67 Accounting Risks
to Detect During Due Diligence
for Buyers and Sellers
of Small / Midsize Businesses
You’ll love hating this exposé . . . Avoiding Accounting Hell.
It can help you anticipate risks during due diligence. And then solve post-completion problems.
For decades, I’ve been keeping a log of the pitfalls searchers detect before deals are done. And the costly obstacles that arise post-completion. My checklist, below, details them.
Searchers can save lots of time and aggravation using this checklist. It points to the trouble spots, which you might see before you buy a business. Or, afterwards.
What kind of problems? Mismanagement, undesirables, inadequacies, incompetency, unnecessary risks, unrealistic foresight, errors and omissions, governmental annoyances, etc.
What’s the penalty for searchers? Buying the wrong business or buying the right business on the wrong terms.
Accounting is foundational.
Financial reporting won’t be right if the accounting isn’t right. (Garbage-In / Garbage-Out)
Do-it-yourself accounting is common, and it’s one of the most costly risks.
And that will adversely affect: Due diligence, financing, valuation, negotiating, personal guarantees, buy/sell agreements and post-completion operations.
financial ratios inconsistent with industry norms.
breakeven point is a mystery.
confusing profit for cash flow.
inaccurate financial reporting.
Erroneous . . .
bookkeeping (see posting history).
operating vs financing leases
classification of employees, contractors, etc..
computation of wages and withholding.
Improper . . .
accounting for deferred revenue
distributions to owners, shareholders, etc..
funding of employee benefit programs.
Inadequate . . .
accrual (especially payroll).
backup and storage procedures.
backup of personnel/cross training.
data entry errors.
documentation of petty cash.
external accounting services lacking useful scope.
granting of credit.
invoicing timing or collection
performance standards of internal and external labor.
policies and procedures.
record retention and storage systems.
recordkeeping for employees paid time off.
Insufficient . . .
disaster recovery plan.
recordkeeping of employee benefit programs.
Misleading . . .
skimming (not- or under-reporting revenue).
expenses paid by another entity
Mismanagement . . .
actual or undetected noncompliance with loan covenants.
history of audits by taxation authorities.
incompetent accounting personnel.
inefficient scheduling (inventory, labor, line of credit.
insecure access rights to accounting system.
instances of negative cash flow.
of accounts receivable or accounts payable.
of documentation supporting accounting.
over, under, or failure to pay taxes.
not using optimum accounting software.
risky reliance on accounting software.
running personal expenses through the business.
timing and consistency of the closing the books.
undesirable accounting for inventory.
unhelpful or untimely financial reporting.
untimely/erroneously reconciling accounting with bank statements.
unwisely handling all the accounting in-house.
Misunderstanding . . .
use of software.
the length, cost and profit of the business cycle.
Nonexistent . . .
budgeting and analysis.
debt covenant definitions don’t match contracts
measurement of KPIs.
separation of employee/accounting duties.
You can avoid other pitfalls, and improve your opportunities, using my books:
120 Financial Lifelines for Small Businesses (Complimentary)
21st Century Entrepreneur Ideas for Kids and Aspirational Adults (Complimentary)
How to Get ALL the Money You Want For Your Business Without Stealing It
(USA and Canadian versions.)
Email Ted J. Leverette, The Original Business Buyer Advocate ®. “Partner” On-Call Network, LLC