuals are hired to buy from the organization and report on their experiences.

Seldom is any given company exactly what it presents itself to be. As such, negative findings during a due diligence audit do not necessarily preclude the purchase of that company. These findings, however, may result in renegotiation of the purchase price. In theory, the reduced cost allows the purchasing company the finances to address any pre-existing problems.

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Discuss this Article

KaBoom
Post 2

@JaneAir - That sounds like just a bit too much intrigue for me.

I do think a due diligence audit is a sensible practice though. If you are purchasing a company, you should know everything there is to know about it. How else are you supposed to make an informed decision?

JaneAir
Post 1

Private investigators go undercover in the company? This sounds like it could be the plot of a movie! It also sounds like it could be kind of fun.

You know, getting inside scoop from the inside? The private investigator would definitely have to have some kind of knowledge of the business though. It seems like they would have to go through the hiring process and actually get hired just like anyone else.

I think this would probably be the best way to get information though. I know most places I've worked are much different on the inside than they appear to an outsider!

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