Fiscal Responsibility and Due Diligence

Wikipedia, paraphrased, defines due diligence as performing the proper and adequate amount of investigation of private mergers and acquisitions concerning relevant areas of interest including - but not limited to - the financial, legal, labor, tax, environment and market/commercial situation of the company in question. In plain English this means that if you are thinking about entering into any kind of an agreement that concerns money you need to investigate it thoroughly and exercise good judgement based on what you learn. The term particularly applies, and is most commonly used, when you are buying or selling a business but it really applies to most other financial dealings as well. Whether you are buying or selling a house, signing a contract, hiring an employee, entering into a "partnership" arrangement of any kind, buying a life insurance policy or a new car, or even proposing marriage you should exercise due diligence so you know what you’re getting into.

On the subject of fiscal responsibility, Wikipedia is much more vague and almost all its definitions allude to balanced budgets, governmental spending and proper and responsible use of governmental funds. I would add that the idea of proper and responsible use of funds i.e., fiscal responsibility, applies to individuals, companies and various other organizations as well.

To continue, in my opinion, failure to perform due diligence in any arrangement concerning money, property or personal and/or corporate indebtedness would constitute fiscal irresponsibility. I remember being introduced to the concept of caveat emptor in high school economics class. To refresh your memory, caveat emptor means "let the buyer beware." It seems to me that, in general, we have abandoned that tenet in favor of preferring that the government and the courts protect us or rescue us in all cases whether or not we exercised good judgement. No one seems to want to accept responsibility for his or her own actions any more. (I am thinking of the all the people who bought homes they knew they couldn’t afford and now want the federal government to bail them out. Also the woman who collected millions from McDonalds after she placed hot coffee in her lap and was burned.)

If you fail to perform due diligence in any particular transaction, you have no one to blame but yourself. And be sure you know what due diligence entails. If, for example, you are contemplating joining with another company in a new venture, it is not enough to "feel good" about the people in that company. (Although that certainly is important.) Nor is it enough to call a few of their business references and ask superficial questions about say, "Do they pay their bills on time?" Nor is it enough to naively think that a call to their bank would get you much more information than a confirmation that they have been doing business with that bank for the past several years. Due diligence demands that you – at a minimum - ask for financial statements and recent income tax returns, financial information release authorizations to send to their bank(s) or other financial institutions and to their major creditors. And that you study them closely when you receive them. If you get positive answers from all those sources, you will probably end up with a mutually satisfying "partnership." If you don’t, it was time well spent and probably a lot of money saved.

© 2008 by Paul Burri