Financial Due Diligence and Audit, is it just a title difference?

Kenneth Ma

When you find an attractive investment, there are a wide range of areas you should contemplate in order to assess whether the investment really fits your expectation and investment risk appetite.

While financial performance is one of the grave concerns to an investor, which financial performance measure to look at has always been a challenge for investors.  Many would opt to start in tandem with audited financial statements as these are well governed with detailed verification work. However, we should not therefore extrapolate and conclude that audited financial statements are sufficient for making the right investment choice.

Investors need to understand that audited financial statements, especially the statutory audit reports, may not always provide all the information that matters in every investment plan. Financial Due Diligence (“FDD”) should be performed before any merger and acquisition (“M&A”) takes place, however, seldom do people understand what FDD is, and its difference from audit.

Simply put, both FDD and audit involve a review of financial information by accountants. Even though FDD and audit may employ the same set of financial data, the discussion and presentation of findings are entirely different, that may involve an extended scope of work, use of different financial tools, and response to risk areas.

For your better understanding of how FDD differs from audit, the below illustrates some of the major differences that people always find confusing.
An Audit of financial statements aims to determine whether these financial statements gives a true and fair view on the financial position and financial performance of a company.

When it comes to transaction, the external auditor’s audit report has its inherent limitation. An auditor is obligated by professional ethics not to promote a position of the entity being audited, no matter how well or under-performed the entity was. The most useful information you should expect is an overall idea whether the financial statements as a whole is free from material misstatements. We should therefore always remind ourselves that there is never enough information to conclude how a company has been operating from an audit report. The financial statements are prepared according to financial reporting standards. The information may not provide a comprehensive picture for investment or acquisition purpose.

Financial Due Diligence
FDD is an investigative analysis of a business which is tailor-made for the specific needs of each investor. FDD can address the issues that matter the most in a transaction. Content and investigation coverage are agreed and further directed by the investor’s particular concerns.

In short, FDD reviews target company’s performance in an alternative angle aimed to enable its intended user to match and unfold a company's historical financial performance with operational data. FDD also reviews target company’s operations according to the intended user’s concerns, including but not limited to operational strengths and weaknesses, assessment on the overall reliability of future cash flow projections, identification of specific risk area and discussion of possible mitigation methods.

Unlike an audit, there is no standard format for an FDD report. Financial analysis and presentation of each FDD report are therefore unique and tailor-made for the intended user's best understanding on a company's present performance and possible future operational outcome.
The table below summarised the major differences between an Audit and an FDD:
Component Audit Financial Due Diligence
Engagement Team
  • External auditors
  • Not restricted to accountants or auditors
  • Experienced M&A professionals
  • Provides a degree of assurance on historical financial information in accordance with the relevant auditing standards such as ISAs, GAAS etc.
Review matters that affect the transaction, especially deal breakers that affect
  • Deal price
  • Deal structure
  • Current and future operations
  • Financing
  • Involves detailed verification and sampling work on transactions and balances
  • Flexible scoping that focus on key matters that affect the transaction
  • Limited verification and sampling work
  • Follows valuation requirements as specified in relevant accounting standards, such as:
    • IFRS 3 / HKFRS 3 – Business Combination
    • IFRS 9 / HKFRS 9 – Financial Instruments
    • IFRS 13 / HKFRS 13 – Fair Value Measurement
    • IFRS 16 / HKFRS 16 – Lease
    • IAS 2 / HKAS 2 – Inventories
    • IAS 36 / HKAS 36 – Impairment of Assets
  • Primarily follows those listed on the left. Valuations on alternative bases might be required to address:
    • Special assumptions and deal structure agreed between the involved parties
    • Valuation requirements set out by the local stock exchange, securities commission or other authorities
  • Typical audit report in standardised format, together with audit opinion
  • A tailor-made report with specific sections covering risk areas related to equity transaction and further operational needs
  • Less negotiable with the extensive scope
  • Depends on the scope, varies from desktop review to a full scope due diligence

How Moore Transaction Services can help?
Financial due diligence is a critical aspect of transaction planning as it can affect the purchase price for a business or even the decision as to whether to proceed. At Moore Transaction Services, our purpose is to provide peace of mind by identifying all the critical factors for which an informed decision can then be made.

Our experienced professionals undertake a tailored approach and focus on key risk areas to provide pragmatic and commercial insights to ensure the investment rationale is robust and the difficult questions can be answered.

For more details, please visit our website: