What Is Due Diligence?
Due diligence is an investigation, audit, or review completed to corroborate the facts of a matter under concern. In the financial world, due diligence requires an examination of financial records before entering a planned business with another party.
Understanding Due Diligence
Due diligence became ordinary practice in the U.S. with the enactment of the Securities Act of 1933. With that law, guarantees dealers and brokers became responsible for fully disclosing material information about the instruments they were selling. Failing to reveal this information to prospective investors made dealers and brokers liable for criminal prosecution.
The writers of the act acknowledged that requiring full disclosure left brokers and dealers susceptible to unfair examination for failing to divulge a substantial fact they did not possess or could not have well-known at the time of sale. Thus, the act included a legal defence: As long as the dealers and brokers applied “due diligence” when probing the corporations whose parities they were selling, and fully disclosed the results, they could not be held liable for data that was not discovered during the inquiry.