Traditionally viewed as a post-deal compliance function, internal audit is increasingly being recognized for its value during the due diligence phase—where risks, assumptions, and red flags must be identified early and acted upon decisively. This article explores the evolving role of internal audit in M&A due diligence and how organizations can leverage this function for better-informed decisions, stronger controls, and long-term value creation https://ae.insightss.co/internal-audit-services/.
Understanding Due Diligence in M&A
Due diligence is the systematic process of investigating and evaluating a potential acquisition or merger to uncover any hidden liabilities, verify financial and operational claims, and assess the risks and opportunities associated with the transaction.
While financial, legal, and tax due diligence have traditionally taken center stage, modern M&A demands a broader lens—covering IT infrastructure, cybersecurity, compliance, ESG practices, human resources, and cultural alignment. This expanded view creates a natural opportunity for internal audit to step in as a cross-functional, risk-focused partner.
Why Internal Audit Matters in M&A Due Diligence
1. Unbiased Risk Identification
Internal audit provides an independent perspective that is not driven by deal pressure or commercial incentives. This objectivity allows auditors to identify deal-breaking risks or overlooked liabilities without bias.
2. Knowledge of Internal Controls
Internal audit has in-depth knowledge of the acquiring company’s control environment. This makes it well-positioned to evaluate whether the target’s internal controls are compatible, effective, and scalable—or if they pose significant integration challenges.
3. Cross-Functional Expertise
Internal audit functions are familiar with various departments—finance, IT, compliance, operations—and can draw on this holistic view to assess integration risks and pinpoint areas where the target company may lack maturity.
4. Post-Deal Integration Planning
Auditors can contribute to integration planning by identifying areas where the acquired business may need additional support, restructuring, or process harmonization—helping to ensure that synergy targets are realistic and achievable.
Key Areas Where Internal Audit Adds Value in Due Diligence
1. Governance and Compliance
Internal audit can review the governance framework of the target company, assessing board structures, ethical standards, and compliance with industry regulations. Red flags in governance can be early indicators of deeper cultural or control issues.
2. Internal Controls Evaluation
Are the target’s internal controls robust, well-documented, and audited regularly? Internal audit can benchmark the target’s controls against best practices or the acquiring company’s standards, identifying gaps that need remediation post-acquisition.
3. Fraud Risk Assessment
M&A targets sometimes mask financial or operational discrepancies. Internal auditors are skilled in assessing fraud risk—whether it’s revenue recognition irregularities, underreported liabilities, or inventory manipulation.
4. IT and Cybersecurity
With the rise in digital operations, assessing the cybersecurity posture of an acquisition target is critical. Internal audit can evaluate data protection practices, system vulnerabilities, and IT integration risks.
5. Operational Efficiency
Auditors can assess the efficiency and scalability of key business processes—from procurement and supply chain management to payroll and reporting—ensuring that the target is operationally sound and capable of supporting post-deal growth.
6. Cultural Compatibility
Though harder to quantify, cultural fit is vital to M&A success. Internal audit, through interviews and surveys, can gauge cultural alignment, employee engagement, and leadership styles, helping to foresee potential clashes or turnover risks.
Best Practices for Internal Audit in M&A Due Diligence
1. Early Involvement
For internal audit to have a meaningful impact, it must be involved early in the due diligence process—before critical assumptions are made or agreements are finalized.
2. Tailored Audit Plans
Each M&A deal is unique. Internal audit should develop a customized due diligence plan based on the target’s industry, geography, and risk profile, focusing on areas with the highest potential impact.
3. Collaboration with Other Functions
While internal audit brings a unique lens to M&A due diligence, it should collaborate closely with legal, finance, tax, and HR teams to ensure findings are integrated and consistent.
4. Documentation and Transparency
All assessments and findings should be thoroughly documented and presented to executive leadership and the deal team, providing transparency around identified risks and mitigation recommendations.
5. Post-Acquisition Follow-Up
The work doesn’t end when the deal is signed. Internal audit should continue to monitor post-deal integration, verify implementation of control improvements, and ensure the acquisition aligns with the strategic objectives.
Case in Point: A Strategic Asset
Consider a multinational manufacturing company preparing to acquire a regional supplier. On paper, the financials and operational metrics appear solid. However, internal audit identifies several red flags: outdated IT infrastructure vulnerable to cyberattacks, inconsistent quality assurance practices, and a fragmented control environment with no internal audit function in place.
Thanks to early involvement by the internal audit team, leadership is able to renegotiate the terms of the deal, earmark funds for post-acquisition control enhancements, and structure a phased integration plan that includes onboarding a robust audit function in the acquired company.
In this scenario, internal auditing served not only as a compliance check, but as a strategic enabler of smarter decision-making and risk mitigation.
In today’s competitive business environment, mergers and acquisitions offer a pathway to growth, innovation, and market expansion. But they also carry significant risks that can erode value if not properly managed. By leveraging the skills and independence of the internal audit function, organizations can uncover hidden threats, validate assumptions, and ensure a smoother integration process.
As the scope of internal auditing continues to evolve, its role in M&A due diligence is becoming more strategic, proactive, and indispensable. Organizations that embed internal audit into their M&A strategy stand a far greater chance of not only closing successful deals but also realizing long-term value from them.
Related Topics:
Stakeholder Management for Internal Auditors: Building Trust and Influence
Internal Audit Reporting: Communicating Findings That Drive Action
Digital Transformation of the Internal Audit Function: Tools and Technologies
Quality Assurance Reviews: Ensuring Internal Audit Effectiveness
Co-Sourcing vs. Outsourcing: Strategic Models for Internal Audit Services