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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Reporting on other assignments

Fenwick & Partners is performing commercial and financial due diligence for Kestrel Group, which intends to buy Ridgeway Ltd. During the work, the team discovers that Ridgeway's largest customer, representing 40% of revenue, has given notice that it will not renew its contract. What is the most appropriate action by the firm?

The firm should report the loss of the major customer to Kestrel, its client, because it directly affects the sustainability of earnings and the price to be paid. The firm owes its duty to the acquirer, not to the target's management, and must respect confidentiality.

  1. AOmit the matter because the contract has not yet expired and so is not a historical fact
  2. BReport the finding to Kestrel as a significant matter affecting the sustainability of earnings and valuationCorrect
  3. CReport the matter first to Ridgeway's management and let them decide whether Kestrel should be told
  4. DDisclose the matter to Ridgeway's competitors so that the market is informed

Explanation

The client for the due diligence is Kestrel, and the information is highly relevant to the valuation and to the quality and sustainability of earnings. The firm should report it to Kestrel in line with the engagement terms. Giving Ridgeway control over disclosure (option C) would compromise the firm's duty to its client, and disclosing to competitors would breach confidentiality.

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