M&A Synergies Framework: Due Diligence Checklist—Accounting and Finance

This is a brief checklist of accounting and finance items to address when evaluating merger and acquisition synergies between two firms. For a more detailed discussion, see M&A Synergies Framework: Accounting and Finance

Accounting Methodology

Accounting Standards. Countries use various accounting standards including International Financial Reporting Standards (IFRS) and their own Generally Accepted Accounting Standards (GAAP).

    • Understand that countries account for transactions differently. Knowing that countries account for transactions differently will help forego mistakes in valuing your target company.

Valuation. Differences in accounting standards, professional behaviors, and valuation methods can cause under- and over-valued bids.

    • Decide on a walkaway price before negotiations. Overvaluation of a company will result in write-off of goodwill. Although goodwill write-off is still possible, deciding on a walkaway price will likely prevent you from overpaying and thus prevent a large write-off in the future.

Professional Behavior

Professionalism vs. Statutory Control.1 The level of professional judgement used when recording transactions varies between countries.

    • People that are less educated may need training to reach the level of professional judgement needed.2 Take time to evaluate the level of professional understanding within each company and decide how to best train them.

Uniformity vs. Flexibility.3 Uniformity versus flexibility is a long-debated issue with no clear end.4  It is still necessary to consider when merging with another company, both in another country and in your own country.

    • Be aware that although accounting standards are set, the way a company interprets them may be different. Taking uniformity and flexibility into account will better help your company in the accounting due diligence process.

Conservatism vs. Optimism.5 The level of risk and caution preferred by certain culture differs. Below are some suggestions for working with conservative countries.

    • Check income and expense recognition of the target company. Some research suggests that conservatism creates less persistent income over time.6
    • Check asset valuations. Research has also shown that conservative cultures are more likely to undervalue their assets.7
  • Secrecy vs. Transparency.8 The amount of information a company publicly discloses differs between cultures.
    • Take time to teach employees the desired level of transparency. Since cultures have different ideas of the acceptable amount of information shared with the public, it is important to teach all accounting and finance employees the correct standards used by the company.

Fraud/Earnings Management. Because of the differences in accounting seen in the above values, the likeliness of fraudulent behavior is high when looking to abroad.

    • Consider a country’s Corruption Perception Index before merging. The Corruption Perception Index (CPI) score will tell you how prevalent corruption is within the country. This CPI could likely relate to the level of corruption within the company, which will provide clues about their accounting.

Previous: M&A Synergies Framework: Due Diligence Checklist—Environment

  1. Gray, S. (1988). Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally. Abacus, 24(1), 1-15
  2. Fang, Y. (2007). On Accounting and Culture. Canadian Social Science, 3(5), 121-124
  3. Gray, S. (1988). Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally. Abacus, 24(1), 1-15
  4. Keller, T. F. (1965). Uniformity vs. Flexibility: A Review of the Rhetoric. 30 Law and Contemporary Problems
  5. Gray, S. (1988). Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally. Abacus, 24(1), 1-15
  6. Tinkelman, D. P. (2015). Introductory Accounting: A Measurement Approach for Managers. Routledge
  7. Tinkelman, D. P. (2015). Introductory Accounting: A Measurement Approach for Managers. Routledge
  8. Gray, S. (1988). Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally. Abacus, 24(1), 1-15