In order to extinguish or mitigate the possible exposure to unknown debts and liabilities which may exist within a ready made company which has traded an accountant or auditor may carry out a due diligence study.
Due diligence is the process of checking and auditing the accounts and other information relating to the company. It's purpose will not only be to verify the existence and ownership of the company's assets, they will also focus on areas where potential liabilities might exist.
To establish whether there are undisclosed debts, accountants carrying out the due diligence work conduct some of the following tasks:
- Contact the ready made or trading company's primary suppliers and request that they state any amounts currently owed to them. These statements will then be compared to the company's own records and any differences reconciled.
- Perform calculations on the off-the-shelf company's VAT, PAYE and corporation tax records to check that the correct debts have been recorded and that the required remittance has been despatched in a timely fashion to Revenue and Customs.
- Contact the company's legal representatives to request details of any known matters which could result in future claims against the ready made company.
- Carry out a general review of the company's accounting procedures, standards, and records to ensure that material items have been accounted for in the appropriate manner.
- Investigate any high risk areas specific to the trading activities of the business in question. Such areas might include the compliance with any special licences under which the company operates, any quality standards applicable to the products and services being sold.
- The accountants or auditors would also review any provisions made by the company in its accounts. These could indicate that the company is expecting some action to be brought against them in the future. The adequacy of that provision would then be accessed.
The findings of the due diligence work are normally distributed to the proposed purchasers in a written report. The decision on whether or not to continue with the acquisition and if so, what price to pay can then be made.
