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Audit Committee and Their Role in M&A

    
mergers and acquistions

To be listed on the stock exchange, companies that are publicly traded are required to have an audit committee. The general role of an audit committee is to evaluate a company’s financial matters, particularly with respect to the reporting and disclosure processes. These committees also participate in risk assessment and management to ensure that a company makes sound business decisions, and they are usually heavily involved in a company’s mergers and acquisitions-related activities. The growing number of mergers and acquisitions, as well as the increasing complexity of these deals, has actually expanded the scope of the audit committee’s responsibilities. For many companies, the audit committee oversees far more than just financial reporting. Here are some of the key areas the audit committee helps evaluate:

Financial Due Diligence

During mergers and acquisitions, submitting to a due diligence investigation is not negotiable. The acquiring entity in a high stakes transaction must be assured that they understand the target entity, including its history, financial standing, legal matters, contracting relationships, intellectual property, and so forth. The audit committee for the target entity will no doubt participate in creating, analyzing, and explaining the financial information that is furnished to the acquiring entity during this investigation. And, the audit committee for the acquiring entity will certainly participate in a review of this information.


Data Security

These days, having strong cybersecurity and IT infrastructure is crucial to a company’s survival. There have been far too many high profile data breaches, leading to the exposure of data for countless companies and individuals. Given the potential consequences of a data security breach, audit committees are often called upon to examine a company’s IT systems and data security measures, as merging with or acquiring an entity that does not have strong security standards in place can easily subject the acquiring entity to costly issues. In many cases, identified security gaps will have to be addressed before a deal can proceed.


Contracts and Relationships

Companies often contract with other firms to obtain goods or services. These subcontracts or supply contracts may be necessary for operational purposes, but they can also be the source of delays and other problems. As a result, the relationships that a company has with external parties is often a source of risk and can even expose companies to unexpected liability issues. Given that such issues will inevitably impact the bottom line, the audit committee will likely want to review any outstanding contracts and learn about the companies with which the target entity is doing business.


Compliance

Complying with local, state, and federal rules and regulations that are applicable to a company’s operations or financial activities is vital. There are a lot of laws governing a public company’s activities, and leaders who are focused on the day to day business operations may not have the time or expertise to account for all of them. Thus, the audit committee is often responsible for monitoring compliance or recruiting outside professionals who are able to do so. During the due diligence phase of an M&A deal, compliance matters will no doubt be under strict scrutiny.


Risk Management

Broadly speaking, the primary goal of the audit committee is to assess and manage risks to a company. Although this has traditionally encompassed financial decisions, all facets of running a business ultimately affect a company’s profitability. Consequently, the audit committees for many companies have experienced growing roles and responsibilities.  

Securedocs-due-diligence-checklist