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Internal Auditor Role in Merger and Acquisition

As boards take on a more active supervisory role in M&A, they will need help assessing risk independently and understanding whether management is providing a plan and implementing risk management. Appropriate risk for these transactions to succeed. The internal audit function should seek to get involved as early as possible in the merger and acquisition (M&A) process and provide value-added support by performing a risk assessment, including a strategic review—of the business, particularly about growth through acquisitions.

Internal auditors’ involvement in the M&A lifecycle includes M&A strategy and target selection, appraisal, and integration. Key success factors include early and ongoing support from senior management and the audit committee; collaboration early and often with external auditors and other compliance teams (e.g. Sarbanes-Oxley); and holding regular contact point meetings with management to monitor and report progress updates.

Involvement Of Internal Audit In Strategic Transactions

Organizations often need to pay more attention to the challenges in acquiring or divesting a business or line of business. Without the details of IA’s M&A, costs can range from lost opportunities to additional investments needed to fix missed issues. The growth of emerging markets, prices, the complexity of the regulatory environment, and growing regulatory pressure are all pressing issues where IA can provide important input and value. Strategic value early in the product life cycle. Similarly, IA involvement is necessary for the acquiring organization to know whether the control environment is sufficiently operating or whether the risk status and controls are considered at the assessment time. 

Repurchase Price Or Not

While many audit committees may be familiar with their roles in financial and accounting due diligence, some have begun to delve into other areas of due diligence for significant transactions, such as activity, technology, information, and seller due diligence. These additional efforts can help better manage the risks associated with the transaction that could affect the financial outcome of the transaction. Without an IA’s insight into M&A activities, costs can range from lost opportunities to the additional investments needed to fix missed issues.

The internal audit function is evolving from a traditional supervisory function to one encompassing a broader range of activities that add value to the organization. Given the high-risk profiles of these significant transactions, proactive IA involvement before, during, and after a merger, acquisition, or divestment can help management identify issues and opportunities related to these transactions and related to a transaction that may not have been otherwise processed.

How and where can internal audit help in mergers and acquisitions

M&A activity can vary from company to company, but a typical life cycle includes the following ten steps, as the Corporate Finance Institute (CFI) explains:

  1. Formulate an acquisition strategy

Developing a good acquisition strategy is all about letting the buyer understand what they hope to gain from an acquisition – what their business goals are to acquire the target business asset target (e.g. product line expansion or new market access)

  1. Define M&A research criteria

Identify key criteria for identifying potential target companies (e.g. margins, geographic location, or customer base)

  1. Search for potential acquisition targets

Buyers use defined search criteria to research and then evaluate potential target companies.

  1. Begin acquisition planning

 Buyer contacts one or more companies that meet their search criteria and appear to offer good value; The purpose of the initial conversations is to get more information and see how acceptable the target company is to the merger or acquisition.

  1. Perform a Valuation Analysis

Assuming initial contact and exchange went well, the acquirer asks the target company for important information (current financial statements, etc.). The acquirer values more ahead of the target, both as a company in ownership and as a corporation. Appropriate acquisition target.

  1. Negotiation

After several valuation models of the target company, the buyer must have enough elements to build a reasonable offer; Once the initial offer has been presented, the two companies can negotiate more precise terms.

  1. M&A due diligence

 Due diligence is an extensive process that begins once an offer has been accepted; The appraisal seeks to confirm or correct the acquirer’s assessment of the target company’s value by conducting a detailed assessment and analysis of all aspects of the target company’s operations – financial parameters. Company, assets and liabilities, customers, human resources, etc.

  1. Buy and Sell Agreement

Assuming the due diligence process has been completed without major issues or concerns, the next step is to execute a final sale and purchase agreement; The parties will make the final decision on the type of contract of sale, whether it is the purchase of assets or the purchase of shares

  1. Acquisition Financing Strategy

The acquirer will explore financing options for the transaction beforehand, but funding details are usually compiled after the sale and purchase agreement is signed.

  1. Acquisition closing and integration

The acquisition has closed, and the target and buyer’s management teams are working to consolidate the two companies.

  1. Third-party risk management at the acquisition target level 

The acquisition target may handle its network of third parties. It should be determined whether the risk of having a third party involved in providing a service or product is correctly identified and systematically managed.

12. If certain risks occur at the level of the acquired organization

The cascade effects of the compromise can engulf the organization seeking to acquire. This is the case with vulnerable assets.

For example, In an acquired organization, third-party controls are weaker (e.g. no proper inventory of all of them). used by third parties; does not request and review Service Organization Controls [SOC] 1 reporting, if applicable; finds that recent contracts and forward agreements are not available) could inevitably lead to financial risk in the event of binding terms that would affect a potential buyer. 

13. Cost reduction and organizational restructuring 

These are typical pressures in the post-acquisition/integration phase. 

 Internal auditors 

Internal auditors can anticipate some issues and respond more effectively if they are also involved in the early stages of the acquisition process.

While internal audit plays an important role, particularly in the planning aspects of M&A activity, a simple diagram explaining Deloitte’s involvement in IA would help define the role and responsibilities over the typical lifecycle of mergers and acquisitions. Throughout the strategic agreement process, the internal audit (IA) should act as the business advisor to the organization. IA can evaluate and monitor program management activities, review controls, and provide key insights while maintaining independence and objectivity.

Prospects of M&A activities in the future

According to KPMG’s M&A Predictor, although 2018 global M&A transactions declined compared to 2017 activity, we expect deal execution to regain momentum in 2019. As a result, expect an uptrend this year – and the first quarter of 2019 has a similarly high trend as total M&A value increases while average deal value hits a 10-year high.

Although the outlook for mergers and acquisitions is positive, a significant proportion of transactions still need to achieve the results originally planned. Corporations and private equity firms largely blame external factors but have the need for more effective due diligence and integration to ensure revenue projections are fulfilled.

Conclusion

Internal audits provide an important perspective on strategic deals that many executives may overlook. Without this perspective – in the first place – the organization could find out too late that the pricing is inappropriate, or they have to spend significant sums of money fixing issues that IA may have identified and helped.

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