Late last month, the country was met with another frightening headline in one of our national dailies, which read: Contractors flee with large sums of public funds while abandoning substantial numbers of government projects for which payments have been affected either wholly or in part.
Reports of this nature do not present us in a positive light, especially considering the amount of resources, effort, and energy the government is putting into winning the war against, and at the same time stemming, incidences of contract inflation, financial fraud, embezzlement, bribery and corruption, leakages, and wastages within the public service.
As a nation, we must all brace up—individually and collectively, in our various closets and workplaces—to address this ugly trend that is gradually creeping into the system and painting a negative image of us.
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Interestingly, addressing the menace of contract scams within the public service entails putting together a well-thought-out and calculated set of measures. These include investigative exercises, parliamentary oversight, budget and budgetary control, effective financial reporting mechanisms, promotion of internal auditing, robust internal control mechanisms, segregation of duties controls, internal check systems, value-for-money assessments, and most centrally, the due diligence review mechanism.
Due diligence can be defined as an investigative exercise embarked upon with a view to ascertaining the viability or otherwise of a business venture, project, asset, or potential investment—either at the point of sale or purchase. It can also be viewed as an investigation or audit of a potential investment that seeks to ascertain all material facts in relation to and in connection with the purchase or sale of any kind of investment or project. Essentially, this exercise, often associated with business combination arrangements such as acquisitions and mergers, serves as a mechanism aimed at preventing unnecessary financial or economic injury to either party involved in a given transaction or venture.
Due diligence review, which may also be referred to as process work, project purchase investigation, or audit of potential investment, involves exercising reasonable care by an individual, group, corporate entity, or government functionary before entering into any form of agreement—contract or otherwise. It may also extend to transactional dealings in extreme cases.
“Due diligence review is a vital mechanism for improving productivity while discouraging all forms of wastage and leakage to the barest minimum within the public service.”
In practical terms, due diligence usually involves the engagement of professional service firms, including accountants, lawyers, actuaries, architects, or surveyors, to investigate and report on critical aspects of the information needed for decision-making.
The scope of due diligence is broad. It covers entering into contract agreements and managing the contracts thereafter. It is also applicable in transactions involving the sale or purchase of assets or investments, as well as mergers, acquisitions, and partnerships of corporate entities. Other relevant areas include property examinations, underwriting of securities, banking transactions, investment or loan underwriting, and business combination arrangements.
The purpose of due diligence is to assist the government in gathering useful information about a proposed project, investment, or contract agreement. It also seeks to identify operational issues surrounding the investment or contract that the government may intend to undertake. Additionally, it helps in confirming the feasibility and effectiveness of such undertakings. When properly applied, due diligence provides the government and its agencies with a high level of credibility in relation to investment decisions. It also helps to set realistic targets or define possible benefits to be achieved from contracts or investment ventures. More importantly, it helps to uncover problems or risks associated with a given project or contract agreement, thus providing early warnings to relevant stakeholders.
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When diligently pursued, due diligence offers significant benefits to the government. It helps to curb contract inflation, especially during the bidding process. Through proper application, the government can make significant cost savings. It also serves as a tool for combating corruption, embezzlement, and bribery when effectively enforced across Ministries, Departments and Agencies (MDAs) and other public functionaries. In terms of operational value, it enables the government and its agencies to achieve the best outcomes, combining cost-effectiveness with quality in contract awards or investment opportunities. If properly executed, due diligence also helps to close all forms of financial loopholes, leakages, and wastages within the public service.
Due diligence review is a vital mechanism for improving productivity while discouraging all forms of wastage and leakage to the barest minimum within the public service. It eliminates inefficiencies and seeks to block systemic loopholes. Above all, due diligence reinforces government control measures aimed at reducing the risks of contract scams, fraud, financial leakages, wastages, and related ills that often characterise public service operations.
Dr Kingsley Ndubueze Ayozie, FCTI, FCA, Public Affairs Analyst and Chartered Accountant, writes from Lagos.
