Due diligence

Due diligence refers to any in-depth investigation, review, or effort to comply with requirements, expectations, or requests. The phrase originated in U.S. securities law. The laws require companies and the accountants, lawyers, and bankers who assist in the process issuing securities to provide accurate information about the securities. The company and its accountants, lawyers, and bankers must show that they were careful in complying with the disclosure requirements of these laws. The courts said that these groups must show due diligence in their efforts to comply with the law. The phrase is now applied to any situation where indepth information about a company is needed. For example, U.S. banking laws designed to reduce money laundering require banks to really know their customers fully, not just on a superficial level. To do this, banks employ due diligence to learn all they can about their clients, including such things as credit checks and background checks on a company’s officers. Due diligence also describes the procedure before one company buys another. It is common for the buyer and seller to agree on the selling price and other aspects of the deal based solely on the information the seller provides about the company. After both parties agree on a price, they have a due diligence period that allows the buyer and seller to check out the details of the transaction, ensuring that all the information is complete and accurate. Due diligence can thus be interpreted as “to check something out to make sure it is true.” Today it is often used just this way within a company. For example, a company adopts a tentative business plan to take a new initiative, such as starting a new product line. Before implementing the plan, a due diligence period will ensure its validity and check all its details.