"The building is not built on a single piece of wood; if the foundation is unstable, it will collapse soon." - Corporate mergers and acquisitions are like building a skyscraper. If the foundation is not solid, it will eventually collapse.
In the world of mergers and acquisitions of listed companies, financial audits are like doctors' CT scans. Once the data is distorted and the decision is wrong, it will bury many hidden dangers. Many companies tend to overestimate the profitability of the target company and underestimate the debt problem when acquiring companies. Even due to errors in financial audits, they have difficulties in operation, stock prices plummeted, and market confidence collapsed after the merger and acquisition.
Goheal has been paying attention to the global merger and acquisition market for a long time and found that financial audit errors are not isolated cases, but common "minefields" in the merger and acquisition of listed companies. Today, let's talk about: Why do financial audits in mergers and acquisitions frequently go wrong? When a financial black hole is found after the merger and acquisition, how to remedy it?
Why are merger and acquisition financial audits prone to errors?
When a listed company acquires a controlling stake, it means not only taking over the resources of the target company, but also taking over all its financial conditions. Audit errors often come from the following aspects:
1. Financial statement "makeup"
In order to improve valuation, the target company may perform "financial beauty" - inflating revenue, underestimating costs, and hiding debts. For example, by recognizing revenue in advance, the performance looks bright and beautiful, but in fact the cash flow has been tight.
2. Asset valuation errors
The asset valuation of some companies (such as fixed assets and intangible assets) is watered down, especially assets such as goodwill and intellectual property rights, which are easily overestimated due to the lack of standardized measurement.
3. Limitations of audit institutions
Some audit institutions may have close relationships with the acquired companies, causing them to "turn a blind eye" in the report and be overly optimistic about risk assessment.
4. Too short due diligence time for mergers and acquisitions
Due to fierce competition, the due diligence time of some mergers and acquisitions has been greatly shortened, resulting in the failure to fully verify the financial data.
Real case: The financial audit storm of Tesco in the UK
In 2014, British retail giant Tesco fell into a historic crisis due to financial fraud. Tesco falsely reported profits of 250 million pounds by means of "accelerating the recognition of commercial revenue and deferring the recognition of accrued costs". This behavior caused its stock price to fall nearly 50% from its high and triggered legal proceedings and regulatory investigations around the world. Subsequently, Tesco adjusted its senior management, and many executives were suspended or resigned. In addition, Tesco was fined 16.4 million pounds for data leakage.
This case shows that financial audits not only affect M&A decisions, but also directly affect shareholder interests and market confidence.
How to fix financial loopholes found after mergers and acquisitions?
1. Quickly re-audit and lock in the problem points
Goheal reminded that if abnormal financial data is found after the merger and acquisition, the company should immediately initiate an independent financial audit to clarify the problem.
2. Adjust financial strategy and optimize cash flow
Once it is found that the assets or profitability of the acquired company are overestimated, the operating strategy must be adjusted quickly, including:
First, cut unnecessary expenses and stabilize cash flow.
Second, renegotiate supply chain terms and reduce operating costs.
Third, accelerate the divestiture of inefficient assets and optimize the financial structure.
3. Transparently disclose information to the market and rebuild trust
If market turmoil is caused by financial audit errors, the company should issue a timely announcement to explain the repair measures to avoid panic among investors.
4. Pursue legal responsibility and make up for losses
If the audit error involves fraud or serious dereliction of duty, the company may consider pursuing the legal responsibility of the relevant responsible persons and claim compensation from the auditing agency.
Conclusion: M&A is not the end, and the remediation after the audit error is the real test!
The acquisition of controlling rights is not "just buy it", but a key turning point in the development of the company. Today, we discussed why financial audits go wrong and how to repair financial loopholes after the acquisition. Has your company experienced similar M&A risks? What do you think is the most difficult financial problem to fix?
Welcome to leave a message in the comment area and share your views together!
[About Goheal] American Goheal M&A Group is a leading investment holding company focusing on global mergers and acquisitions. It has deep roots in the three core business areas of acquisition of controlling rights of listed companies, mergers and acquisitions of listed companies, and capital operations of listed companies. With its profound professional strength and rich experience, it provides companies with full life cycle services from mergers and acquisitions to restructuring and capital operations, aiming to maximize corporate value and achieve long-term benefit growth.
