Financial Due Diligence Process And Content Research

In light of continuing economic globalization, recent years have witnessed rapid development of mergers and acquisitions (M&A) in China. M&A has become a centerpiece of China’s private equity markets. However, increasing complexity of M&A transactions poses a lumber of risks to stakeholders, whereas financial risks arise from over-reliance on corporate financial statements and negligence of due diligence.While financial statements serve as the primary source of information on the acquisition target and the basis for target valuation, at the same time they suffer from several inherent flaws. For example, financial statements do not disclose all significant information for timely and comprehensive acquisition analysis. As a result, the acquiring party may miss some major issues regarding the transaction.Acquisition analysis based on financial statements may lead to false representations, which, in turn, delays the acquisition process, increases costs, and triggers financial and legal disputes. As a result, the overall risk increases and the whole transaction are affected. Against the backdrop of corporate scandals involving Chinese companies, in July 2011, China Securities Regulatory Commission, China’s Ministry of Finance and the U.S. Public Company Accounting Oversight Board (PCAOB) and the United States Securities and Exchange Commission (SEC) entered in talks on supervisory cooperation. In just three months,19 Chinese companies listed in US public markets suffered embarrassment and a series of suspensions and delisting. The regulatory discussions revealed that the source of these problems stem from inadequate due diligence.Literature on Chinese due diligence appears to be limited to procedural aspects, but omits key financial factors, case studies, and substantive contents of the entire process of financial due diligence.This article is based on practical case studies and analyses. It is a comprehensive and complete introduction to practical financial due diligence. It demonstrates procedures, methods, and describes case studies that illustrate in-depth practice of financial due diligence.