The Institute of Chartered Accountants in England and Wales (ICAEW) is preparing to unveil new guidelines for commercial due diligence (CDD) on 10 September 2005, at Moorgate Place in London.

This development comes as the significance of CDD in transaction processes gains recognition, particularly in light of current market fluctuations.

The guidance, co-authored by the KPMG Strategy Group and Luminii Consulting, will address a variety of topics, including best practices for scope and methodology, commissioning protocols, ethical considerations, and the role of AI in CDD.

ICAEW pointed out that while CDD has existed for some time, its application has increased since the global financial crisis.

Investors and acquirers are now focusing on future potential rather than solely historical financial performance, reflecting the growing complexity of mergers and acquisition processes.

Luminii Consulting  managing director and co-author of the guidelines Lushani Kodituwakku remarked: “Understanding market opportunity, competitive position, customer retention, growth levers and risks that impact the achievability of a target’s business plan and its ability to maintain a sustainable differentiator are extremely important for a potential investor – whether that’s private equity, venture capital, a corporate or lenders.”

The forthcoming guidelines will offer commissioners insights on CDD methodology, typical scopes of work, practitioner selection, and strategies to optimise the process.

Additionally, the guidelines will cover ethical considerations, including confidentiality and independence, as well as legal obligations.

A section will also focus on the integration of AI in CDD practices.

Kodituwakku explained, “Practitioners can use AI tools to automate time-consuming manual tasks, and when used with care to mitigate the risk of ‘AI hallucination’, the combination of human and machine can deliver a more innovative and enhanced CDD product.

“This puts the onus on practitioners to stay on top of technology developments and implement them in our work processes.”

KPMG UK Deal Strategy lead partner, a veteran in CDD and fellow co-author David Larsson noted: “Market participants now recognise the role and value CDD plays in a deal process.

“At the same time, CDD has evolved and become a much more useful tool for all stakeholders, moving from being somewhat of a ‘tick-box’ exercise in the past, to becoming the starting point of the acquirer’s value creation plan.

“Much more of the focus is now on what can be achieved in the future, and how.”

Larsson highlighted the diverse sources and analyses involved in CDD, which has contributed to the time taken to establish these guidelines.

“In writing the document, we were very conscious that we wanted to offer commissioners a baseline of what they could ‘normally’ expect a CDD to do and how.

“We also wanted to make it clear that, probably unlike most other forms of due diligence, CDD should consider a wide range of data sources, tools and methodologies to get to the right answers.”

Kodituwakku emphasised on the critical nature of defining the scope of work when commissioning a CDD, asserting that the guidelines will provide essential insights for commissioners.

From the perspective of practitioners, she stated that the guidelines will establish a standard for delivering CDD, describing the initiative as a significant step forward that introduces clarity, rigour, ethical standards, and innovative methodologies to the field. ICAEW Corporate Finance head David Petrie concluded by saying:

“In the age of AI, understanding and development of commercial opportunities is changing very quickly. Advisers and investors need to understand how and why a good CDD report has become a fundamental part of so many deals.”