Comments on: Due diligence decreases fraud liability http://www.pwcblogs.be/transactions/2010/01/due-diligence-decreases-fraud-liability-2/ Our experts'comments on Mergers and Acquisitions Thu, 04 Aug 2011 10:02:39 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: Jacqueline Gram http://www.pwcblogs.be/transactions/2010/01/due-diligence-decreases-fraud-liability-2/comment-page-1/#comment-634 Jacqueline Gram Thu, 14 Apr 2011 10:59:33 +0000 http://www.pwcblogs.be/transactions/?p=518#comment-634 Hi San Antonio, That would indeed be great. Shredding documents and especially originals is not a recommendation I would make, since they could prevent companies from presenting evidence in cases of reviews/investigations. Companies should develop the necessary procedures, communicate these clearly throughout the organisation, train all stakeholders on these procedures and regulalry follow up. Hi San Antonio,
That would indeed be great. Shredding documents and especially originals is not a recommendation I would make, since they could prevent companies from presenting evidence in cases of reviews/investigations. Companies should develop the necessary procedures, communicate these clearly throughout the organisation, train all stakeholders on these procedures and regulalry follow up.

]]> By: San Antonio shredding http://www.pwcblogs.be/transactions/2010/01/due-diligence-decreases-fraud-liability-2/comment-page-1/#comment-500 San Antonio shredding Tue, 06 Jul 2010 05:27:24 +0000 http://www.pwcblogs.be/transactions/?p=518#comment-500 It would be great if due diligence could actually lower the chances of companies or individuals from getting victimized by fraud. In this way, more investors will be encouraged to build up businesses, without that fear of fraudulent transactions. Shredding documents may be done for precautionary measures but there are those who even dispose of original copies so as not to leave a trace and this is causing doubt. As these procedures get polished, let us hope for the best that the number of fraud victims will eventually decline. It would be great if due diligence could actually lower the chances of companies or individuals from getting victimized by fraud. In this way, more investors will be encouraged to build up businesses, without that fear of fraudulent transactions. Shredding documents may be done for precautionary measures but there are those who even dispose of original copies so as not to leave a trace and this is causing doubt. As these procedures get polished, let us hope for the best that the number of fraud victims will eventually decline.

]]> By: Jacqueline Gram http://www.pwcblogs.be/transactions/2010/01/due-diligence-decreases-fraud-liability-2/comment-page-1/#comment-348 Jacqueline Gram Fri, 22 Jan 2010 09:33:43 +0000 http://www.pwcblogs.be/transactions/?p=518#comment-348 Hi Michael, 1) A fraud due diligence is performed before any deal/merger or acquisition takes place. A fraud due diligence needs to be distinguished from the audit, because, amongst others, the work of the auditors has a different scope than a fraud due diligence. During an audit though, the fraud experts add value for the audit team in assessing certain processes/procedures/transactions from a fraud perspective. Vice versa, during a fraud due diligence the audit team may give valuable input for the fraud team that increases the added value of the fraud due diligence. 2) Could you explain a bit more since I don't think I understand this question right? Best Jacqueline Hi Michael,
1) A fraud due diligence is performed before any deal/merger or acquisition takes place. A fraud due diligence needs to be distinguished from the audit, because, amongst others, the work of the auditors has a different scope than a fraud due diligence. During an audit though, the fraud experts add value for the audit team in assessing certain processes/procedures/transactions from a fraud perspective. Vice versa, during a fraud due diligence the audit team may give valuable input for the fraud team that increases the added value of the fraud due diligence.

2) Could you explain a bit more since I don’t think I understand this question right?

