Due diligence normally refers to an investigation into a business or an individual before formally entering into a business contract. It is the systematic verification of the accuracy of a statement. It also refers to the care an individual should take before entering into a contract or agreement. Once an individual or business offers to purchase an asset from another company or individual, it enters into due diligence analysis.
The final decision of formalizing the contract largely depends on the outcome of due diligence. This may involve inspecting the financial records, past credit worthiness, past record of honoring contracts and anything else that is deemed relevant in the transaction. Due diligence is aimed to avoid unnecessary harm, hassles and dispute between the two parties involved post formalizing the contract. It enables all the stakeholders involved in the transaction to have the required information to assess the risk involved accurately. Given the sensitive and delicate nature of such analysis, normally it is done by a neutral unbiased trusted third party, acting on behalf of all the stakeholders.
Due diligence report can also be used as a legal defense by a party charged with allegations of financial scandal and the defendant may be found not guilty if he or she can prove that adequate due diligence was exercised and precautions were taken against any falsified financial transactions. It may be expensive to conduct a due diligence analysis but if that is not done you may end up purchasing an asset that is not what you wanted it to be or may end up in a business relationship that may cause you problems in future.