Due diligence is best described as the audit or investigation carried out on potential investment so as to ascertain material facts with respect to a sale. In other words, due diligence is simply the reasonable care that an individual ought to take prior entering any agreement or transaction with another party.
Globalization has granted companies and other business entities numerous third party relationship be it with lawyers, distributors, suppliers, brokers, accountants, consultants, travel agencies, real estate agents, visa processors, customers, manufacturers and even clients. Third parties help the companies grow but to some extent, they bring such risks like operational risks, regulatory compliance risks, IT security risks, quality risks, anti-corruption risks and health & safety risks. These risks have prompted companies across the world to establish efficient and effective processes/systems to combat them; due diligence and third party governance is what has been implementing to curb this risk. Indeed, companies that have implemented due diligent exercise have had robust growth.
Firms that carry out business in overseas accrues lots of benefits via conducting third party/vendor due diligence. The importance is only accrued if a company carries out on associated persons performing a service on behalf of the given entities. A company will hence consider some key elements like data collection, verification & validation of data and evaluation of results (identification of red flag) while conducting third party due diligence. Some of the importance of third party due diligence includes:
Management of corruption risks down the supply chain: Through due diligence, a firm screens its third parties so as to eliminate corruption risks that may emanate from a third party using another thirds party to perform a given contract. The screen also shows a potential agent to use in the supply chain of a firm.
Leaves fewer questions are deluged to management: due diligence on third party will provide all essential information that management seeks to know. There would be no room for questions after due diligence; if any then it would be little.
Expands the wake of Legislation: The UK Bribery Act stems up from the due diligence obligation that focused mainly on anti-corruption field. Such law enactments are a tremendous incentive in reducing third party risks.
Management of third party information & Onboarding: A firm will have a central repository which it can maintain about its third party after conducting due diligence on them. This also maps third parties to their roles, responsibilities as well as duties and parameters for a complete transparency and accountability.
Enhances Third party risk Management: Through due diligence, a company is able to proactively identify, manage as well as mitigate third party related risks. The use of powerful risk hit maps and calculator during the due diligence exercise helps companies manage risks. Risk details are as well maintained in the central risk repository after due diligence.
Enhances Audit Management: End to end due diligent audits is achieved when a firm consistently and regularly carries out due diligence on its appropriate third parties. Configurable due diligence checklist, audit advisors and graphic dashboards employed during due diligent exercise adds value in the audit.