Beyond Audits: The Importance of Financial Due Diligence in Risk Management

“If my target’s financial statements are already audited, why is financial due diligence still necessary?”

This is a common question we get asked. While audited financial statements provide a level of assurance, there are significant distinctions between an audit and a financial due diligence exercise that make the latter crucial.

Audit	Financial due diligence
Verification of financial statements Audit opinion aims to ensure fairness and accuracy Seeks reasonable assurance of accurate presentation Ensures compliance with the financial reporting framework Enhances user confidence in the financial statements	Confirm material facts for sale/purchase Exercise due care before finalising any agreement/transaction Prevent unnecessary harm to parties involved Establish a standard for entering into agreements/transactions

Table 1: Differences between an audit and a financial due diligence exercise

Why Financial Due Diligence Matters, Even After an Audit

Here are three key reasons why financial due diligence is essential, even when an audit has been undertaken:

Risk management	Value enhancement	Post-diligence plan
Identification of red flags and/ or potential risks that may not have been detected during an audit Risks likely to impact the valuation of the business, such as non-recurring income and/or expenses, hidden costs, and over-reported income that is not part of sustainable earnings	Identification of opportunities for synergies and cost savings Identification of areas with opportunities to create value, either strategically or operationally	Developing a strategy and action plan post-diligence to achieve the goals and objectives of the transaction Realising value takes careful thought, planning, and execution. Diligence helps identify risks and opportunities, providing the time to create a plan so you can hit the ground running

Table 2: Three key reasons why financial due diligence is essential

How we’ve helped our clients

We have helped numerous clients in achieving successful transactions through our financial due diligence services, including but not limited to:

Identifying operational inefficiencies within the business
Identifying gaps in the revenue model that could impact performance
Identifying control deficiencies during the due diligence process
Identifying potential “banana skins” in specific segments or areas of the business
Identifying inaccurate and/or inappropriate accounting practices
Assisting in reviewing definitive agreements to include the necessary protections for our clients

Conclusion

Relying solely on audits or “agreed-upon procedures” may not provide a comprehensive view of the business and can expose the investor/ purchaser to additional and sometimes unnecessary risks. Financial due diligence is a critical step in the acquisition process that can help manage risk, enhance value, and ensure a smooth transition.

Contact our specialists today to learn how RSM can help you with financial due diligence

Terence Ang

Partner & Head of Advisory