Due Diligence Audit
A due diligence audit is an internally conducted audit of a company that seeks to ensure that the company is ready for sale. It seeks to preempt the questions and issues that arise during a typical due diligence process, and ensure that the selling company is ready for whatever comes it way during due diligence. Due Diligence can be sub-classified into:-
· Commercial/Operational Due Diligence: It is generally performed by the concerned acquire enterprise involving an evaluation from commercial, strategic and operational perspectives. For example, whether proposed merger would create operational synergies.
· Financial Due Diligence: It involves analysis of the books of accounts and other information pertaining to financial matters of the entity. It should be performed after completion of commercial due diligence.
· Tax Due Diligence: It is a separate due diligence exercise but since it is an integral component of the financial status of a company, it is generally included in the financial due diligence. The accountant has to look at the tax effect of the merger or acquisition.
· Information Systems Due Diligence: It pertains to all computer systems and related matter of the entity.
· Legal Due Diligence: This may be required where legal aspects of functioning of the entity are reviewed. 1. The legal aspects of property owned by the entity or compliance with various statutory requirements under various laws.
· Environmental Due Diligence: It is carried out in order to study the entity’s environment, its flexibility and adaptiveness to the acquirer entity.
· Personnel Due Diligence: It is carried out to ascertain that the entity’s personnel policies are in line or can be changed to suit the requirements of the restructuring.
How we conduct due Diligence Audit
Pre Due Diligence Period:-
· Discussion with client to gain understanding of the transaction
· Assessment of the most appropriate scope of work and methodology
· Centralised coordination of project team
· Preparation of due diligence request list to target specific areas of Concern.
Due Diligence Process & Negotiation Phase
· Working off-site or on-site
· Flexible approach even after project kick-off
· Q&A process with management
· Report drafting including assistance in the definition of financial aggregates and wording of financial clauses
· Support for preparation of negotiation terms
· Regular updates with the client
Closing & Post-Closing Process
· Preparation of review of closing documents prepared by the Target
· PPA assistance and other post-closing transactions review
· Involvement in price adjustment procedures using the findings of the due diligence
The contents of a due diligence report generally KSC provide:-
¨ Background of Target company
¨ Objective of due diligence
¨ Terms of reference and scope of verification
¨ Brief history of the company
¨ Share holding pattern
¨ Observations on the review
¨ Assessment of management structure
¨ Assessment of financial liabilities
¨ Assessment of valuation of assets
¨ Comments on properties, terms of leases, lien and encumbrances.
¨ Assessment of operating results
¨ Assessment of taxation and statutory liabilities
¨ Assessment of possible liabilities on account of litigation and legal proceedings against the company
¨ Assessment of net worth
¨ Interlocking investments and financial obligations with group / associates companies, amounts receivables subject to litigation, any other likely liability which is not provided for in the books of account
¨ SWOT Analysis
¨ Comments on future projections
¨ Suggestion on ways and means including affidavits, indemnities, to be executed to cover unforeseen and undetected contingent liabilities
¨ Suggestions on various aspects to be taken care of before and after the proposed merger/acquisition.