Audit accuracy key for M&A returns

Businesses looking to grow through acquisitions are better off having audit work completed by one of the ‘Big Four’ accountancy firms, a new study reveals.

While this finding is no surprise considering the scope and resource of Ernst & Young, Deloitte, KPMG and PricewaterhouseCoopers, the report reveals that acquisitions of targets audited by the accountancy giants creates an average $166 million more in value for the bidding company’s shareholders.

Conducted by Cass Business School, the University of Surrey, the University of Illinois and ALBA Graduate Business School, the study concludes that M&A deals are more likely to succeed when targets are audited by the ‘Big Four’.

Lecturer in finance at Cass Business School, Andrey Golubov, says that financial statements are one of the most important sources of information available to companies looking to acquire.

He adds: ‘Bidding businesses and their advisors rely heavily on audited financial statements when valuing a target and estimating potential synergies.

‘We found that takeovers of companies audited by one of the Big Four accountants generate higher synergies than acquisitions of targets audited by [other] firms. These gains are reflected in the stock price reaction to deal announcements as well as improvements to the long-term operating performance.’

The report notes that investor gains and bidder returns were higher when the target was more difficult to value and there was a greater need for more accurate financial information.

The work done in auditing produces greater accuracy, the findings argue, which in turn reduces uncertainty and allows for better ‘bidder-target matches’.

The survey examined over 1,900 deals involving US publicly traded businesses between 1996 and 2008.

Todd Cardy

Todd Cardy

Todd was Editor of GrowthBusiness.co.uk between 2010 and 2011 as well as being responsible for publishing our digital and printed magazines focusing on private equity and venture capital. Connect with...

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