Introduction
Due diligence as a subject has been in vogue for a long period now, even though the naming of the exercise varies from place to place. The exercise has been conducted by professional organizations around the world in specific cases, and have given reports and conclusions to their respective clients, without naming it as a ‘Due Diligence Review Report'.

Basic Idea
The need for a due diligence emerged in the 1970's in the United States of America when acquisitions came into vogue. The reason for such acquisitions in America was the fact that the economy was advanced and near full employment. The acquisitions added value to the bottom line. However, acquisitions had to be undertaken with great care. To verify the business decision, law firms and auditing firms were appointed to conduct the due diligence exercise to study not only the financials but also the organizational structure and the business environment before coming to a conclusion in their report.In India too, due to an increasingly adversarial and litigious business environment, client demands for efficiency, large sums of money involved, conducting a thorough due diligence has become absolutely vital. Without complete and accurate information, lawyers, auditors and clients negotiating the transactions would be unable to address potentially significant areas of concern. At best this can lead to a failure to pay or receive a fair price for the target company or its securities and, at worst, can result in significant liability to the client.

The Principal Goals of Due Diligence
A host of benefits accrues from a well-conceived, properly implemented, and skillfully executed due diligence review. These range from the principal benefits of full disclosure, transaction evaluation, and limitation of professional liability, to lesser but nonetheless important benefits such as the elimination of inefficiencies, the identification of potential areas of cost savings, and the implementation of improved corporate planning and policy-making. In short, effective due diligence can save time and money, minimize the potential for costly mistakes or misunderstandings, and help ensure that fully informed business decisions are made by all parties concerned.

Full Disclosure
Whether the transaction involves corporate finance, a merger/acquisition, a joint venture, a proxy statement, a lending arrangement, or virtually any other kind of business transaction, it will most certainly require the disclosure of specified information by one or more parties to their counterparts on the other side of the negotiating table. To the extent that such disclosures are misleading, inadequate or incomplete, liability may result and damages be awarded.

In the context of securities offerings, the registration statement, prospectus or private placement memorandum must contain a materially accurate and complete description of the issuer, its business and the other information required to be disclosed therein. Failure to meet this standard can result in liability for the issuer, the underwriters and other persons who participated in the preparation of the registration statement and prospectus.

In business transactions not involving securities offerings, disclosure obligations generally arise in the context of the principal transaction documents—generally in the form of representations and warranties, and the disclosure schedules contemplated thereby. If the representation, the warranty or the disclosure schedule is inaccurate or incomplete within the parameters established in the agreement (e.g., “materially correct and complete,” “correct and complete to the best knowledge of seller after reasonable inquiry”), the damaged party or parties may bring a suit for contractual damages or claims involving indemnification rights. Effective due diligence investigations can help to ensure that all such contractual disclosures – whether in purchase and sale agreements, loan agreements or otherwise –meet the level of materiality established in the relevant agreement.

In general, all material contracts, agreements, permits, licenses, etc. (e.g., raw materials, contracts and other supplier contracts, customer orders, , leases, dealer agreements, employment agreements, collective bargaining agreements, guarantees, powers of attorney, operating permits, equipment licenses, and the like) should be described in reasonable detail on a schedule. In addition, each of these documents should be reviewed in general for an understanding of the material terms and to check assignability, enforceability, breaches/defaults, expiration, escalation clauses and other material provisions.

Transaction Evaluation
By its very nature, a business transaction involves the exchange of one commodity for another. In the case of corporate finance transactions, the issuer sells stock, bonds, debentures or other securities for cash or some combination of cash and other consideration. In merger/acquisition transactions, securities or assets are exchanged for cash, securities, other assets or some combination of these. Simply stated, one party is buying and the other is selling. Absent some political or other non-financial motive, each of the parties has every intent of striking an economically and strategically advantageous deal. In order to maximize the likelihood of achieving this result, all of the materially important information about the target company must be revealed and evaluated. Effective due diligence conducted by a skilled multidisciplinary team is the best way to ensure that such discovery and evaluation occurs. For example, if the target company has a union related workforce and the collective bargaining agreement expires shortly after the anticipated closing, the acquirer clearly will need to factor into its pricing analysis both the possibility of disruptions of production and additional labour costs in future years. Or, if one of the principal assets of the target company is the lease on its principal manufacturing facility, then it is imperative that the acquirer ensure that such leases are assignable without undue cost, complication or delay. While one can reinforce this point by reciting scores of additional examples, the key thing to remember is that in the absence of effective due diligence, neither party to a commercial transaction will be able to make a fully informed investment decision.

Valuation of Intangibles
Valuation of intangible assets such as brand value, goodwill, intellectual property rights has assumed considerable significance on account of their growing importance. The valuation of ‘brand' has emerged as a highly competent and professionally difficult task. The auditor has to make sure that the valuation is done appropriately. Valuation of Intellectual Property Rights (IPR) poses a far more difficult problem, IPR includes patents (including design registration), trademarks, copy rights etc. There may have to be an IPR audit which must not only confirm the status of the material intellectual property but must identify all the intellectual property involved since they may be the company's most valuable assets. The validity and enforceability of intellectual property may substantially affect the goodwill or the intrinsic net worth of the organization. Also the validity and assign-ability of license to use the intellectual property are material considerations in the evaluation of the IPR.

Valuation of Human Resources
Sometimes human resources in an organization may be the most valuable assets. This may happen in businesses engaged in intellectual property. For example, scientific organizations, information technology, media industry. In such cases, it is necessary that an appropriate value be incorporated in the balance sheet before preparing a due diligence report.

Scope of Due Diligence
The scope of due diligence study is therefore not confined only to financial due diligence but also extends to operational due diligence, market due diligence, technical due diligence, legal due diligence, all of which together constitute the full process of due diligence.

The work of due diligence study includes amongst others:

I)  A comprehensive study of the organization, its management structures and practices.

II)  Assessing the extent/ efficacy of corporate governance in vogue.

III)  Evaluation of competence levels of top/ middle level managerial personnel.

IV)  Review of Management Information/Internal Control systems in vogue.

V)  Assessment of Capital Structure.

VI)  Evaluation of all tangible and intangible assets.

VII)  Determination of outstanding/ contingent liabilities.

VIII) Review of appropriateness of Technology/Technical expertise/ quality of products.

IX) Study of market factors/acceptance and competition level.

X)  Analysis of performance/ operations of the company.

XI)  Preparation of due diligence report.

Conclusion
Often in practical situations, financial due diligence may not be complete by itself and it may be part of a whole study involving also commercial due diligence, legal due diligence and technical due diligence etc. The financial due diligence team has to work supportive of and complimentary to the whole process group. It is important that for a comprehensive due diligence study, in addition to the primary data available, a good deal of secondary data generated by the entity, or additional information required are gathered through intelligent appropriate questions drawn for due diligence through ‘desk research'. Time is the essence of due diligence; confidentially is paramount and it requires detailed investigation and analytical study