General Accounting Due Diligence List

  1. Obtain a copy of the most recent 12 months financial statements as compared to the prior year.
  2. Obtain a copy of the most recent 12 months bank statements along with the respective reconciliation’s.
  3. Obtain a copy of the most recent 6 months reconciliation of the A/R subsidiary ledger along with the related A/R aging.
  4. Request the most recent detail A/R subsidiary ledger in order to later select customers at random to be selected.
  5. Obtain breakdown of units by:

    a. product mix ( )

  6. Obtain list of all frequencies that they own the license to operate.
  7. Request a reconciliation of their units in service per switch vs. the number of units being billed per their billing system.
  8. Obtain list of top 20 customers. Specifically, request listing of resellers detailing units in service by market if applicable.

General Procedures:

  1. Calculate EBITDA based upon numbers as submitted.
  2. Review rev. and exp. for unusual % relationships or fluctuations considering Company and Industry standards.
  3. Considering adjustments to EBITDA on a continuing basis given results from steps above.
  4. Inquire about the existence of related party transactions which would have to be adjusted for a going forward basis. (ex. free rent from owner), or other transaction that do not appear to be at arms length.
  5. Consider any other changes to be made for Company to own and operate the customer base that should be adjusted for when calculating EBITDA for purchase price determination.
  6. Calculate adjusted EBITDA and determine range of purchase price.

Cash Procedures:

  1. Review most recent 12 months bank statements for unusual deposit amount fluctuations.
  2. Select at random 10 deposits and agree them to the detailed deposit listing amounts paid by customer.
  3. Compare average monthly deposits totals to the average monthly total revenue per the F/S. If deposits represent less than 95% of revenues (consider total rev less approx. 5% allowance for bad debts) discuss with executive management the reasons for our findings. Also, determine the method of applying credits and where they are recorded on the F/S.
  4. Discuss with management the daily deposit procedures and the overall control of moneys.

Revenue Stream Procedures:

  1. Review and discuss rev. account breakdown to obtain overall understanding of #’s presented.
  2. Determine recurring vs. non-recurring revenue
  3. Determine whether the company defers unearned revenues (quarterly, semi, and annual billed customers, amounts billed at month end to be earned the following month)
  4. Based upon the units in service, determine arpu and compare to Company and industry standards.

Accounts Receivable Procedures:

  1. Review A/R aging for past 6 months for possible uncollectable balances
  2. Discuss write-off procedures with management and determine adequacy of the allowance. (Basically all of 90 and older should be reserved with approx. 50% of 60 to 90 days.
  3. Document the company procedures for disconnecting service and retrieving the unit on non-pay accounts. At what point is service interrupted and is the customer charged for the unit at that time? Also, at the point of interruption, is the unit continued to be included in the units in service calculation?
  4. Select 10 customers from the most recent A/R subsidiary ledger and perform the following:

    a. agree balance on sub-ledger to customer account balance in the billing system.
     b. trace the most recent cash posting to the valid deposit slip.
     c. agree units billed to units in service per the switch.
     d. review account for unusual credits issued.
     e. determine arpu of each units billed.

  5. Determine total amount of customers with credit balances

Expense Procedures:

  1. Analyze expenses in relation to total revenues to determine reasonableness when compared to Company and industry standards.
  2. In particular, review salaries & wages, tower rents, bad debts, legal, and unusual executive type expenses.
  3. Obtain sales tax returns for the last 12 months.

Please forward information to the following:

M. Eric Furlow
eric@furlowconsulting.com
Furlow Consulting
362 Gulf Breeze Pky. #202
Gulf Breeze, FL 32561

850-982-8102 mobile