The word 'Audit' comes from Latin word 'audire', which means 'audio' or 'to hear'. During medieval times, when manual bookkeeping was prevalent, auditors in Britain used to hear the accounts read out for them and checked that the organization's personnel were not negligent or fraudulent. Auditing has evolved over the years to come to what it is today.
Today, an audit is concerned with historical financial statements and provides an opinion as to whether the financial statements represent a “true and fair” view of the company’s operations. Due Diligence, on the other hand, reviews not only look the historical financial performance of a business but also considers the forecast financial performance for the company under the current business plan.
Due Diligence has a wider scope than Auditing. While Auditing is limited to financial analysis, Due Diligence includes not only analysis of financial statements, but also business plan, sustainability of business, future aspects, corporate and management structure, legal issues etc. Thus it is more holistic than Auditing.
Secondly, while Auditing is based on historical data, Due Diligence covers future growth prospects in addition to historical data. It can be said that Due Diligence comprises of both ex-post and ex-ante analysis. Yes, Auditing is highly effective when conducting a post-mortem analysis however, Due Diligence is required for making future decisions.
While, Due Diligence may or may not be mandated by any Act or Law in force, but it certainly provides a more conservative approach to running the affairs of the company, as it helps in giving a negative assurance by identification of risks, if any.
The flexibility and versatility of Due Diligence makes it the preferred choice for organizations as they can scale or contract its scope, depending on their needs. It can be specific to a segment such as Secretarial, IT, HR, Operational, Ethical or specific to a transaction such as M&A or Joint Venture Due Diligence. The findings of a detailed transactional Due Diligence report can thus be a Deal-maker, Deal-cautioner, Deal-diluter or Deal-breaker.
Due Diligence ultimately opens a window into a company’s success and potential, including what opportunities exist to grow the business further to meet goals and objectives.
In a nutshell,
'Due Diligence is the beginning of brilliance'
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(This Article intends to educate businesses. Opinions if any, contained in the article, are strictly personal to the author and should not be considered as legal, financial or technical advice)
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