Understanding Financial Due Diligence Accounting

When conducting Financial Due Diligence (FDD), one must carefully review and evaluate a company's financial documents, internal processes and overall business activities. The primary objective of FDD is to detect, analyze and resolve any risks, issues or irregularities prior to entering into commercial deals like mergers and acquisitions, or initial public offerings (IPOs).

FDD distinguishes itself from a financial statement audit in important ways.

• Purpose: While an audit primarily focuses on verifying the accuracy and completeness of statements, FDD aims to assess a business's quality and long-term viability.
• Scope: FDD encompasses a range of areas compared to audits. It includes projections, debt agreements, supplier contracts, management capabilities, and industry trends that audits typically do not delve into.
• Approach:  Audits follow established processes dictated by accounting standards. Conversely, FDD involves diligence customized for each deal or transaction.
• Output: An audit provides an auditor's opinion on the accuracy of statements. In contrast, FDD evaluates business risks and recommendations regarding deal pricing.

In summary, FDD is an expansive, deal-specific analysis that helps assess an investment opportunity's viability, scope, and valuation. It provides vital insights well beyond the scope of a standard audit.

Why Companies Use FDD

Financial due diligence (FDD) is vital to the merger and acquisition (M&A) process. When one company plans to acquire another, the acquirer must have a complete picture of the target company's financial position and health. This is where the FDD team comes in. FDD allows the acquiring company to dig deep into the target company's financial statements, accounting methods, and internal controls. Its main goals include:

1. Assessing risks in M&A deals: FDD uncovers potential financial risks or red flags that could impact the deal's valuation or viability.
2. Valuing the target company: FDD helps determine a fair valuation for the target company, preventing overpayment.
3. Evaluating financial health: FDD thoroughly examines the target company's financial metrics to assess its overall financial health and stability.

By confirming the accuracy of statements and identifying any issues that could affect the transaction, FDD instills confidence in deal pricing and cost structure. It helps the team avoid mistakes while ensuring a foundation for both financial and operational aspects post-acquisition.

FDD Accounting Job Responsibilities

The core responsibilities of an FDD accountant include:

1. Analyzing financial statements: Examining documents like income statements, balance sheets, cash flow statements and footnotes  to look for patterns and identify any irregularities or unexpected changes.
2. Assessing the quality of earnings: Look at how much of the reported earnings come from operating activities instead of one-time events or accounting changes. This gives a picture of the business's profitability.
3. Identifying red flags in financials: It is crucial to watch for any flags. FDD accountants search for signs of earnings manipulation, liabilities, overvalued assets, or any indications of accounting misstatements like reserve changes or sudden spikes in receivables/payables.
4. Validating reported data involves tracing figures back to source documents and underlying records to verify accuracy and compliance with accounting standards.
5. Building financial models: Developing projections, sensitivity analyses, and other models to assess earnings growth prospects and downside risks under different scenarios.
6. Interviewing management: Meeting with executives and financial personnel to discuss processes, controls, judgments, and assumptions underlying the financial statements.
7. Documenting findings in reports: Summarizing the analysis performed, issues identified, and recommendations in formal reports for clients.

FDD accountants need skills in analyzing the audited financial statements to support and effectively carry out these responsibilities and identify areas of interest/concern for clients involved in acquisitions or business units.

Skills and Qualifications for FDD Accounting

To be successful as an FDD accountant, there are some key qualifications and technical skills you will need:

• CPA License: An active CPA license is crucial for FDD accounting positions. FDD teams require Certified Public Accountants (CPAs) who understand Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) and have expertise in reporting and analysis. Many firms prefer candidates who already hold a CPA license.
• Big 4 Experience: Gaining auditing experience at one of the Big 4 accounting firms is highly valued. Working in audit exposes you to reviewing financial statements and models, which is directly applicable to FDD accounting.
• Advanced Excel Skills: Strong Excel skills are a must. FDD accountants spend a lot of time building models, analyzing data, and creating visualizations in Excel. Advanced skills like pivot tables, VLOOKUPs, and complex formulas are expected.
• Accounting Knowledge: A strong foundation in accounting principles and standards is critical. Extensive coursework and hands-on accounting experience will help you hit the ground running in an FDD role.
• Critical Thinking: FDD requires strong analytical skills to investigate details, spot irregularities, and identify risk areas. You'll need to think critically when reviewing the quality of earnings reports.
• Communication Skills: The ability to communicate complex financial information is vital. You must discuss and present findings to team members, clients, and management.

