Hey there,

I hope you are doing great.

A number is not always a number - that's the title of this insight. Much of my content circles around running certain analyses and asking questions.

But let’s step away from the numbers for one moment. As important as being able to analyze the numbers is to understand where these numbers come from.

In due diligence reports, this is often called the “quality of financial information”. This section assesses the quality of the data. It also shows reconciliations among the various data sources.

Today, I talk about three aspects to determine the quality of financial information.

Sources of numbers

Numbers used for the due diligence work can either be internal or external figures. For example, management reporting or audited financials. Which data we use, depends on the level of detail we want to show. If we use different sources, we have to make sure that the data sets reconcile. This means that there are no major differences between the sources. We should also make sure that the data is presented consistently across all periods. An exception is a carve-out situation. Typically, there are no audited financials for the carve-out perimeter. So, we need to present how the figures have been derived.

Accounting policies

Consistently presenting data is a key aspect of every due diligence assignment. So, making sure that the data is consistent (i.e. no accounting changes) is pivotal. Not only is this important across periods but also within periods. Are there differences between monthly and year-end closing? If yes, what are these differences? Two reasons why this is important. First, imagine the transaction is closed at a date other than year-end. Second, to understand monthly working capital developments. When we check for the underlying accounting policies, we also look at group policies. This covers, e.g., cash-pooling or inter-company financing. But it also covers the specific accounting rules of the company. These are often described in the firm’s accounting manual.

Management information

Having the right numbers and understanding how they reconcile is great. But not enough. In the end, we need to describe the figures. We need to understand why certain changes happened. Why there has been an increase or decrease of a position. And that’s why we need to discuss numbers and developments with the company’s management and the team.

Key aspects

1. The sources need to be determined and have to reconcile to the statutory accounts
2. We need to understand which accounting changes there are
3. Access to management information allows for a meaningful report

As always, feel free to reach out if you have any questions.

Cheers,

Jan