Why Due Diligence for the Financial Professional Belongs in an Auditor’s Toolkit

L. Burke Files’ Practical Guide to Looking Beyond the Surface

Auditors are trained to verify.

Due diligence professionals are trained to investigate.

The two disciplines overlap heavily, but they are not the same.

An auditor may ask:

“Is this transaction supported?”

A due diligence professional may ask:

“Who is really behind this transaction, what am I not being told, and what could make this deal go bad?”

That distinction is what makes L. Burke Files’ Due Diligence for the Financial Professional particularly useful for auditors doing due diligence work.

The book is a substantial treatment of due diligence, published in its second edition by Aegis Journal in 2010. Google Books lists the volume at 486 pages.

More importantly, it was written by someone whose professional background is directly connected to the subject. Files is an international financial investigator and due diligence specialist with decades of experience in mergers and acquisitions, investments, fraud investigations, financial litigation support, and cross-border investigations. CFA Institute describes him as having managed investigations ranging from relatively small matters to cases involving more than $20 billion and having conducted work in more than 130 countries.

For auditors, that practitioner perspective matters.

The First Lesson: Due Diligence Is a Process, Not a Checklist

One of the strongest ideas associated with Files’ approach is that due diligence should not be reduced to a standard checklist.

An ASIS review of the book highlights this point directly: the book treats due diligence as a process, not something completed through a generic checklist, and discusses how to gather, filter, and evaluate information.

That should immediately resonate with experienced auditors.

A checklist can tell you whether a document exists.

It cannot necessarily tell you whether the document is:

• Authentic

• Complete

• Current

• Misleading

• Inconsistent with other evidence

The due diligence mindset therefore changes the question from:

“Did we complete all 37 procedures?”

to:

“Do we understand the risk well enough to make an informed decision?”

That is a much stronger professional standard.

Auditors Need to Learn to Look Behind the Representation

Due diligence frequently begins with information supplied by another party.

Management may provide:

• Financial statements

• Contracts

• Ownership records

• Customer lists

• Forecasts

• Litigation representations

• Regulatory information

• Background information

The weak approach is to accept the package as the investigation universe.

The stronger approach is to ask:

What independent information can corroborate this?

Files’ work is useful because his due diligence practice emphasizes the quality and accuracy of information required to make informed financial decisions. His professional biography describes him as focused on helping investors and business owners move from “guessing” toward knowing through deeper investigation.

For auditors, that translates into a basic rule:

Do not confuse information provided to you with information independently verified by you.

Due Diligence Is About the Story Behind the Numbers

Financial auditors naturally gravitate toward numbers.

That is necessary.

But due diligence requires the auditor to look beyond the financial statements.

Suppose a target company reports excellent revenue growth.

Traditional analytical procedures might ask:

• Is the trend reasonable?

• Does the margin make sense?

• Are receivables growing unusually fast?

Due diligence adds different questions:

• Who are the customers?

• Are they real?

• How concentrated is the revenue?

• Are there related parties?

• Is management overstating the quality of the customer base?

• Are key relationships dependent upon one individual?

• What happens after the acquisition?

That is where Due Diligence for the Financial Professional can stretch an auditor’s thinking.

The auditor moves from simply validating historical numbers toward understanding the economic reality underneath them.

Background Investigation Is Part of Financial Due Diligence

The book addresses background investigations as one of its practical subject areas.

That is especially relevant in:

• Mergers and acquisitions

• Vendor selection

• Investment analysis

• Joint ventures

• Lending

• Executive hiring

• Third-party risk

Auditors should consider questions such as:

Who are the principals?

What other companies have they operated?

Have those organizations failed?

Are there undisclosed relationships?

Is litigation significant?

Are there conflicts of interest?

Are the biographies being presented accurate?

Financial analysis without understanding the people involved can leave a major hole in due diligence.

Due Diligence Requires Corroboration

A sophisticated due diligence process should seek confirmation from multiple sources.

Think of it as:

Management Representation

↓

Documents

↓

Independent Sources

↓

Interviews

↓

Financial Analysis

↓

External Verification

↓

Conclusion

If all of those sources tell the same story, confidence increases.

If they do not, the discrepancy becomes the next investigative lead.

This is very similar to professional skepticism in auditing.

The difference is that due diligence may go further outside the accounting records.

Follow the Money

Auditors already understand the importance of following transactions.

Due diligence extends that concept.

If a financial relationship is important, trace:

• Who paid whom?

• Who owns the receiving entity?

• Where did the funds originate?

• Where did they ultimately go?

This becomes particularly important when examining:

• Related parties

• Shell companies

• Intercompany transactions

• Private investments

• Offshore structures

• Asset ownership

• Unusual consulting arrangements

Files’ broader career in financial investigation and asset recovery makes this aspect of the book especially relevant. His professional work has included due diligence, asset tracing, AML matters, and fraud investigation across numerous jurisdictions.

The Auditor Should Ask: What Is Management Not Telling Me?

Due diligence should never begin with an assumption that management is dishonest.

But it also should not begin with an assumption that management has voluntarily disclosed everything important.

