In the realm of M&A, due diligence is essential for ensuring the success and value optimization of transactions. It involves a comprehensive review to confirm facts, analyze potential contingencies, and validate the financial health of the target company. Understanding the target’s business model and industry nuances, especially in regulated sectors, is crucial for anticipating future contingencies.

Key issues encountered during accounting and tax due diligence include the analysis of historical trends in working capital components like accounts receivable, accounts payable, and inventory to uncover potential cash flow management issues and assess the company's financial health. Additionally, evaluating the company's ongoing government commitments and ensuring provisions are set aside to cover these obligations is crucial. Assessing the collectibility of long outstanding AR and the adequacy of allowances, using subsequent collections as supporting evidence, is another important aspect.

Undisclosed distributions to shareholders, such as cash dividends or share buybacks, may lead to tax exposure and transparency issues. Timely recording of monthly expenses is necessary to avoid inflated net income and inaccurate financial statements. Reviewing the nature and validity of prepaid expenses, advanced expenses, and other assets helps determine if they should be expensed. Checking for covenant breaches and significant asset pledges is vital as they could impact the M&A transaction. Lastly, scrutinizing tax filings, payments, returns, and related-party transactions ensures compliance and accurate reporting, addressing potential tax issues and assessing the company's tax dispute history.

For more detailed insights and a thorough understanding of these crucial due diligence issues, read the full article.