Thoughts about the different types of questions

During a due diligence, we dedicate a lot of time to asking questions. Questions about developments, outliers, and reconciliations.

This is often very time-consuming and demanding. And possibly annoying for the people on the other end who have to answer these questions. But it is still necessary to raise these questions in order to understand the company better.

In this article, I am going to discuss how to ask the right questions.

Whenever we start working on the due diligence, we need to analyze a company’s data, e.g. on an account level. We then see movements that we don’t understand. Or account names where we would like to better understand what’s been posted there. This analysis leads to asking questions about developments and outliers.

Development

Development questions improve our understanding of the company and its business model. What has happened and why? We must not scratch on the surface but dig deeper. These questions are important for writing the report later on.

Outliers

Sometimes, there are accounts with no balances in one year and a huge balance the other year. Oftentimes, these movements relate to extraordinary situations. We might consider these within our adjustments section. Thus, asking for these outliers helps identify potential adjustments.

Reconciliations

When we analyze a company’s data, there is often data that cannot be reconciled to the financial statements. This leads to reconciliation questions about how different data sets are connected. Depending on the quality of the data, the number of reconciliation questions will be higher or lower.

Key aspects

1. Questions about development help understand what happened within the company and why.
2. Questions about outliers support us in identifying adjustments.
3. Questions about reconciliations provide an understanding of the quality of the data and how the different data sets are linked.

Final thoughts

Asking questions to gain an understanding of the company is crucial during a due diligence. In this article, I intend to provide insights into the different types of questions that can be raised and how these questions can support our work.

Hi, I am Jan, I share insights about financial due diligence procedures. If you find this helpful and would love to receive more content like this, follow me here on LinkedIn.

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