Financial services adapt pandemic due diligence practices

19 June 2020: journalist Jonathan Minter considers how financial services firms must change their due diligence processes to manage the challenges from coronavirus.

As a result of coronavirus and the resulting lockdown, due diligence teams are being tasked assessing companies in detail at a time when 'the new normal' is continuously changing.

The lockdown has raised all sorts of new challenges and opportunities for these teams.

Not only are due diligence teams working from home, but so could the clients they should be working with.

Mark Benka, a Partner in Smith & Williamson's Transactions Services team says while 95% of the work can be done virtually or over the phone, it can become a problem if there is a complex issue or a topic which lacks rigorous data. "Then those meetings are really important", he says. "One needs to get around it by spending more time with the key people, and more time with a variety of people on the management team to get their perspectives."

The volatility may have slowed general deal-making, but it has not stopped it altogether. Distressed companies whose owners need to sell are only likely to become more common as we enter what is anticipated to be a severe recession.

Tom Macdonald, a partner in Deloitte's Financial Advisory Transactions Services team, explains: "A seller wants what something was worth yesterday, and the buyer wants what it's worth today. And unless there is some impetus on the seller, that gap may not get bridged."

Even if lockdown rules for COVID-19 appear to be easing, the worries it has caused have heightened awareness that this might not be a one-off. In a globalised world, further pandemics are a real possibility.

For global companies, different responses in different countries might raise questions, and in cases of outsourced labour, it may now be worth working on contingency planning to manage an alternative. 

Although COVID-19 is unlikely to change any of the fundamental principles of a due diligence report, it has given different parts of it more importance. Non-financial information, already a growing field in the world of accounting, may well gain increasing prominence in these reports as end users figure out just what planet they will be operating in following this crisis. 

You can read more about this with the Financial Services Faculty full feature here.