Building a company’s reputation is a lengthy and fragile process. Anyone key employee’s careless actions or utterances can do irreparable damage to a company’s reputation. To avoid such unpleasant situations, experts advise conducting due diligence. What it is and what to pay attention to when compiling it, we suggest learning from this article.
What is due diligence?
Under current legislation in some countries (in particular the US and the FRN), due diligence is a concept of how a company should behave during a transitional period. Typically, a period of transition may arise when a company changes organiяational form, is sold, or merges. Due diligence is intended to protect shareholders and purchasers of securities from all kinds of risks.
The term is quite common in private and commercial law. It most often refers to the primary risks arising from the acquisition of a company and the first offering of shares after a reorganization. Today, due diligence principles are applied not only by state supervisory authorities but also by company owners themselves. Neither the scale of the company’s operations nor its business specifics matter.
What is due diligence used for?
By applying due diligence assessments main points in a company’s operations, the owners or management bodies try to prevent financial losses in the first place. But due diligence principles will also be useful in the following areas:
- Assessing the economic feasibility of future changes. Before a company is merged or acquired, the investment risks of such an action are often assessed. It also checks whether the requirements and plans set out in the documents correspond to reality.
- Assessment of the financial risks of flow-through activities. From time to time, it is necessary to review and assess a company’s operations for illegal elements. This will help avoid penalties and reduce reputational damage.
- Assessing the overall operations of the company. Here due diligence is necessary to enhance a company’s business reputation. Especially if it has been damaged in the past due to unfair partnerships or corruption offenses.
In addition, a due diligence check is necessary to prevent possible legal consequences through tax audits, market or environmental due diligence, technical audits, and more.
A due diligence checklist
In order to conduct a risk assessment and obtain the most reliable due diligence data possible, a checklist should be compiled in advance. It should have the following items:
- the purpose of the risk assessment, taking into account the categories of risks to be initially checked;
- the persons responsible for carrying it out, their mandate, the timing of the assessment, and its format;
- development and implementation of a procedure for conducting the due diligence process;
- monitoring of the due diligence assessment and its compliance with applicable legislation.
The number of items on such a checklist depends on the scope and purpose of the due diligence. Once the process has been completed, those responsible for carrying it out will produce a report, which should include an evaluation and general conclusions for each item. This report is submitted for review by company management and, if necessary, relevant government agencies.