Obtaining the CPA license gaining audit experience at one of the 4 firms mentioned above, and honing your technical Excel skills will position you well for a successful and fulfilling career in FDD accounting. The role utilizes your expertise in finance to support and bring value to organizations.

Day-to-Day Responsibilities of an FDD Accountant

In the role of an FDD accountant, your day-to-day work experience can differ significantly based on the client transaction you're handling. Nonetheless, there are other common aspects you can anticipate in this dynamic position:

• Travel Requirements: As an FDD accountant, you may often need to travel extensively, especially to client sites. This could involve visiting offices and locations with notice and conducting onsite assessments.
• Long Hours: FDD deals typically have deadlines, so be prepared for working hours, particularly when approaching crucial milestones. It is common to have days lasting 12+ hours when striving towards completing a deal. Effective time management and stress-handling skills are essential
• High-Pressure Environment: FDD projects have implications that involve millions or even billions of dollars. Consequently, the environment can be. High pressure. Maintaining composure under pressure is vital.
• Collaboration and interpersonal skills: FDD projects require teamwork with people in other sectors and companies.
• Attention to detail: A patient and detail-oriented approach is crucial when reviewing documents, financial records, and contracts. Your analytical skills will be useful in this regard.
• Environment: Your work environment will primarily consist of an office where you analyze data and spreadsheets on your computer. Sometimes you may get the chance to go out and meet clients, for a change of scenery. As an accountant specializing in FDD, it's important to have the energy, endurance and knack for excelling in a fast paced environment with tight deadlines.

Your primary workspace will be in an office, where you'll spend your time examining data and spreadsheets on your computer. Occasionally, you may visit client sites for a change of pace. Being an FDD accountant requires energy, stamina, and the ability to thrive in an environment with deadlines.

Career Paths and Growth in FDD

FDD accounting offers great potential for career advancement and growth. Here are some of the typical career progression opportunities:

Advancement Within FDD

Many FDD accountants start at the associate or senior associate level. With a few years of experience, they can move up to manager, senior manager, and eventually director roles with expanded responsibilities. At the higher levels, FDD accountants may oversee valuation projects, manage teams, and interface directly with clients. There is room for advancement while staying within FDD.

Switching to Advisory Roles

Some Financial Due Diligence (FDD) accountants utilize their expertise to transition into firm roles. These roles involve guiding clients on valuations of mergers and acquisitions, restructuring, and other strategic financial considerations. Advisory positions offer a range of responsibilities for financial buyers and the potential for earnings.

Exiting to Industry Jobs

The skills acquired in modeling, analytics, and valuation through FDD are highly sought after across industries. Accountants who specialize in FDD have prospects for transitioning into finance positions such as Financial Planning and Analysis (FP&A), investment banking, corporate development or various roles under the Chief Financial Officer (CFO). There are plenty of opportunities to progress in their careers.

Overall, FDD accounting is a foundation for progressing within the accounting field or transitioning toward a corporate finance role. The experience gained is highly valued and transferable across industries.

FDD Accounting Salaries

FDD accounting offers a career path within the legal, finance and accounting realm, with significantly higher salaries and benefits than audit or other accounting positions.

Entry level accountants in FDD usually start off with a salary ranging from $65,000 to $75,000. Over the course of 2 to 3 years, they can anticipate a salary bump to the range of $85,000 to $100,000. As one progresses to a directorial position, the average salaries tend to fall between $140,000 and $180,000.

Professionals with expertise in FDD at big companies may be eligible for bonuses surpassing $50,000. When compared to auditors, FDD accountants earn salaries that are 20-50% higher, attributed to their expertise and capacity to lead teams with increased utilization and billing rates.

The attractive combination of high earning potential and accelerated career growth makes FDD accounting a choice for talent.

Top FDD Accounting Firms

FDD accountants typically work at large accounting and professional services firms with dedicated transaction advisory practices. Some of the major players in the world of FDD accounting include:

Big 4 Firms

Leading accounting firms known as the Big 4 (PwC, Deloitte, EY, and KPMG) excel in providing FDD transaction services and employ a significant number of skilled FDD accountants worldwide. Their proficient teams handle large transactions spanning various industries. Notably, PwC boasts one of the practices dedicated to FDD.