Best
Jacqueline

]]> By: Jacqueline Gram http://www.pwcblogs.be/transactions/2010/01/due-diligence-decreases-fraud-liability-2/comment-page-1/#comment-347 Jacqueline Gram Fri, 22 Jan 2010 08:21:42 +0000 http://www.pwcblogs.be/transactions/?p=518#comment-347 Good question, but without a yes/no response. If a fraudulent practice is discovered during a fraud due diligence, one should immediately stop this practice. The new Board members are, in principle, not responsible for fraud committed prior to their appointment, and which was fully ceased before or upon their appointment. However, one should be careful of the distinction between Board members and management. In general, management does not change after a merger or take-over. This might bring along risks that should be mitigated. In theory, one should not be liable for fraudulent practices to which he did not collaborate and of which he was not aware. However, in practice, directors/managers of a company where fraud is committed and continued after an acquisition, will often (at tried to) be held liable for such fraud. If one can show that one has taken all kind of efforts to discover and mitigate fraud risks, by means of a fraud due diligence, then this might indeed substantially reinforce the legal position. Good question, but without a yes/no response.

If a fraudulent practice is discovered during a fraud due diligence, one should immediately stop this practice. The new Board members are, in principle, not responsible for fraud committed prior to their appointment, and which was fully ceased before or upon their appointment. However, one should be careful of the distinction between Board members and management. In general, management does not change after a merger or take-over. This might bring along risks that should be mitigated.

In theory, one should not be liable for fraudulent practices to which he did not collaborate and of which he was not aware. However, in practice, directors/managers of a company where fraud is committed and continued after an acquisition, will often (at tried to) be held liable for such fraud. If one can show that one has taken all kind of efforts to discover and mitigate fraud risks, by means of a fraud due diligence, then this might indeed substantially reinforce the legal position.

]]> By: Michael Lu http://www.pwcblogs.be/transactions/2010/01/due-diligence-decreases-fraud-liability-2/comment-page-1/#comment-336 Michael Lu Tue, 19 Jan 2010 19:22:29 +0000 http://www.pwcblogs.be/transactions/?p=518#comment-336 Dear Sir/Madam, Indeed, due diligence plays an important role in "identifying" fraud risks and "detecting" fraudulent actions "outside books and records." Nevertheless, since due diligence seems to provide reasonable assurance on the reporting of financial statements, does that mean it will decrease the amount of audit work and time on assessing the effectiveness of internal control? On the other hand, could due diligence increase company's pressure in making deals? If so, could that also increase the likelihood of fraud risks so it will offset the original intention of due diligence? Best, Michael Lu Dear Sir/Madam,

Indeed, due diligence plays an important role in “identifying” fraud risks and “detecting” fraudulent actions “outside books and records.”

Nevertheless, since due diligence seems to provide reasonable assurance on the reporting of financial statements, does that mean it will decrease the amount of audit work and time on assessing the effectiveness of internal control?

On the other hand, could due diligence increase company’s pressure in making deals? If so, could that also increase the likelihood of fraud risks so it will offset the original intention of due diligence?

Best,

Michael Lu

]]> By: Steven Westhouse http://www.pwcblogs.be/transactions/2010/01/due-diligence-decreases-fraud-liability-2/comment-page-1/#comment-318 Steven Westhouse Tue, 12 Jan 2010 12:57:39 +0000 http://www.pwcblogs.be/transactions/?p=518#comment-318 Dear Sir/Madam, Indeed thorough due diligence will help mitigate the risk of (inadvertently) taking on board liabilities linked to fraudulent practices. However, to what extent does the performance of due diligence provide legal protection against future liability - e.g. when undiscovered fraud comes to light at a later date? Is proof of investigations carried out on a "best effort" basis adequate to reject future liability, especially in a court of law? In other words, is pre-deal fraud due diligence a necessary and prudent "common sense" expense, or does it help reinforce a legal position in potential future disputes? And to what extent do insurers providing directors and officers liability coverage demand such due diligence be carried out? Best regards, Steven Westhouse Dear Sir/Madam,

Indeed thorough due diligence will help mitigate the risk of (inadvertently) taking on board liabilities linked to fraudulent practices.

However, to what extent does the performance of due diligence provide legal protection against future liability – e.g. when undiscovered fraud comes to light at a later date? Is proof of investigations carried out on a “best effort” basis adequate to reject future liability, especially in a court of law?

In other words, is pre-deal fraud due diligence a necessary and prudent “common sense” expense, or does it help reinforce a legal position in potential future disputes? And to what extent do insurers providing directors and officers liability coverage demand such due diligence be carried out?

Best regards,

Steven Westhouse

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