Fundamental Principles of Financial Due Diligence

Financial Due Diligence is the professional reviewing service provided by the Professional Accountant. and this service is normally offered by professional accounting firms. Financial Due Diligence is the type of reviewing service or negative assurance.

Fundamental Princeiples of Financial Due Diligence

All of the professional firms have to set proper internal control procedures and guidelines to make sure that the services that the Financial Due Diligence service that they are providing is of acceptable quality and comply with relevant standards and laws.

Not different from auditing, a professional accountant who performs the Financial Due Diligence also has to stay Independence, Objectivity,  Prudent, Competence, and Comprehensive, and Materializes.

Independence Principle:

In this regard, the firm that provides the Financial Due Diligence to the target company has to make sure that it does not provide the target company other services like auditing service and accounting review which might conflict Due Diligence service that will be provided.

The firm has to make the proper procedure to make sure that the engagement team involved with the assignment has no interest in what might impair the independence of the firm and team.

If the note that there is a conflict of interest that could lead to impaired firm independence, proper assessment of impairment needs to be performed, and a safeguard procedure needs to be in place to ensure that impairment is reduced as small as possible. If the safeguard could not help, the firm should consider withdrawal from engagement.

Prudence Principles:

Prudence Principles of Financial Due Diligence

Prudence Principles of Financial Due Diligence concerned the professional skepticism that the engagement team has to uphold on every stage of engagements.

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All information that providers need critical analysis and think if there is anything behind that.

The Prudence principle is concerned about the correctness of the information is a review, management judgment, and bias on the transaction.

For example, management might inform the auditor who conducts Financial Due Diligence that the company does not have any contingent liabilities or legal cases against the company, but the actual company might have and management tries to hide it from the auditor.

Comprehensive Principle:

Comprehensive

The comprehensive principle is concerned about all sides and aspects of the review of all items and areas in the Financial Statements especially the hidden liabilities that might affect the future owners.

To ensure that Financial Due Diligence could provide the benefit to the prospective shareholders and help them in their decision making, the auditor needs to have proper Due Diligence strategy, planning, procedures, and technique which in accordance with the relevant professional standards so that all aspects that agreed in the engagements letter are covered properly.

Materiality Principle:

The materiality principle is concerned with the level of risk that the engagement team uses to perform the financial review. and those levels of risk should be an analyst at the risk assessment stage.

Not different from audit, the materiality principle of Financial Due Diligence requires the set of performance materiality as well as a tolerable error that auditors could accept. The work done must be able to obtain sufficient and appropriate evidence in order to help the auditor to prove their option.

Conclusion:

Fundamental Principles of Financial Due Diligence:

  • Need to be Independence
  • Require Prudence concept
  • Need to be more Comprehensive
  • Materiality
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