There may be issues involving:

• Litigation

• Customer disputes

• Regulatory exposure

• Tax matters

• Related parties

• Ownership disputes

• Key-employee problems

• Intellectual property

The due diligence professional needs to search for what has not been volunteered.

That is a different mindset from simply validating a prepared disclosure schedule.

Case Histories Make the Book Particularly Useful

The ASIS review specifically notes that the book incorporates case histories from due diligence investigations.

That matters because due diligence is learned partly through pattern recognition.

The more real situations an auditor studies, the better the auditor becomes at recognizing:

• Inconsistencies

• Implausible explanations

• Hidden relationships

• Unusual transactions

• Missing information

Case studies build judgment.

And judgment is one of the hardest professional competencies to teach from a checklist.

Due Diligence Is Risk Assessment at a Much Deeper Level

Internal auditors frequently use risk assessment to decide what to audit.

Due diligence uses risk assessment to decide whether someone should:

• Acquire a company

• Enter a partnership

• Make an investment

• Extend credit

• Retain a third party

• Hire an executive

The consequences can be immediate and substantial.

The due diligence professional therefore needs to identify:

• Financial Risk

• Legal Risk

• Regulatory Risk

• Fraud Risk

• Reputational Risk

• Operational Risk

• Ownership Risk

That broader risk perspective is extremely useful for auditors who want to move beyond traditional compliance testing.

The Book Is Especially Useful for M&A Due Diligence

Files’ professional background includes international mergers and acquisitions and investment due diligence.

That makes the book particularly relevant for auditors involved in acquisitions.

A purchase agreement may be signed based on assumptions involving:

• Revenue quality

• Working capital

• Customer relationships

• Intellectual property

• Litigation

• Management competence

• Regulatory standing

A due diligence failure in any of those areas can turn a good-looking acquisition into a costly mistake.

Auditors participating in M&A teams should therefore think beyond:

“Are the financial statements materially correct?”

and ask:

“What could materially reduce the value of this business after closing?”

Intellectual Property Can Be a Hidden Asset—or Hidden Risk

The ASIS review notes that the book addresses intellectual property protection along with fraud prevention.

That is an area financial auditors can overlook.

A company’s value may depend heavily upon:

• Proprietary software

• Patents

• Trademarks

• Customer information

• Trade secrets

• Processes

• Key technical knowledge

The auditor should ask:

• Does the company actually own the intellectual property?

• Are rights properly documented?

• Are former employees making claims?

• Are third parties involved?

• Is critical knowledge concentrated in one person?

Those issues may never be obvious from the trial balance.

Due Diligence Should Be Tailored

Another useful lesson from Files’ approach is that due diligence cannot be identical for every engagement.

The ASIS review notes that the book treats its methods as a starting point and recognizes that actual engagements require a tailored approach.

That is exactly right.

A due diligence review of:

• A bank

• An insurance company

• A software company

• A manufacturer

• A real estate developer

should not look the same.

The auditor needs to understand the business model first.

Then tailor procedures to the risks.

AI Can Make Files’ Due Diligence Approach Even More Powerful

This is where modern auditors can add another layer.

AI tools can help with:

• Background research

• Document comparison

• Contract analysis

• Ownership mapping

• Risk brainstorming

• Interview preparation

• Large-volume document review

But the lesson from Files’ approach remains essential:

AI does not replace verification.

AI can tell the auditor where to look.

The auditor still needs to determine what is true.

A particularly strong workflow would be:

Files' Due Diligence Methodology

• 
  

Traditional Audit Evidence

• 
  

AI Research and Analysis

• 
  

Professional Skepticism

That combination can make modern due diligence far more efficient without weakening judgment.

The Book Encourages Professional Skepticism Without Paranoia

That is an important balance.

Auditors should not assume everyone is lying.

But they should not assume everyone is telling them the whole truth either.

The professional approach is:

Verify what matters.

Files’ professional philosophy is fundamentally consistent with that idea. His current practice emphasizes uncovering information necessary for informed decisions before risk turns into loss.

Who Should Read This Book?

Due Diligence for the Financial Professional is particularly useful for:

• Internal Auditors

• External Auditors

• CPAs

• CFEs

• CFOs

• Controllers

• M&A professionals

• Investment professionals

• Risk managers

• Compliance professionals

It can be especially valuable for auditors who are moving into:

• M&A due diligence

• Third-party investigations

• Fraud work

• Vendor due diligence

• Investment review

• Executive background investigations

The Bottom Line

Due Diligence for the Financial Professional is useful to auditors because it pushes them beyond traditional audit mechanics.

The central lesson is not:

“Use this checklist.”

It is closer to:

“Understand what you are trying to learn, gather information from multiple sources, verify what matters, follow inconsistencies, and do not stop until you understand the risk well enough to make a decision.”

That is a powerful discipline for any auditor.

Auditors already know how to examine evidence.

L. Burke Files’ approach helps them become better at determining which evidence they should be looking for in the first place.

For an auditor performing due diligence, that may be the most important skill of all.