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This Grant Thornton memo provides some thoughts on the unique diligence issues that buyers confront when buying a government contractor. This excerpt addresses the financial issues addressed through government contract due diligence:

Traditional financial due diligence (FDD) focuses on financial statements and the accuracy of the quality of earnings. Government contract due diligence goes further, ensuring ongoing compliance with government contracts and the government contract oversight. Due diligence that is focused on government contracts and accounting can be helpful in support of the financial due diligence or independently, to the benefit of the buyer or seller.

In support of FDD, government contract diligence identifies items that impact the financial statements and quality of earnings. This diligence can help identify potential unrecorded liabilities of the company, including overbillings, unallowable costs, claims or withholds. To successfully uncover any government contracting issues or outstanding liabilities, you must know what to ask for — and how and where to look within a company’s documentation.

Independently and beyond FDD, government contract expertise can help identify the unique risk factors associated with a government contractor. For example, contractors with cost-reimbursable contracts may need to submit an annual incurred cost submission. It’s important to understand the status of these submissions, and any audit history around them, to help identify potential risks to the company. The risks may be in the form of significant questioned costs, or the latency that comes with settling indirect rates.

The memo points out that risks associated with business systems and internal controls that the target uses in accounting for government contract costs must also be assessed.

– John Jenkins