What is the Difference Between Company Due Diligence and an Audit?
22

Jun 2021

Companies operating in the UAE should conduct the affairs per the rules and regulations of various UAE laws, failing to attract fines and heavy penalties. It is also essential for organizations to know the requirements and differences between audit and Due Diligence.

Due Diligence

Due Diligence is used to assess the company based on reviewing the different financial and non-financial documents. In Mergers and Acquisitions, by conducting thorough Due Diligence, the acquiring company will be able to study and identify the potential risks and opportunities associated with the company subjected to merger or acquisition.  

Due Diligence always aims to ensure that all the decisions made regarding the company under consideration are thoroughly informed, one which will maximize the chances of value addition in the transaction. There are different types of Due Diligence such as legal due diligence, financial due diligence, operational due diligence, tax due diligence, etc., which are considered to assess the company's standing before making a decision.

Benefits of Due Diligence  

The various benefits of the due diligence process are as per the following:

  1. Benefits of Due Diligence for Acquirors 

It helps the acquirer to obtain the necessary information to assist with the decision making of the board. It will help in reducing any post-merger & Acquisition surprises which may be unpleasant. It will allow us to better prepare for any PMI strategy implementation. 

  1. Benefits for targets

Due Diligence enables the smooth transaction finalization process. It will also reduce the likelihood of post-closure disagreements with the acquirers. The process will help to identify and correct any post-sale tax-related issues. 

  1. Benefits for stakeholders

The Due Diligence for the stakeholder helps to set realistic expectations of the merged or acquired company. Due Diligence assures the company investors and lenders that the merged entity still recognizes their individual equity and loans. The process is responsible for keeping the company employees, private vendors and customers engaged in the entire process and provides a sense of internal security. 

Difference between Due Diligence and Audit

In the UAE, there is a mandatory requirement for the annual financial audit, and reports play a vital role at the time of the renewal of the company trade licenses. The Financial Due Diligence is conducted at the time of the mergers and acquisition transactions, and it is not mandatory. 

An audit can be considered the internal or regulatory requirement process in an organization. In contrast, due Diligence is carried out by either the potential investor of the company or party looking for mergers with the target company. The scope of work of the financial audit varies from that of the Due Diligence process. 

The primary purpose of a financial statements audit in an organization is to provide the required reasonable assurance that the company's financial statements are factual and fair, which depict an accurate picture. But the audit often does not identify critical issues that the company investors might be interested such as the efficiency and effectiveness of the target company's management team and the quality of annual earnings.

The Company Due Diligence process often covers a wide range of areas in the organization, such as legal, operational, tax, and finance. Though the audit of the financial statements in the company may provide a required starting point for an evaluation of a target company, the audit generally does not provide any in-depth details on every area the acquiring company may be are interested to know. 

A financial statements audit provides the acquiring company with the necessary assurance that the target company's financial statements are presented fairly and accurately, compliant with well-defined accounting and audit report rules. To make a confident and well-informed investment decision, an acquiring company must understand that the target company's financial statements audit is always complementary and not a substitute for the due diligence process in merger and acquisition transaction. 

How Can We Help?

Jaxa Chartered Accountants, one of the most experienced auditors in the UAE, are experts working with companies across the United Arab Emirates (UAE) and assist them with the process of due Diligence and financial audits. Our experts discuss with client companies to understand the requirements to carry out the due diligence process at the time of merger and acquisitions and work closely to access the target companies. Please Contact Us with any questions regarding the Due Diligence and financial audits. We'd be delighted to help!