Entity Acquisition Controls.....................? 1491

  • My current employer just recently announced the acquisition of another company in the same industry. However, I am curious to know about acquisition controls. I am assuming that there are some common controls we need in place and to be able to evaluate and test those controls as the acquisition progresses through each of the different stages. Can anyone give me some things to look for (new to auditing).

  • I will state a few of the obvious controls to get the discussion going -
    Control to ensure that the consolidated financial statements are properly stated. Generally, you will have an unallocated purchase price on the books of the acquiring company until you complete the purchase price allocation (PPA). Even measuring the total price paid can be tricky when you have part of the price contingent on certain factors (working capital, stock price of acquiring or acquired entity if both are publicly-traded, golden parachute payments to executievs of the acquired company, etc.)
    Controls to properly value the acquired assets. Measuring FMV is part art, part science. Intangible asset valuation is particulary difficult.
    If this is the first acquisition, then there may be intercompany balance sheet and P-and-L items that need to be eliminated in your consolidation that you have not had before.
    Accounting treatment of certain items on the acquired company may not be the same as they are on the acquiring company. There needs to be a detail review of this prior to completing consolidated financial statements so that the acquired company conforms to the parent company’s accounting policies and financial statement presentation.
    I hope that I have interpreted your question correctly and am heading down the right path with my suggested controls.

  • That’s perfect…

  • Hi,
    Good internal controls in conjunction with an acquisition of another business are similar to controls for a large non-routine purchase that is capitalized.
    Some considerations:
    Accounts receivable and collectibility - consider credit versus cash sales mix; consider the credit policy and terms
    Fixed Assets - market /appraisal value of assets; age and life expectancy of assets; maintenance records. When recording fixed assets, record each asset cost separately. Two or more fixed assets purchased at the same time is called a basket purchase. Allocate the total purchase cost to each of the individual assets purchased.
    Inventory - Inventory should be shown on the balance sheet at the lower of cost or market. If market is below cost, show at market. If cost is below market, show at cost. Consider inventory obsolescence.
    Intangible assets - Future benefit remains? Consider legal life.
    Liabilities - Pay off or debt assumption?
    Operating results - For net income, compare profitability with previous years and to industry norms
    Financial information - Consider the accuracy of the acquired company’s FS; were they audited? Develop a horizontal analysis by comparing current year figures to previous years financial information; compare percentages with industry.
    M-and-A and Internal Controls
    Adequate onsideration should also be given to two issues that sometimes occur after a merger or an acquisition–possible internal control weaknesses as a result of reduction or elimination of certain job positions or functions and increased opportunity for fraud, for example as a result of a breakdown in internal control or employee bitterness.
    A company acquiring another entity may be motivated to lessen the reported financial results of the acquiree company in the period immediately before the acquisition date (stub period).
    This enables management to report improved performance after the acquisition date and demonstrate the positive effects of the acquisition. This is referred to as spring-loading, and may involve manipulation of reserves and allowances accounts on the purchased entity’s books, only to be reversed in the period following the acquisition.
    Some of the accounts that are at risk may include:
    Reserves for worker’s compensation and medical insurance
    Allowance for inventory obsolescence
    Pension liabilities
    Merger costs reserves
    Restructuring reserves
    Example opportunities for internal control improvements in conjunction with a company acquisition
    Companies can enhance the control environment and efficiently prepare for related Sarbanes-Oxley compliance requirements by:
    -Assessing new company controls
    -Establishing additional controls at the new company
    -Incorporating new company controls into existing infrastructure and processes
    PwC provides some good guidance regarding M-and-A and SOX, on Page 78, SECTION IX: Mergers and Acquisitions Impact of the Sarbanes-Oxley Act.
    This guidance can be found in their document, Sarbanes-Oxley Act: Section 404 Practical Guidance for Management, July 2004. It can be found online by simply performing a search in google.com on the document title reference above.
    Also, they have another document, The impact of Sarbanes-Oxley
    on M-and-A Transactions. It can be found at:
    Hope this late, but additional feedback further helps,

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