Internal Audit Checklist for Mergers and Acquisitions

Internal audit staff must interview people, examine information and evidence, test controls and read policies in order to conduct an audit effectively – this work can be especially difficult in command-and-control cultures where pressures exist to deliver value quickly.

An effective internal audit department can significantly lower the risk of material misstatements in an acquired company by ensuring its integration. This requires devising a plan which includes system integration, people integration and process integration.

1. Review the Company’s Financial Statements

Financial statements reveal much about a company’s overall health. An internal auditor must keep an eye out for any signs of fraud, manipulation or abnormal accounting practices in order to provide timely feedback to senior management.

One of the worst M&A missteps occurs when a Fortune 500 company buys a small start-up only to discover that its CEO falsified financial numbers to make his firm appear attractive as an acquisition target.

Internal audit can assist in mitigating these potential issues by reviewing the previous company’s financial statements and reviewing past documentation and methodology, familiarising themselves with it to save time and reduce unexpected discoveries that could cause costly delays and disruptions. Furthermore, an acquiring company can use information gleaned from previous auditors to identify its exposures and risks.

2. Review the Company’s Operations

Internal auditors need a deep knowledge of an acquired company’s operations in order to spot any potential integration challenges such as synergy tracking, organization design and taxes that need addressing in the integration process.

An internal audit team’s greatest contribution lies in providing a transparent report with objective analysis, appraisals and recommendations that help management identify any risks or opportunities for improvement.

As well as giving an acquiring company the information needed to assess whether its own entity-level controls are sufficient to mitigate risk associated with material misstatements in acquired companies until fully integrated, due diligence can also save both parties both time and money.

3. Review the Company’s Human Resources

Human Resources departments play an essential part of a company’s culture and can play an instrumental role in its merger or acquisition success or failure. Poor HR policies and procedures may result in lawsuits, significant fines, lost revenue streams, low employee morale or inability to attract talent – which all can have serious ramifications on company operations and morale.

Reviewing your company’s human resource policies and practices can help ensure they align with company goals and strategies, comply with employment laws, and identify areas where HR processes can be improved to save both time and money in the long run. An audit may reveal additional areas where improvement could save both time and money in the form of reduced turnover time or savings on overtime payroll costs.

4. Review the Company’s Information Technology

As M&A transactions can be complex processes, auditors can provide invaluable assistance. Their skillset lends itself well to M&A processes – preventive measures are more cost effective than corrective ones!

Problems often arise when an acquiring organization fails to fully integrate the accounting controls of an acquired company, leading to material misstatements going undetected for extended periods.

One way to prevent this from happening is by making sure key risk factors are considered and that the business unit being acquired designs and implements adequate controls to mitigate risk – this can be accomplished by engaging internal audit early in the merger and acquisition process.

5. Review the Company’s Legal Documents

Legal departments for companies looking to acquire targets can assist with assessing any liabilities or outstanding debt instruments; as well as any contracts that would need renegotiating. They can also review documents related to tax status as well as current and historical governmental filings of their target.

As part of any acquisition, it is crucial for an acquiring company to ensure the target systems and processes align with their control environment. This may take some time with larger transactions. An internal auditor can assess existing controls of an acquired entity before offering recommendations to strengthen them further in order to reduce risks that could cause material misstatements until integration takes place in full.