Job Discussion Forums

[dmb]

Can anyone explain this term to me? A student mentioned it this morning and said it was an accountancy/economic term. Something about contacting accountants, lawers,etc in the process of a business agreement.

[ETG]

Actually due diligence applies widely across most activities. This is a nice concise definition:
Due diligence is the level of judgement, care, prudence, determination, and activity that a person would reasonably be expected to do under particular circumstances.
the reasonable expectation part is what can save or kill you legally in any legal actions that might be taken whether to do with finance, construction, patient care etc.

[dmb]

Thanks ETG

[tedkarma]

In non-legalese "due diligence" means that you (or whoever) will INVESTIGATE the claims of the other party in a business transaction in a thorough and reasonable manner.

If you exercise "due diligence" it means that you have looked into things in a way in which could be expected if you were investing a large sum of money.

It means essentially that you have a responsibility to check into the details of a transaction - to know if the other party is full or BS or not - and to do the things we could expect of a responsible party in a financial transaction.

Many contracts - by asking (or requiring or allowing the opportunity to) for you to exercise "due diligence" mean that you are allowed a certain amount of time to look into things to be sure that they are as represented - so that you later can not claim that you were tricked or deceived.

Hope that helps.

[dmb]

Again thanks TedKarma. Just to give you the context, the Turkish National Oil company is being privatised and my students' company is handling the accountancy side. That's how it came up.

[tedkarma]

If you, or they, or someone is buying a company - they would attempt to verify all claimed income (which will to an extent determine the value of the company) - and also to determine if all expenses have been claimed (by not claiming expenses I can jack up the value of the company).

Also they would need to determine if debts claimed to be owed to the company really are - and how old those debts are (the older the less value as they are less likely to be paid) - as well as debts the company owes.

Other parts of the due diligence would include verifying ownership of real property (checking title deeds and and any liens against those deeds), and personal property (owned by the corporation) and it would even extend down to who owns the telephone system, the desks, chairs, etc.

Companies often have value not ordinarily thought of (for the oil company for example) a contract for below market rate use of pipelines - income from pipelines owned - or leasing out unused pipeline capacity that they have leased - perhaps hedged oil contracts (oil sold at future dates at guaranteed prices - which may or may not at this time be deemed to be a good value), etc.

Oil companies also - depending on where they are in the supply chain - have unusual values or expenses - such as depletion allowances (how much of an oil well's oil is used up - forgot the term for that) - depreciation of expensive equipment that have somewhat limited lifespans (like billion dollar deep sea oil rigs), etc.

Depending on how much of the task your student's company has - it could be a massive contract and provide work for a lot of people for a year or more.

Business and even accounting can be fun!

[dmb]

^ Thanks again. I'm printing this off and using it on Monday morning.

(Any other lessons you care to plan for me? )