Corporate due diligence is the process of verifying the information provided by another firm or individual before entering into any business partnership with them. It typically involves an investigation, audit or review of financial, legal or other aspects of an entity. It is a systematic and practical approach to mitigate risk from any transaction.
In corporate scenarios, due diligence can be applied in a number of cases. Some of them are:
- During mergers & acquisitions Companies need to look into the overall functioning of the company they plan to merge with or acquire to ensure smooth operations post the deal. Lack of due diligence can lead to unpleasant surprises and the loss of huge amounts for both firms involved. In 2012, HP acquired enterprise software company Autonomy for USD 10.2 billion only to later face the consequences of poor due diligence with regards to inaccurate income statements, balance sheets, cash flows and footnotes. Autonomy had been grossly overvalued and HP ended up writing off around USD 9 billion.
- Before onboarding new clients Conducting due diligence before onboarding new clients is especially important when the clients bring a large quantum of business to the firm. Factors such as credit ratings, political affiliations, ongoing litigations and financial status must be reviewed if the client’s relationship with the business is expected to be an important one. In 2015, the Financial Conduct Authority charged Barclays with a fine of about USD 100 million for neglecting to perform the required due diligence before onboarding ultra HNI clients. These politically exposed clients were found to have engaged in corruption and money laundering transactions amounting to a few billion dollars.
- While getting into business with a new vendor Background checks and due diligence of vendors is a critical step towards managing vendor risk. In businesses where large parts of product or service processes rely on outsourced vendors, it is crucial that the business have clear visibility into the operations of the vendor. Important factors to look into before engaging with a third-party vendor include validation of credentials, reputation check, financial solvency, conflicts of interest and leadership.
- For employment background checks CXO level employees play a critical role in the functioning of a company. It is imperative that individuals hired at these levels are capable of doing the job with integrity and the right skill set. Pre-hiring screening can include qualification verification, reference checks from previous employers, civil and criminal litigations and political affiliations. According to a study by Career Builder, 74 percent of companies who made a poor hire lost an average of USD 14,900 per poor hire.
The due diligence process includes a targeted deep dive into the area of interest as per the transaction. Some common areas that are looked into are criminal and civil litigations, verification of credentials, bank and financial checks, credit rating, asset verification, reputation checks, verification of political affiliations, conflicts of interest and identification verification. This can be done for companies as well as individuals.
Conducting due diligence is important since it helps the company avoid large financial losses through poor hiring, suboptimal mergers and bad partnerships. It also helps avoid intangible costs such as reputation loss and goodwill. A strong due diligence process ensures that the company and its stakeholders are safe in the long run.
Due diligence is one of Globe Detective Agency’s specialised services. Since no two transactions are the same, GDA’s services are tailored to the specific needs of each transaction and each client’s requirements. Explore the list of due diligence services provided by Globe Detective Agency
