Internal vs. External Due Diligence Corporate Investigations: Choosing the Right Approach

Due diligence is the background research and analysis that informs business decisions like investments, partnerships, mergers, acquisitions, or sales. Taking a deep dive into a company’s financial, legal, or operational history and current status, called a due diligence investigation, gives a more clear picture of the risks that may be involved before proceeding. 

If your company is considering a major investment or other new business venture you might be wondering if you should perform a due diligence investigation with your existing internal staff, or if it’s better to work with an external investigator. Both are valid approaches; however, there are pros and cons to each depending on the situation. 

Here we’ll look at what a due diligence investigation should include and what to consider as you decide between conducting an investigation internally or working with an outside firm.
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Critical Due Diligence Information to Gather 

Depending on the nature of the business decision at hand, an investigation may focus more heavily on financial, legal, or operational matters. For example, before investing in a company it’s important to assess things like financial stability and current market share. In contrast, if two companies’ operations will be combined, it’s critical to gain insight into company culture, quality procedures, regulatory compliance, and related things.

Generally speaking, a thorough due diligence investigation will cover:

• Financial details: Assets, liabilities, payroll, real property and equipment ownership, annual reports, cash flow and balance sheets, SEC and other filings, major investors
• Market share and industry position: At present and over time
• Corporate details and history: Past and present leadership and company size, locations and any subsidiaries or parent companies, product or service portfolio, major events and changes (positive or negative)
• Legal: Past litigation or complaints with regard to products, services, compliance, safety, personnel, taxation, or other matters, pending legal matters, any evidence of problems with contracts, fraud, or ethics (for business matters or leadership personally)
• Compliance: Domestic and international laws and regulations for trade, product safety, worker health and safety, labor laws, import/export laws
• Operations: Company culture, quality assurance, production efficiency and innovation, supply chain management,  investment in workforce, technology, and resources, relevant industry certifications, any HR or personnel issues
• Reputation and public perceptions: Media coverage at large and in relevant industry publications, internal public relations and press kits
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Choosing Between Internal and External Investigators: Factors to Consider 

There are some trade offs between conducting this kind of investigation with in-house personnel and working with a third party investigator. Depending on the details of the situation, the company being investigated, and the business decision in question, some of the considerations listed below may be more or less significant. 

• Experience: Efficient, thorough investigations require a strong background in US, foreign, or international business and tax law, finance, or accounting. 
• Access to information: In the age of information many online databases catalog valuable information, some overlapping and some unique, and almost all quite expensive. Keep in mind also that it’s usually far easier to find information on a public company than a private one. Access may also hinge on the ability to travel to obtain some information.
• Familiarity with sources and records: Beyond mere access to a database, investigators must be able to conduct complex research in online databases with highly specialized data fields and controlled search vocabulary. They also need to know how to monitor watch lists, sanctions lists, how to interpret and look for patterns or red flags, cut through extraneous details, and prioritize risky situations.
• Language and culture: Especially when dealing with a non-US company, language and culture barriers may come into play. It’s also critical to have a solid understanding of different recordkeeping systems and government documents.
• Confidentiality: It’s critical that details of the investigation and the reasons for it remain confidential within your company and in social or general media. All investigators must use discretion in their research and evaluation of findings.
• Objectivity: An outside investigator is impartial and feels no pressure or personal investment in a specific outcome. For internal employees, trying to uncover all sides of the situation and maintain objectivity can be difficult, especially if leadership has strong feelings about the matter or if there are disagreements about the significance of some information.
• Time and focus: Hiring a due diligence firm is focused on your investigation alone and is not juggling other work duties within your company. They are not limited to a set amount of time as your employee, and their experience usually leads to greater efficiency in searching and analyzing information.
• Cost: Hiring an outside investigator may be more expensive in some instances; however, it may be worth the extra expense. Compare the experience, quantity and quality of information, and timely reporting you benefit from when working with an outside firm with the work time lost and additional training or time required for an internal investigation. 

Weighing the Pros and Cons of In-house vs. External Investigators

Undertaking an internal corporate investigation is not a simple matter of temporary reassignments or setting up a subscription to a leading legal or financial database. What may appear to be straightforward research and fact gathering can quickly grow in complexity or simply take more time than anticipated. It’s often wise to save time and frustration in the long run by outsourcing this work rather than restarting the process if an internal investigation falters.

Industry expertise may be an area where internal staff have advantage, especially in niche industries, products, or services. An external investigator may need your assistance in developing a close understanding of specific risks, concerns, business models, or priorities. Because your employees know your business and its tolerance for risk best, it may make sense to conduct some or all of the investigation internally. 

An internal investigator may be a reasonable choice if the situation is not overly complex, or if you employ experts in business law, accounting, or relevant fields. In contrast, if the choice to merge with or acquire the company you’re investigating marks a new direction for your firm, your expertise may not be as much help. What’s more, an external corporate investigation will bring specialized knowledge of common pitfalls and the limitations of certain sources. This is especially helpful when dealing with a privately held company or one that’s overseas.

Finally, try to be realistic about the amount of time and money available for a thorough investigation, including digesting and presenting information to stakeholders and decision makers. If so, is there also a plan to adjust duties and schedules so productivity is not lost if staff are redeployed to investigation for a period of weeks or months? 

Regardless of how you decide to proceed, remember that your company is ultimately responsible for weighing the information and data gathered and for making a final decision based on it. 
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Experienced, Insightful Due Diligence Investigation with Kreller 

At Kreller, we provide the actionable intelligence needed for critical decision making. With access to financial, legal, business, and government information and data for both low- and high-risk due diligence situations, our team can do the legwork and provide the visibility you need. 

Kreller’s investigators bring years of experience to each investigation, including international and private company research. We maintain offices around the world and have access to a range of resources to save you time and money.

Contact us to discuss your needs regarding due diligence investigation or to learn more about our services.

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