M&A Due Diligence: How to Uncover Corruption

• DOI: http://doi.org/10.1002/jcaf.22050
• Published date: 01 May 2015
• Author: Jo Ann McGee,J. Ralph Byington
• Date: 01 May 2015

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© 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI 10.1002/jcaf.22050

This article was originally published in Volume 23, Number 2 of The Journal of Corporate Accounting and Finance.

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J. Ralph Byington and Jo Ann McGee

Corporate bal-

ance sheets in

the United States

currently show an

excess of cash. This

has been recognized

as practically evident

in nonfarm and non-

financial corporations

(Sadowski, 2011). The

management of these

companies will be

looking for something

to do with that cash

that will make their

shareholders content.

The current economic envi-

ronment in the United States

is not conducive to increasing

corporate earnings through

increased sales. Among other

issues, corporations are facing

high unemployment, increasing

commodity prices, low con-

sumer spending, and the fear

of tightening credit in view of

the debt crisis in Europe. On the

other hand, one of the best ave-

nues for management to pursue

to increase shareholder wealth

is through acquisitions (Mahn,

2011). By pursuing M&A

activity, companies can (1)

strengthen market position, (2)

improve economies of scale, and

(3) expand into new markets as

ways to achieve rapid growth

and return. The process will

also enable them to gain new

expertise, synergism, knowledge,

and technologies that will make

the acquiring business become

in general more efficient and

more effective (“When Consid-

ering M&As,” 2011).

The business press is pre-

dicting that 2011 will wind up

being a record year for M&A

activity (Mahn, 2011) as corpo-

rate management pursues this

avenue to create shareholder

wealth. Specific industries,

such as oil and gas,

are already reporting

an anticipated rise or

already experiencing a

rise in M&A activity

(“When Consider-

ing M&As,” 2011).

Most chief financial

officers (CFOs) in

the retail industry are

anticipating this type

of activity to remain

steady or increase dur-

ing the next year, with

most of the activity

in the United States

(27 percent) followed by the

Asian-Pacific area (18 percent)

and Europe (16 percent). How-

ever, 75 percent of the CFOs

of the top 100 largest retailers

expect to see the majority of

the activity in Europe (“Retail

CFOs Expect 3% Increase,”

2011). The global automotive

industry is also observing a

significant increase in M&As

for 2011 (“Global Automotive

Industry M&A Activity,” 2011).

While M&A activity is

anticipated to increase share-

holder wealth and satisfaction,

it does not come without risks.

Companies engaging in this

M&A Due Diligence: How to

Uncover Corruption

Corporate balance sheets in the United States

currently show an excess of cash. And to make

earnings-conscious shareholders happy, many cor-

porate managers will funnel that cash into more

merger-and-acquisition (M&A) activity. But M&A is

never without risk, warn the authors of this article.

And they caution managers that their M&A due dili-

gence should not overlook the existence of possible

corruption and bribery in an acquired company.

The authors also include a handy checklist to help

corporate managers find possible problems when

examining a target company. © 2015 Wiley Periodicals, Inc.