Off-balance sheet liabilities

[cronian]

In a typical merger, how do typically companies determine if the company being acquired has substantial hidden liabilities. For example, this could be due to hidden side letters, or other things. Is there any way to audit for this? How do you ever know a company doesn't have lots of secret liabilities?

[redox]

We did several things during my audit days to detect unrecorded liabilities in the financial statements:



1) We pulled all cash disbursements after the balance sheet date to see if there were any unrecorded liabilities at year-end



2) We sent confirmations to the bank, attorneys, etc. to make sure we had all the activity in the ledger and that there was no pending or threatened litigation we were not aware of



3) We had management represent to us that the financial statements were complete and accurate



4) We thoroughly reviewed/understood related party transactions



Baring those things there is not much else you can do...