The role of the audit committee over the last several years continues to evolve in conjunction with the risks to business and financial reporting changes. The traditional role of overseeing financial reporting and internal and external auditing now encompasses a much broader scope. Today's audit committees still maintain their central mandates but they also frequently gauge risk in its countless forms. With all of these changes, it was foreseeable that the scope and influence of the audit committee would expand during the M&A process and, due to the committee's experience, would become more involved in the M&A lifecycle, from evaluating the the prospective investment targets through due diligence to post deal analysis, with due diligence being more and more part of the audit committee's growing risk role.
According to a report entitled There's no shortcut to M&A success: How audit committees help keep transaction journey on track (the Report) released by KPMG, one area ripe for audit committee involvement is ensuring appropriate due diligence is done. Whether done in house or managed by a third party, the audit committee should make sure that management looks intently at a long list of issues, including but not limited to deal valuation, price and the long term benefits of owning the target. The Report goes on to stipulate that management tends to look at cost saving measures by undertaking the due diligence process themselves. As this may be feasible for some deals, organizations often underestimate the resources needed and complexities involved and therefore the audit committee's role should begin from the onset:
"The audit committee's role should begin at least as soon as the due diligence process is planned. The audit committee should challenge management from the outset on the appropriateness of their due diligence measures, finding out who owns the process and whether third-party assistance should be engaged—insisting on it if necessary. They should also consider striking a deal committee tasked with overseeing critical legal and financial issues and asking management the hard questions that may ultimately avoid transactional failure. Companies involved in deals can be overly focused on financials to the detriment of other issues, and the audit committee can help ensure success doesn't fall through that gap."
For the audit committee who is intent on overseeing the due diligence M&A process, the Report lists out the following questions that should be asked of management.
- Who has responsibility for the due diligence and post-acquisition integration planning and implementation?
- Do the team members tasked with due diligence and integration have the skills, experience, resources and time to conduct their work? Have you determined whether your deal is complex enough to require 3rd party assistance or integration planning?
- What work have you done to substantiate the quality of earnings?
- Have you looked at the target company's long term customer and supplier relationships, as well as the security of those relationships?
- What initiatives and programs are in place to retain key personnel?
- What measures have been taken to avoid value leakage through price adjustment mechanisms and/or representations and warranties set out in the purchase agreement or related documents?
Bottom line: having audit committees oversee the due diligence process can assist in considerably reducing the risks characteristic to M&A transactions.
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