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Many companies are now requesting a controls review as part of the due diligence process when making an acquisition or entering into a joint venture. This is particularly relevant where the new subsidiary is located in a different country where there may be a less developed corporate governance / internal control framework. A "Controls Due Diligence" review is necessary to gain early warning of any key control weaknesses in the target companies.
While the scope of this review can, of course, be tailored according to each client's specific requirements, the standard scope would include:
- a high level review of key control areas e.g. inventory management, procurement, sales, information systems and finance (including month/year end reporting and budgeting process etc);
- a summary report to the parent company management including key control weaknesses and prioritised actions for improvement; and
- comment on the experience of management within the entity and their ability to implement any proposed changes.
These reviews would typically require a brief (5-10 days) on site visit to hold interviews with management and carry out a limited degree of testing. The visit would take place either alongside the financial and/or legal due diligence prior to completion of the deal, or immediately following the deal completion.
Typical reasons for this service:
- Directors/management concerned over weak controls in new acquisition.
- Risks of disruption to parent company's reporting processes, frauds, senior manager time diverted or adverse publicity.
- Need to understand extent of control weakness to properly allocate management or internal audit resources.
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