Due Diligence
Due diligence is the term used to describe an investigation or audit of a potential investment – be it the employment of an individual or the purchase of a commercial entity – prior to completion of contractual arrangements.
The term first came into use after the United States introduced the Securities Act 1933. This Act provided a defence for broker-dealers if they had exercised ‘due diligence’ in their investigations of the seller, should they later be accused by investors of inadequate disclosure of the material facts prior to the purchase of investments.
The term is generally used today to describe the process of establishing all the facts prior to a transaction taking place and should be conducted by both parties as a way of avoiding preventable injury. The process of due diligence involves overt and covert searches being conducted to ascertain the veracity of the business information supplied by both contractual parties. Due diligence is a useful tool in establishing the material facts in the following areas:
- Credit history
- Criminal & civil court history
- Resume verification
- Personal & business associations
- Previous employer verification
- Property and asset searches
The overt aspect of due diligence is normally conducted by solicitors, financiers and accountants whereas the covert side is executed by trained investigators experienced in gathering evidence in the aforementioned areas either by passive data research or covert surveillance.
