The year 2016 has brought new challenges also for the mergers and acquisitions (“M&A”) market. Over the past few years evasion of laws and regulations, including numerous corruption scandals, were widely reported in the media. Today, we are not surprised to see heightened activity on the part of the regulators, more rigorous scrutiny exercised by them in the course of their investigations or hefty penalties levied on business entities operating in various market sectors.
Forensic pre-close due diligence
In order to identify specific risks prior to the entry into the SPA (share purchase agreement), buyers frequently engage professionals to conduct forensic due diligence. The central focus of that review is not placed on analysis of general operations but mostly on specific risks, such as a failure to respect or improper interpretation of the key sector regulations, e.g. AML regulations for the financial sector, the pharmaceutical law for healthcare entities or international regulations, such as the FCPA for U.S. entities. As avoidance of conflicts of interest or fraud is a crucial aspect of due diligence projects, their scope includes identification of key risks along with a preliminary analysis of the framework structure of controls aimed at their mitigation. Also, hidden equity interests and personal relationships between the key business partners and members of the entity’s governing bodies may frequently be identified in addition to suspected transactions which may involve embezzlement of funds. A detailed analysis of the current reputation of the company is also conducted.
Forensic post-close due diligence
The buyer is more and more frequently interested in eliminating the risk of finding the skeletons in the closet by conducting a thorough post-close due diligence, which typically guarantees a considerably better access to staff, a wider scope of information and documents. The findings of the post-close due diligence are taken by the buyer into account as part of the final transaction pricing mechanism.
“Within due diligence projects we are informing our clients about multiple symptoms of fraud and corruption which are not always visible on the first sight, basing on the experience of our Deloitte forensic team. In our works we do consider potential legal or reputational risks of the target coming from non-compliance or legal issues that are or not undisclosed or simply not considered. Materializing of legal and reputation risks may bring unexpected and large by volume negative financial impact in the long-term. Not only do we realize what the consequences of compliance irregularities in organizations are but we do have a vast experience when comes identification of the common, yet hidden deficiencies of internal control systems that is also challenged by fast pace of a developing business. Today, clients realize that fixing the mess the organization may get into as a result of a purchase transaction may cost a pretty penny, so it is worth to get such information as early as possible to make a right decision”
– comments Rafał Turczyn, Forensic and Dispute Services Practice Leader.