Why do we need Due Diligence now more than ever? Are you doing your bit?

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Why do we need Due Diligence now more than ever? Are you doing your bit?
02
Dec

Why do we need Due Diligence now more than ever? Are you doing your bit?

Due diligence is becoming increasingly popular in today's world, and rightly so. With all of the world's major corporations experiencing unexpected downturns that were ultimately caused by this very reason of not performing thorough research, it's time we got serious about this.

Why is due diligence crucial, and what does it involve?

"Practically, Due diligence is a way of managing risks."

It is a critical business tactic to take into account before making any major business decisions or owning a company. It assists investors and businesses in understanding the nature of a transaction, the risks associated, and whether the transaction fits into their portfolio. It's like doing homework on a new agreement and is crucial for making informed investment decisions.

Here's some quick case studies to help you understand the significance of due diligence:

Case Study 1: The Enron Scandal

The Enron Failure involves Enron deceiving regulators through off-the-books accounting practices and the incorporation of phony holdings. To conceal its bad assets and massive debts from investors and creditors, the company used special purpose vehicles. But was any of this even remotely predictable?

Nobody saw it coming. Enron was doing exceptionally well. The 1990s bull market fueled Enron's ambitions and attributed to its exponential rise. There were opportunities all over, and the company was prepared to create a sector for traders everywhere.
 

Enron1

That was until it was found that Enron used special purpose entities to keep debt off its financial statement and mark-to-market accounting to inflate revenue. Furthermore, despite knowing that its publicly reported financial position was incorrect, it disregarded internal advice against these practices.

The Enron scandal brought to light accounting and corporate fraud, as its shareholders lost hundreds of billions of dollars in the years that led to its going bankrupt, and its employees lost even more in pension benefits. Increased regulation and monitoring and supervision have now been implemented to help avoid corporate fraud on the scale of Enron. However, some businesses are still struggling to recover from the fallout from Enron.

Case Study 2: The Elizabeth Holmes Scandal

Theranos' founder Elizabeth Holmes was found guilty of defrauding investors and her former business partner Sunil Balwani of millions of dollars. Both whistleblowers felt they were not taken seriously by those at the start-up and eventually alerted organisations and press representatives outside the company.
 

ElizabethHolmes1

She also admitted that she gave false information about a contract with the military as a 'misunderstanding', and that she regretted the falsified report with the company logos inserted. Theranos founder Elizabeth Holmes has been sentenced to more than 11 years in prison for fraud. She was found guilty on four of eleven charges such as defrauding investors, though she was acquitted of charges including lying to the court about Theranos' clinical trials.

What is the key takeaway from these case studies?

It is a lesson that history has been validating repeatedly. When we find ourselves trying to justify behaviour that we would generally find odd, we must always think twice.

The simple solution for this would be to take measures against not having the Enron/Theranos case repeat itself. These could be:

  • Increasing board oversight
  • Keeping financial incentives for execs to a minimum
  • Instilling ethical values in business organisations 

But at the end of the day, it all comes down to doing your due diligence. Enron and Theranos are characterised by a widespread failure by investment firms to ask sufficient questions before transferring funds. It’s about taking matters into your own hands.

So, the question is, are you doing everything it takes to prevent something like this from happening to you or your business? Prevention is always better than cure. And in cases like these, there may not be a cure. Get started now. Click here to contact one of our agents and begin taking preventative measures today.

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