Why should you have a clear audit schedule?

A man named Alex V. (his real name was changed to preserve the confidentiality of the client), has gone through the difficult path of finding a suitable business and entered the contract in May. He was given 2 weeks to check the enterprise.

The seller assured Alex that the bookkeeping was perfect, as it was conducted by a CPA.

When the due diligence began, documents such as the company's balance report and profit and loss report (P&L) were on the table. Inconsistencies surfaced in the balance report, which, under normal accounting, should not be present; - there were negative liabilities.

When the buyer asked the seller to explain everything, the standard phrases as “Well, I don’t do it” and “Let's ask a CPA.” followed. In the meantime, the verification period was coming to an end.

The buyer began to worry. He asked the seller for an explanation repeatedly and finally found out that the CPA simply didn`t answer the seller.

Alex offered to have an online conference to talk with the CPA online. At the conference, he said directly that there were questions about how such numbers appeared and asked to provide the entire accounting database. The CPA said that this database belonged to him and he will not provide a copy. After the meeting, the buyer's hopes of getting answers to his questions were once again dashed. Alex remained at a loss, but, hoping for the best, offered to extend the due diligence process until he received a clear explanation of the situation.

A few more weeks passed and no additional information and no explanation appeared. Alex's patience was running out, and he called the CPA directly, but could only talk to his secretary.

It turned out that the CPA had gotten married right after the conference and went on a honeymoon trip to the Caribbean, leaving no way to contact him. Having not received answers to his questions, Alex could only try to clarify with the secretary when the CPA would return and ... give the answers Alex required: “Maybe in a month, but I`m not sure.”

As a result, the due diligence process lasted 4 months. The CPA resisted and hid the information as best he could, but they pressured him until he confessed that the presence of negative liabilities resulted from his mistake.

The irony of this story is that, by keeping the records in such a bad way, the CPA underestimated the real value of the company, and the seller received less money than he could have received with the correct accounting.

Factors that affect the due diligence schedule:

  1. Difficulty collecting documentation that needs to be checked.
  2. Slow work of consultants. As a result, you miss the deadline.
  3. A large number of documents to be checked.

It is important not to delay checking the company. For this article, read the article "Business audit - when to start".

How to conduct a quality audit:

График проведения проверки 3

  • Do not trust the company owners or executives. Even if they say that the CPA wrote the report, it still needs to be checked.
  • Hope for the best, prepare for the worst. Difficulties always arise. Be sure to stipulate in the offer that if the seller doesn`t provide all necessary documents, he must either extend the due diligence period or the contract terminates.
  • When you hire assistants, keep in mind that they can make the same mistakes. You cannot blindly take everything at face value. As you listen to the explanations, check to see if what they are saying matches what you know about the facts.
  • Consultants are nothing more than assistants. Only you can make the final decision regarding the quality of the business and the results of the audit. Read more about who checks the business in our article.

You can learn how all this is done from our Business Due Diligence class.

The verification process will not be 100% perfect even with your good preparation, as it depends not only on you. Read the article "Business audit - expectations and reality" to be prepared for different nuances.

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