Questions to ask so you know what you’re buying
When considering an attractively priced acquisition, the temptation to cut corners runs high. Rushing to get the deal done, however, can lead to unwelcome surprises down the road. It is more important than ever to consider a target's compliance risks and controls as part of due diligence to limit inherited liabilities as well as future exposures. This is particularly true if the target is in high-risk markets and/or highly competitive industries. Moreover, an effective look at a compliance program often can help narrow the scope and cost of due diligence, while giving you a better assessment of the likely cost of compliance requirements post integration.
Issues you should explore
Here are five issues you should look at in conducting due diligence to avoid compliance surprises and understand weaknesses that will need to be corrected in the future.
Is the compliance program state-of-the-art and up-to-date? Look carefully at the target’s compliance program. Are there sufficient resources, with authority and access to top executives or the Board? Review compliance risk assessment processes, manuals and audit reports to assess the program’s likely effectiveness.
What is the target’s risk profile? Consider: 1) the nature of the target’s business and industry, 2) the nature of the jurisdictions in which it operates, 3) how it conducts business (e.g., does it use intermediaries, consultants, third parties, joint venture partners) and 4) the profile of its customers.
Is there a culture of compliance? Does the target encourage a compliance mindset? Does management regularly stress the importance of compliance? Is compliance training tailored to prioritized risks? Is there a hotline to report suspected violations? How often is it used? To what result?
Is there a strong control environment? Ask about the control framework, e.g., questionnaires and surveys, used to control risks deemed likely to occur or to result in costly penalties. Who sees the results? (It may be necessary to expand due diligence in high risk areas after reviewing monitoring reports.)
Are any investigations currently under way? Get reports on any ongoing investigations. Consider the cost of: 1) dealing with any pending or ongoing investigations, 2) ceasing certain business practices resulting in reduced revenues, 3) acquiring the target without regulatory consents, and 4) upgrading the target’s compliance culture.
Our experience and service advantages
Global perspective, practical insights. We bring to due diligence a global perspective on compliance requirements across business functions and markets and a practical understanding of the cultural and social contexts in which compliance issues arise all over the world. We have helped major companies design, implement and enforce global programs and have acted as prosecutors in important compliance enforcement actions. So we offer insights into major risks as well as the reliability of various compliance approaches, enabling us to help clients more accurately price potential acquisitions and assess merger partners.
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