Financial due diligence is a process through which financial professionals carry out an investigation and research on the financial matters and circumstances of the target firm and an analysis of various related factors. The due diligence investigation is managed according to the commissioned concepts and objectives of the acquiring firm. There are a number of methods that are used by the firm implementing the financial due diligence action, such as conducting interviews and discussions with important employees and the senior management, document reviews, comparing various historical financial data, analysis of trends as well as reporting of financial challenges and tax risks. The financial due diligence service providers also study the situation of the actual operations for the target firm so that such information can be delivered to the firm responsible for acquiring them.
Due diligence mainly functions as an assurance engagement report. The accountant responsible for reporting the due diligence must have a thorough understanding of the latest standards associated with accounting and auditing. Even though the accountant who is responsible for managing the auditing and reporting function is not supposed to comment on whether the financial statements are true or false, they may apply financial due diligence regulations associated with ISA or International Standards on Auditing. The main goal of financial due diligence is to understand and establish the actual financial condition of the target firm within the last few years. The financial due diligence can also help in addressing the matter of understanding and predicting the financial situation for the future.
It is also important to clearly understand the current financial condition of the company along with internal control regulations and operations management. Due diligence services are extremely important in any merger or acquisition situation as they provide the buyer with an insight into the operations and inner workings of a target firm. By analyzing the report, an investor can decide whether to acquire the business or invest in it. Further the investor can choose to re-negotiate the price based on the findings of the due diligence and their impact on the target firm’s future profitability. In other words, such reports allow investors to make informed decisions and be aware of the possible risks in associating themselves with the business firm. Due diligence experts and auditing professionals help to make sure that a company sticks to proper book keeping format, the applicable accounting standards and correct financial reporting. They can also decide whether there are any alarming aspects or red flags.
Leading providers of financial due diligence solutions can offer thorough and precise solutions to companies while maintaining a very high level of accuracy during the analysis of financial statements. They can also take many things into consideration while offering due diligence expertise, such as the industry in which the target operates, risk areas specific to the firm, tax risks and statutory risks, legal and compliance risks, etc. The goal of a due diligence is to provide the buyer with updated and complete information on the target which would enable the buyer to make a fair offer and know all the risks that he is entering into.