Answers / Financial Due Diligence
Why must you reconcile management accounts to the audited statutory financials early in an FDD, and what do gaps tell you?
A core Financial Due Diligence interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Management accounts are what the deal runs on — the databook, the trends, the EBITDA — but they're unaudited and built on management's own conventions. Reconciling them to the audited statutory numbers early validates that the figures you're analyzing actually tie to a reliable anchor. Persistent or unexplained gaps are informative: they can reveal different revenue-recognition or cut-off treatments, management adjustments baked silently into the MI, consolidation or intercompany differences, or in the worst case manipulation. A clean, small reconciliation builds confidence; large or moving gaps tell you the management information is unreliable and that your adjustments need to start from the statutory base. It also frames how much weight you can put on interim/recent-period MI that has no audited comparison.
WHAT INTERVIEWERS LISTEN FOR
- ✓Management accounts drive the deal but are unaudited
- ✓Reconcile to audited statutory as a reliability anchor
- ✓Gaps reveal recognition/cut-off/consolidation differences or manipulation
- ✓Large/moving gaps → distrust the MI, anchor on statutory
COMMON MISTAKES
- ✗Analyzing MI without tying to audited accounts
- ✗Ignoring reconciliation gaps
- ✗Over-relying on unaudited interim periods
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