Internal audit's role in strategic transactions

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According to our survey of senior executives from large organizations around the world, global confidence in the economic recovery is optimistic.

We are seeing an increase in mergers and acquisitions (M&A) and divestitures.

Why internal audit (IA) should play a role during strategic transactions

Financial statements are only as good as the risk and control environment that support them.  IA can play a role in divestitures by ensuring that controls remain strong during the financial statement carve out, and operational and IT transition.

Similarly, without IA’s involvement, the acquiring organization will not know whether the control environment has sufficient rigor, or if the state of risks and controls were taken into account at the time of valuation of the acquiring organizations.

Strategic transactions such as mergers and acquisitions (M&A) and divestitures remain some of the most risk-heavy initiatives that any organization can undertake.

Organizations often underestimate the challenges associated with the acquisition or divestiture of a company or line of business. Without IA’s insight, costs could range from a loss of opportunity to additional investments required to fix the issues that were missed.

How IA can help during strategic transactions

  • Provide increased visibility and transparency to key risks related to strategic transaction changes
  • Reinforce that risks and controls are the responsibility of management
  • Identify gaps in the integration or separation project management plan
  • Suggest opportunities for additional synergies that would boost the acquisition’s return on investment or cost savings as a result of the separation
  • Call out the impact that the acquisition and its integration, or the divestiture, may be having on other parts of the business
  • Highlight potential gaps in the internal control structure
  • Support management’s prioritization of risks of transition and organizational readiness for the effective and efficient allocation of resources to address the risks and controls
  • Provide increased visibility of process changes impacting management’s 302 certification process.

Chief Audit Executives should work closely with their corporate development teams to involve IA during the entire strategic transactions life cycle:

  • Strategically, IA can determine an organization’s readiness for the transaction.
  • During due diligence, IA can alert the organization to potential risk, or control or regulatory issues that would cause the organization to overpay or undervalue.
  • Prior to deal close, IA can help prevent deal value leakage.
  • From a post-transaction perspective, having IA involved in critical components of the execution can create organizational efficiencies and ascertain proper control monitoring of new or changes in processes.
  • Finally, throughout the strategic transaction life cycle, IA can assess the management of the program to identify any improvement opportunities.

IA provides a critical perspective to strategic transaction deals that many executives may not consider. Without that perspective — right from the start —organizations could find out far too late that the price was not right, or that it has to spend a significant amount of money to fix issues that IA could have identified and helped the organization avoid.