Thriving on Change: The Internal Auditor's Role in Mergers and Acquisitions
Trampe, John, Journal of Accountancy
The internal auditor's role in mergers and acquisitions.
Mergers and acquisitions are a way of life in today's commercial banking industry. They were partly responsible for the number of banks declining from approximately 14,500 in 1984 to about 9,200 as of September 1997. In the last few years, merger activity among the nation's largest banks has intensified, with numerous multi-billion-dollar deals announced since the beginning of 1995--more than ever before. Given the unique challenges such mergers and acquisitions present, management should understand how the internal auditors who already work for them can play a vital role in facilitating these transactions by saving time and money. This article tells the story of how the internal auditors at one bank did so in a recent merger.
BEYOND THE DUE-DILIGENCE PROCESS
The internal auditors' role in bank mergers and acquisitions usually is associated with the due-diligence process. Auditors can provide senior management with vital information about the value of the company being acquired, its financial condition, any weaknesses in its financing or internal controls as well as its history, customer base, property conditions and management practices. Frequently, however, when two large, well-established companies decide to merge, the due-diligence process is less important than expected by internal auditors who have never been involved in a merger. Because senior management already has decided the merger makes strategic sense, due diligence is more of a fact-finding mission than a critical step in the decision-making process.
Due diligence is only one aspect of the services an internal audit department can--and should--perform in a bank acquisition. Once the transaction is announced, the acquiring bank forms a team to begin the transition. Frequently, internal auditors are overlooked as players on that team. Management often sees them only as fact checkers and not as a source of important new information. This is not the case. Because internal auditors already have in-depth knowledge of the operations and employees in every important area of the acquiring company, they can be extremely valuable as key advisers to senior management throughout the process, resulting in both calculable and incalculable savings.
If management does not automatically involve its internal auditors, they should take the lead and prepare a proposal of work they can perform during the transition and then review that plan with management. Auditors who have no such experience should focus their planning efforts on mitigating operational and financial risk, retaining customers and reducing expenses during the transition period. At NationsBank, the results of work the internal auditors had performed in previous mergers were reviewed and enhancements made for the new merger plans, incorporating lessons learned from past experiences.
Despite the positive experience NationsBank has had involving its internal auditors in the merger process, managements at other companies may still balk, fearing the auditors will get in the way or won't have the skills needed to add value during the transaction. To become part of the merger team, internal auditors may have to play a more nontraditional role. The NationsBank auditors helped anticipate what might go wrong during the merger, participated on teams to clean up problem areas and pointed out lessons from previous mergers. As a general rule, internal auditors should try to get involved in the merger process as early as possible and begin adding value so management recognizes them as valuable team members.
NationsBank has had a number of large acquisitions in its history and the internal audit department has played a significant role in the larger mergers since 1989. Originally, it was the department's managers who proposed to the bank's senior management that they could make a contribution during the merger transition process. …