It is possible to check all counterparties in official registers, but it takes a lot of time. The report will collect data for you from all tax websites, analyze them, warn you about accounting risks, and compile the report itself. Thus, what is a due diligence report?

Due Diligence Report and Other Points that Will Help Defend Your Business

When concluding an agreement with a new business partner, the parties must comply with the principle of due diligence: make sure that the counterparty is a real working company, and not a one-day business created to evade taxes. We tell you exactly how to check individual entrepreneurs and legal entities, defend your case before the tax authorities – and what threatens cooperation with an unscrupulous business.

Unfortunately, the legislation does not contain an exhaustive list of provisions, according to which auditors can refuse to deduct companies. Therefore, only the criteria used by the tax authorities during inspections, conclusions from judicial practice, as well as explanations from regulatory authorities allow us to judge the reasons for the refusal. First of all, when checking organizations, inspections pay attention to:

  • the correctness of registration of invoices received from counterparties;
  • the interdependence of the parties to the transaction, which determines the good faith of the parties and the absence of unjustified tax benefits;
  • the reality of the transaction, namely the presence of the physical ability of the organization to carry out the operations indicated in the documents;
  • economic feasibility of operations.

Consequently, the reasons for refusing due diligence reports for companies can be combined into groups of violations in terms of processing primary documents and violations related to the dishonesty of counterparties. The company can appoint an employee who will be responsible for checking counterparties. He will produce a report on the results of the supplier reliability analysis. The document can be issued in the same way as private investigators do for clients. A written report on the results of the verification of the reliability of the counterparty for the conclusion of the delivery will help to prove to the inspectors that the company has been prudent.

Things to Know About the Due Diligence Reports

Due diligence reports contain information about the stability of a company or organization. They are usually required when a company is considering another company for a possible acquisition. In the first part, the buying company needs to know all the details of the selling company’s stability before making an informed decision on whether to buy. Due diligence reports may be prepared by an outside accounting firm or maybe the result of an internal audit.

The second part of the due diligence report is a brief analysis of the counterparty’s reliability and includes:

  • an overall assessment of the counterparty’s reliability in the form of a rating (high, medium, low);
  • the number of facts about the company in each group: negative, requiring attention, and favorable.

It also lists specific facts about the organization being audited, which are grouped into sections:

  • risks of default;
  • signs of one day;
  • financial position;
  • tax risks.

The third part of the file contains recommendations from the service. These are hints on what to pay special attention to when checking this counterparty. The content of the recommendations directly depends on the revealed facts about the counterparty. As a result of determining the investment strategy in the company, there may be a shortage of financial resources to ensure the implementation of investment needs.