Employee theft costs U.S. companies roughly $50 Billion every year. This only includes fraud and embezzlement, and does not include the $100 Billion lost every year due to corporate espionage. These statistics highlight why it is so essential for companies to conduct due diligence prior to hiring new employees, entering into any contractual relationship, or investment into any new project. Corporate due diligence is a process that helps organizations assess the risks associated with their prospective employees, partners, and investments, enabling them to make informed decisions. Due diligence includes investigating a person or entity’s finances, legal issues, compliance matters, and potential liabilities. This article discusses the importance of corporate due diligence and its components, as well as how it can protect your business from potential liabilities and losses.
What is Due Diligence?
As previously stated, corporate due diligence is the process of investigating an individual or entity’s financial, legal, and operational risks. This research is typically conducted by investigative specialists such as private investigators, and internal investigators / security personnel working for investment banks and law firms prior to hiring an individual, a business acquisition, a merger, a partnership, or a new investment.
The purpose of corporate due diligence is to protect the employer, buyer, or investor from potential liabilities and to identify any red flags that could indicate problems with the subject of the investigation. For example, due diligence might reveal that the subject has significant outstanding lawsuits, unresolved legal issues, significant debt, or a pattern of allegations.
Due diligence is not a guarantee against all risks, but it can help mitigate them. A thorough due diligence process should include interviews with key individuals, review of financial statements and tax returns, criminal history check, civil court records, and red flags within an individual’s personal conduct history.
Due Diligence vs Background Check
They key difference between due diligence and a background check is the scope and depth of the investigative process. A background check does not typically go as in depth as a due diligence investigation and tends to focus more on the black and white facts such as criminal history, rather than developing an overall assessment of who or what an individual or entity is.
The goal of due diligence is to get a complete picture of the person or entity before making any decisions. It is an important step in any business decision, especially when hiring individuals in positions of trust, investing money, or entering into a joint venture.
Background checks are just one piece of the puzzle. They can provide valuable information about a person’s criminal history, employment history, and credit history. However, they cannot give you a complete picture of someone’s character or ability to do their job. That’s why it’s important to supplement background checks with other forms of due diligence.
Fraud and Embezzlement
Fraud and embezzlement are serious offenses that can have a devastating impact on a company. Corporate due diligence is an important process that can help prevent these types of crimes from occurring.
When conducting corporate due diligence, it is important to look for red flags that may indicate fraudulent or illegal activity or the potential of an individual to commit such crimes. Some red flags to look for include:
-Unusual or unexplained activity
-Pattern of derogatory allegations and/or irresponsible behavior
-Suspicious changes in accounting practices
-Missing documentation or records
-Unexplained discrepancies in work history
If any of these red flags are present, it is important to investigate further to: Prevent the hiring of a high risk individual or determine if there is any wrongdoing taking place by an individual currently employed. Corporate due diligence is an essential part of risk management, and companies that fail to perform due diligence in certain circumstances may find themselves liable down the road both criminally and civilly.
Due Diligence Saves Companies Money
By conducting proper due diligence, companies can avoid costly mistakes and bad investments.
Due diligence is not only important for avoiding financial losses; it can also help companies improve their bottom line. By identifying potential problems early on, companies can take steps to mitigate them. In some cases, due diligence can even lead to cost savings.
For example, suppose a company is considering bringing in a new partner or hiring for a high-level position. If due diligence is conducted properly, the company may identify all of the potential risks associated with bringing in said individual. This information can then be used to negotiate better terms, detect fraud within the individual’s qualifications to fill such a role, or protect the company from liability by detecting a pattern of criminal history or allegations. A company that fails to conduct due diligence and protect its employees and stockholders will surely face civil lawsuits if the at fault party’s past comes to light.
The bottom line is that conducting due diligence investigations preemptively cost a fraction of hiring an attorney / investigative team after the fact, the loss of revenue from a poor investment, the loss of money from an embezzlement scheme, or paying out civil lawsuits and criminal penalties. F3 Intelligence, an Orlando based Private Investigation firm specializes in corporate due diligence. Their investigators have backgrounds in white collar crime, business, and corporate espionage. Do not hesitate to contact F3 to discuss conducting due diligence on your behalf.
F3 Intelligence Corp