The business risk of M&A activity and the role of internal audit function in the risk management process

Abstract

Mergers and acquisitions represent a dynamic process of corporate culture and strategy. Empirical evidence indicates a high rate of failure of M&A’s to create value for the shareholders of the firms. M&A projects encounter a great number of risks and often end up in failures and loss of shareholder wealth. These exposures are often the reasons that lead to major failures in the financial or operational area for the recently constructed entity. On the other hand, internal audit has evolved significantly during the last years from its traditional role of control orientation to a more proactive, risk based and consultancy role. But despite this evolution, internal audit function has no effective contribution during the M&A activity. Mergers and acquisitions tend to represent the ambition of adding value to the new company and internal audit function can prove that is a “value added activity” during the process and the various stages of a merger or acquisition. This paper will analyze the various risks that are present during the various stages of an M&A project and the role of internal audit activity, taken also into consideration the evolution of internal audit profession to a pro-active risk based function. The increasing importance of merger and acquisition activity to corporate strategy and the record of failure of such strategies in creating value gave the motivation to further analyze the role internal audit function possibly can play in the process.