Question

A due diligence review may be a(n)

A. Review of the internal controls in place at an organization targeted for acquisition by a larger entity.
B. Operational audit of a division of an organization to determine whether divisional management is complying with laws and regulations.
C. Review of operations as requested by the audit committee to determine whether the operations comply with audit committee and organizational policies.
D. Review of interim financial statements as directed by an underwriting firm.

Answer 1

Due diligence reviews are critical in assessing various business aspects before major transactions, ensuring compliance with legal and financial standards. These reviews complement the role of the board of directors, auditing firms, and outside investors in corporate governance.

Step-by-step explanation:

A due diligence review may cover various aspects of a business or organization to ensure that all legal, financial, and operational activities are in order before a significant business transaction, such as an acquisition, is completed. In the context of corporate governance, due diligence is an essential process that complements other institutions like the board of directors, auditing firm, and outside investors.

While the due diligence review may include elements related to internal controls, operational compliance, and review of financial statements, in a broader sense, it aims to protect potential investors and the acquiring company from future risks and undisclosed liabilities. The case of Lehman Brothers exemplifies the failure of corporate governance in providing accurate financial information, thereby underlining the importance of a rigorous due diligence process.