The Four Biggest Due Diligence Challenges

If you help oversee your company’s due diligence and compliance functions, you are constantly strengthening your defenses to minimize risks that could harm the business. You help make your organization less vulnerable to fraud, fines for non-compliance and loss of reputation. And as you know all too well, these essential tasks have grown in frequency and complexity.

Take compliance. Whether your business has to contend with data privacy rules such as HIPAA or various state, federal and foreign environmental or financial reporting requirements, it can be all too easy to lose sight of regulatory changes, especially in several jurisdictions. Some regulatory requirements are not always easy to meet. For example, firms in certain investment-related activities must ensure that certain employees comply with regulatory requirements, such as disclosure of outside business engagements, litigation and bankruptcy.

Your company can also ensure that new customers, employees and suppliers are who they say they are and deserve your company’s trust. In the digital age, this has become an essential task. According to PwC’s 2022 Global Economic Crime and Fraud Survey, the top external fraudsters companies faced in 2020 were customers (the source of 26% of all fraudulent activity), hackers (24%) and vendors/suppliers (19%). And they are becoming increasingly sophisticated in their use of digital weapons. If your business cannot thoroughly vet a potential employee, customer, or supplier, it could leave itself vulnerable not only to fraud, but also to legal liability.

A May insight report from Forrester Research examines how companies are using Thomson Reuters CLEAR ID Confirm and Risk Inform to manage due diligence, compliance and fraud prevention. Based on interviews with compliance and due diligence decision makers, the analyst report identifies four common challenges companies face in these areas. Chances are you and your business have faced at least one of these challenges as you work to improve your own compliance reporting and onboarding processes.

Resolving all of these issues is essential not only to protect your business and its reputation, but also to keep your due diligence and compliance teams happy and productive. Failing to protect your business from non-compliance, fraud, and other issues related to incomplete due diligence can damage an organization’s reputation, and therefore its business.

The Four Biggest Due Diligence Challenges

• Due diligence work is seen as too laborious – Interviewees in the Forrester Insight report said their due diligence and fraud prevention processes require too much work from employees. Manual methods and legacy solutions used by many employees have become inefficient and unsustainable, especially as an organization grows. And more and more time is needed to train the new team members, which is not a simple task.
• Available data is unreliable – Employees often don’t trust the data they have access to. Data may be out of date, duplicate or even incorrect. Needless to say, this reduces the accuracy of their work and damages the team’s confidence in their work, which can slow down the due diligence process even further.
• Available data is unclear – It’s not quite the same as untrusted data, but it can be just as problematic for a company’s compliance teams. Data may lack the detail or context necessary to make it truly useful. A related problem: Many employees don’t fully understand information about legal violations. They have difficulty determining the seriousness of these offences, especially when comparing them across jurisdictions. Failure to understand these issues can expose a business to potential legal liability.

• Respond to evolving compliance and reporting obligations – Every business wants to reduce the risk of non-compliance with compliance requirements. But it can be difficult to meet compliance standards. One of the main reasons: backlogs, which take up a lot of the time of compliance employees. These staff members may also have many other types of work on their plate, which means they don’t have to keep up to date with regulations and requirements.

Keep your team together

As the Forrester Insight report notes, all of these challenges will become increasingly important as companies grow, and their due diligence and compliance teams will need to grow with them.

No company wants to have disgruntled employees. The competition for talent is too fierce and expertise in these areas is not always easy to find. The loss of institutional and process knowledge as team personnel change can set back your compliance efforts and thus make your business more vulnerable to fraud and legal liabilities.

By being aware of these four challenges and understanding why they arise, you are taking the first step towards successfully improving your risk management processes in our increasingly complex world.