These companies provide tax investigation services for mergers and acquisitions, initial public offerings, spin-offs, fundraising activities, and various other transactions. Deloittes experts in Financial Due Diligence work within its Financial Advisory department. They concentrate on M&A transactions, such as IPOs, asset sales and debt issuances. EYs dedicated group for FDD is part of its Transactions Advisory Services division.

Their knowledgeable teams provide operational support for acquisitions and divestitures involving clients and private equity firms.

KPMG professionals specializing in Deal Advisory provide assurance, diligence and transaction support services to individuals and companies engaged in international transactions.

Mid-tier Firms

Some of the mid-tier national accounting and advisory firms with sizable FDD practices include:

• Grant Thornton
• BDO
• RSM
• Crowe
• Baker Tilly

These companies focus on transactions in the middle market and partner with top-tier firms like the Big 4 for deals.

Boutiques

There are also several specialized FDD boutique firms, such as:

• Kroll
• Alvarez & Marsal
• FTI Consulting
• HLB Decision
• Cohn Reznick

These agencies exclusively concentrate on FDD and related services. They provide expertise at various levels. Compared to the Big 4 and national firms, these agencies typically handle smaller deals. The larger firms offer training, career growth opportunities, and a strong reputation.

Finding an FDD Accounting Job

FDD accounting is a competitive field, so you'll need to work to land one of these lucrative roles. Here are some tips to help with your job search:

• Network extensively: Connect with FDD accountants on LinkedIn and attend events organized by accounting associations to broaden your connections. Let your contacts know that you're interested in transitioning into the field of Financial Due Diligence (FDD).
• Understand recruiting timelines: FDD hiring usually occurs between August and November for entry-level positions. However, 4 firms often recruit throughout the year. Experienced hire opportunities increase during transaction periods.
• Brush up on accounting technical skills: Review accounting principles, excel modeling, valuation methodologies, and financial statement analysis. Be prepared for questions during interviews.
• Practice interviewing: Spend time preparing for questions that assess your abilities, attention to detail, and teamwork skills. Consider practicing case interviews to practice thinking through scenarios
• Create a standout resume: Tailor your resume to showcase any FDD experience you have, as well as transactions you've worked on, relevant technical skills, and leadership activities. Quantify your accomplishments where possible and optimize them with keywords.
• Ace the interview: Dress professionally, ask questions during the interview process, and remember to follow up with thank you notes afterward. Being persistent and well-prepared can help you succeed in breaking into the field of FDD accounting!

Is FDD Accounting Right for You?

Financial due diligence accounting can be a thrilling and fulfilling career path for some individuals; however, it's important to acknowledge that it may not fit every accountant or financial due diligence team due to drawbacks or preferences.

Here is a summary of the advantages and disadvantages to consider when deciding if FDD accounting is suitable for a business or you:

Pros of FDD Accounting

1. Generally offers salaries compared to audit and tax accounting positions.
2. Involves a skillset focused on investigative analysis and valuation.
3. Engages in paced projects with clients regularly.
4. Provides work compared to auditing.
5. Enables the opportunity to gain an in-depth understanding of businesses.
6. Offers travel opportunities to client sites.

Cons of FDD Accounting

• It can involve long, stressful hours leading up to dealing with deadlines
• Work is less structured than audit
• Having to start fresh with new clients frequently
• Very technical and detail-oriented
• It can be repetitive in analyzing financial documents

Good Fit If...

FDD accounting is likely a good career path for you if:

• You enjoy constantly learning about new companies and industries
• You're comfortable working independently with less oversight
• You have strong analytics skills and high attention to detail
  You work well under pressure and tight deadlines
• You enjoy investigative work and problem-solving

Compare to Audit

Compared to audit accounting roles, FDD:

• It is more specialized and deals with strictly financial analysis
• Doesn't require as much client interfacing and communication skills
• Has projects structured around specific deadlines rather than a fixed annual audit schedule
• Requires valuation modeling and analytical skills rather than audit fieldwork skills
• Offers higher compensation but also longer, less predictable hours

Overall, FDD accounting is best suited for those who enjoy constantly analyzing new financial data and information, have strong analytical skills, and can handle intense project deadline periods. While it has some downsides, it provides opportunities to gain financial investigation expertise while earning a higher salary potential than many other accounting career paths.

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