Due Diligence

AuthorLaurie Hillstrom

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Due diligence is a legal term that describes the level of care or judgment that a reasonable person would be expected to exercise in a given situation. The term finds application in a wide range of business

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settings, including mergers and acquisitions, occupational health and safety, environmental impact assessments, supplier and vendor relationships, asset purchase decisions, and employee hiring or promotion practices. Performing a due diligence analysis in such situations helps managers make informed decisions and reduce the risks incurred by the business. "Real due diligence analyzes and validates all the financial, commercial, operational, and strategic assumptions underpinning the decision," an analyst for Price Waterhouse Coopers told Mondaq Business Briefing. "Due diligence is a strategy to reduce the risk of failure, as well as the embarrassment of discovering what underlies spectacular success," Herrington J. Bryce added in Nonprofit Times.

In the area of workplace safety, employers have a responsibility to exercise due diligence in eliminating hazards and creating a work environment that minimizes the risk of accidents or injuries. In fact, due diligence is the legal standard used to determined whether employers can be held liable under occupational health and safety laws. Employers are generally not held liable for accidents if they can prove that they took reasonable precautions to protect workers from injury. Companies can establish due diligence by putting workplace safety policies and procedures in writing, providing appropriate training to employees, and holding managers accountable for following safety guidelines.

Due diligence also applies to the process of making investments, whether personal investments in shares of stock, corporate investments in technology, or the purchase of one company by another. In the area of mergers and acquisitions, a due diligence analysis is an important part of the process of evaluating potential investments and confirming basic information before entering into a transaction. "Quite often, a proposed merger or acquisition gets canned or valued down following conflicts over intellectual property rights, personnel, accounting discrepancies, or incompatibilities in integrating operating systems," wrote Lee Copeland in Computer World. "The process of researching, understanding and, in some cases, avoiding these risks is known as due diligence."

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