Due Diligence & Forensic Analysis in Turnaround Flashcards

What is the primary purpose of conducting due diligence in a turnaround situation?

Answer: To assess risks, verify financial information, and identify root causes of distress

Due diligence in turnaround situations primarily aims to assess risks, verify financial information, and identify root causes of distress to inform the turnaround strategy.

Which document is most critical to review first when conducting financial due diligence on a distressed company?

Answer: Cash flow statements and near-term liquidity projections

In distressed situations, cash flow statements and liquidity projections are most critical because immediate liquidity needs often determine whether a company can survive long enough to execute a turnaround.

In forensic accounting for a distressed company, what is 'channel stuffing'?

Answer: A fraudulent practice of inflating revenue by forcing excess inventory onto distributors

Channel stuffing is a fraudulent practice where companies force excess inventory onto distributors to artificially inflate revenue figures, a common red flag discovered in distressed company forensic analysis.

What is the purpose of an accounts receivable aging analysis in turnaround due diligence?

Answer: To identify overdue invoices and assess collection risks and liquidity quality

Accounts receivable aging analysis identifies overdue invoices and assesses the quality and collectability of receivables, which is critical for understanding true near-term liquidity in a turnaround.

When a turnaround professional discovers evidence of potential fraud during due diligence, what should be the immediate first step?

Answer: Confer with legal counsel before taking any further action

Upon discovering potential fraud, the turnaround professional must first confer with legal counsel to understand legal obligations, protect evidence integrity, and properly manage disclosure requirements.

What does 'management due diligence' primarily assess in a turnaround situation?

Answer: The capabilities, integrity, and depth of the management team

Management due diligence primarily assesses the capabilities, integrity, and depth of the management team, as management quality is a key determinant of whether a turnaround can be successfully executed.

What is a 13-week cash flow forecast primarily used for in turnaround due diligence?

Answer: To assess near-term liquidity and identify potential cash crises requiring immediate action

The 13-week cash flow forecast is a short-term liquidity tool used in turnaround situations to assess near-term cash needs, identify potential cash crises, and plan immediate funding requirements.