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Published in Japanese
Eikoku News Digest
January 2012
Due diligence: instructing your accountant

Hello again! You will remember we’ve been discussing due diligence. You
explained some basic background and then outlined the content and context of
a “typical” engagement. This time you were going to explain what to watch out
for when instructing an accountant in due diligence work.
Yes, I was. The key point is to remember what your aims are in instructing the
work in the first place: to help ensure you don’t overpay; to bring major risks to
your attention and suggest ways to mitigate them; and to leave you confident that
your decisions are appropriately well-informed. Clearly your accountant cannot
guarantee the success of your venture, but they can provide data, analysis and
guidance to help you.

I understand – the buck stops with me! I’m inclined to take as much help as I
can get, but presumably it can get expensive.
Certainly the broader the scope, the higher the fees, but the law of diminishing
returns implies there should be a “sweet spot”. The terms of reference are
therefore crucial in ensuring that the expectations of both parties match. In most
due diligence engagements there are no statutory or regulatory requirements
setting the parameters, so the extent and focus of the work is up to you.

That’s pretty daunting. How can I get my accountant to help me in making
judgement calls regarding the terms of reference?
It can be daunting, indeed, but do remember that your accountant is as keen as
you are to ensure you hit the “sweet spot”. Bring to their attention, as far as
possible, the full circumstances of the proposed transactions, including:
 “Fit” with your business strategy
 Anticipate synergies
 Deal-breakers
 High or low risk areas
 Plans for integration
 Key personnel on the deal
 Time lines
Registered to carry on audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants in England & Wales
Greenback Alan LLP is a limited liability partnership registered in England and Wales No. OC320104
Partners: A list of partners is available at the above address

So, this way we can instruct precisely as much work as is cost-effective in
managing risk. Are there any other restrictions on scope?
There may be. Access to information is often the most significant. Usually a
successful sale is in the interests of both the buyer and the seller (although what
constitutes “successful” is likely to differ). Accordingly the target company will
make records available and you will accept confidentiality restrictions.
Nevertheless, there are often practical difficulties, if you are competitors or if key
employees are unaware of the proposed deal, for example.

Yes, I can see that. How do we deal with those issues?
The seller may release information in stages and/or impose rules on data access.
You might use a “data room”, a physically secure, continually-monitored room
where you can inspect the data. Increasingly, virtual equivalents are used, to
mitigate costs.

Any other major issues to consider when instructing the accountant?
The terms of reference are where to detail agreed scheduling and reporting
matters. This is also stage at which the accountant is likely to want to limit their
liability. The level of fees will depend in part on any cap negotiated. The British
Private Equity and Venture Capital Association (BVCA) agreed guidelines for
liability caps in 1998. These guidelines are typically followed by investigating
accountants. Liability caps are, however, open for negotiation in principle and it is
generally accepted that engagements that are limited in scope or subject to
severe limitations in time or available information will be have lower caps applied.
Registered to carry on audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants in England & Wales
Greenback Alan LLP is a limited liability partnership registered in England and Wales No. OC320104
Partners: A list of partners is available at the above address