For many companies, undergoing an audit and/or financial due diligence will likely be an inescapable reality at some point in their existence, and the idea of undergoing either arduous process is no doubt rather daunting. Granted, they are quite different processes, but they both involve fairly substantial scrutiny of a company’s finances. This can obviously shed a lot of light on how a company is doing, but it can also bring up some unexpected issues and may force a company to have to make some pretty tough decisions. Here is a brief rundown on the primary differences between an audit and financial due diligence:
Internal versus External
For the most part, undergoing an audit is more of an internal review. Companies may intentionally subject themselves to an audit to obtain a sense of their financial health and status. In some cases, an internal team may actually conduct the audit by reviewing its company’s own financial statements to verify accuracy and completeness. However, some companies may hire independent auditors to review and verify their information, as this helps lend further credibility to the reports that are generated. The information gleaned from such an audit may be useful when seeking some sort of external financing, particularly a loan.
On the other hand, financial due diligence is almost always conducted in an external capacity, meaning that a team of experts not affiliated with the entity under review are going to be examining any and all documentation related to the entity’s finances. Of course, due diligence often encompasses far more than just a company’s finances, as these investigations generally accompany a merger or acquisition. Nonetheless, for financial due diligence, the team will be interested in reviewing and understanding a company’s assets, sales, earnings, revenue, profit, debt, and so forth.
Corroborate versus Understand
In light of the fact that an audit is generally conducted for internal reasons, the primary purpose of this sort of review is to corroborate existing information. The audit will generally look at historical performance and ensure that the data and documentation that is on file is properly reflected in the balance sheet, financial statements, and other related documents.
Granted, with respect to financial due diligence, there is also a desire to corroborate the information that has been presented. However, the overarching goal of the due diligence process is to understand the company’s financial position. In many cases, due diligence is more forward looking in that it assesses the company’s prior performance to try to forecast how it will fare in the future.
Financial versus the Whole Gamut
In general, an audit is just focused on a company’s finances. Obviously, financial matters frequently intertwine with other facets of a company’s business and operations, but an audit is primarily concerned with crunching numbers. Although there is due diligence that is mainly financially focused, the investigation generally involves a comprehensive examination of a company’s legal, accounting, tax, operational, and property matters as well. Clearly, the acquiring company will want to know everything about the company it is buying, so its due diligence team will be looking at just about any data imaginable.