Financial Due Diligence Checklist: GAAP Edition

By April Bulahao

Financial due diligence is the backbone of any informed investment or acquisition decision. It is the detailed and systematic investigation of a business’s financials, aimed at ensuring transparency, accuracy, and compliance with regulatory standards. For businesses in the United States, one of the most vital frameworks used during this process is GAAP—Generally Accepted Accounting Principles.

This article offers a detailed GAAP-based financial due diligence checklist, explains its importance in the accounting process, and illustrates how adherence to GAAP enhances business credibility and decision-making. Whether you are an investor evaluating a potential acquisition or a business preparing for sale or funding, understanding the ins and outs of financial due diligence under GAAP is crucial.

What is GAAP?

GAAP is a set of accounting standards developed by the Financial Accounting Standards Board (FASB). These principles are designed to ensure consistency, comparability, and transparency in financial reporting across companies and industries in the United States.

GAAP covers everything from revenue recognition to expense matching and is essential for:
External audits
Tax reporting
Mergers and acquisitions
Raising capital
Ensuring regulatory compliance

Why Financial Due Diligence Matters

Due diligence verifies the financial health of a company. It helps investors, lenders, and buyers make sound decisions and avoid costly surprises. Without proper due diligence, stakeholders may inherit liabilities, overvalue assets, or misunderstand cash flow sustainability.
Performing financial due diligence under GAAP increases the credibility of the financial data and gives all parties confidence in the outcomes of a deal or investment.

GAAP-Based Financial Due Diligence Checklist
The following checklist is designed to guide your financial due diligence efforts with a focus on GAAP compliance.

1. Review of Financial Statements (3–5 Years)
Income statements, balance sheets, and cash flow statements.
Ensure proper classification of revenues, expenses, assets, and liabilities under GAAP.
Look for consistency in accounting methods.
2. Revenue Recognition Policies
Are revenues recognized according to GAAP standards?
Review contracts and customer agreements for timing and basis of revenue recognition.
Evaluate compliance with ASC 606 (Revenue from Contracts with Customers).
3. Accounts Receivable and Allowance for Doubtful Accounts
Are receivables reported to have a net realizable value?
How is the allowance for bad debts calculated?
Investigate aging reports and collection history.
4. Inventory Valuation and Obsolescence
Ensure inventory is recorded at a lower cost or market.
Confirm the use of appropriate inventory methods (FIFO, LIFO, or weighted average) and consistency.
Review reserves for obsolete or slow-moving inventory.
5. Fixed Assets and Depreciation
Verify fixed asset capitalization policies.
Review depreciation schedules and useful lives under GAAP guidelines.
Inspect recent capital expenditures and impairment testing procedures.
6. Liabilities and Contingent Liabilities
Are all liabilities recorded, including contingent ones?
Assess notes payable, lines of credit, and off-balance sheet liabilities.
Examine warranty obligations and litigation exposure.
7. Leases and Lease Accounting (ASC 842)
Are leases properly categorized as finance or operating?
Review lease schedules and commitments.
Evaluate the impact of lease liabilities and right-of-use assets on the balance sheet.
8. Equity and Capital Structure
Analyze equity accounts, including stock issuance, dividends, and buybacks.
Check for accuracy in retained earnings and paid-in capital accounts.
Review any equity-based compensation (stock options, RSUs).
9. Tax Compliance and Deferred Tax Assets/Liabilities
Examine current and deferred tax accounts for GAAP compliance.
Validate tax filings and potential tax exposures.
Assess net operating loss (NOL) carryforwards and valuation allowances.
10. Cash Flow Analysis
Compare net income to cash flows from operations.
Identify unusual or non-recurring items.
Reconcile discrepancies between reported profits and actual cash movement.
11. Internal Controls and Accounting Policies
Review the internal controls over financial reporting (ICFR).
Examine documented accounting policies and procedures.
Ensure segregation of duties and approval workflows.
12. Related-Party Transactions
Identify any related-party transactions.
Review terms and assess whether they are conducted at arm’s length.
Ensure proper disclosure in financial statements.
13. Financial Projections and Budgeting
Assess the reliability of future financial forecasts.
Review the basis and assumptions behind projections.
Compare past projections to actual performance.
14. Audit Reports and Notes to Financial Statements
Examine any audit qualifications or emphasis of matter paragraphs.
Read footnotes for detailed disclosures.
Look for transparency in accounting judgments and estimates.

Advantages of GAAP in the Accounting Process

Using GAAP as the foundation of financial due diligence offers significant advantages, including:
✅ Consistency
GAAP standardizes the accounting process, ensuring that companies present their financials in a comparable format. This is critical when evaluating multiple acquisition targets or investment opportunities.
✅ Transparency
Comprehensive disclosures and footnotes in GAAP financials increase visibility into a company’s operations, assumptions, and risks.
✅ Investor Confidence
When businesses follow GAAP, it signals professionalism and adherence to best practices—instilling trust among investors, creditors, and regulatory bodies.
✅ Risk Mitigation
GAAP-compliant due diligence uncovers hidden liabilities and risks early, allowing buyers or investors to negotiate better terms or exit deals that do not meet financial expectations.
✅ Audit Readiness
GAAP financials are audit friendly. If a business plans to go public, raise funding, or undergo a formal valuation, GAAP compliance is often a prerequisite.
✅ Legal Protection
Clear and accurate records reduce the risk of legal disputes post-transaction. If issues arise, GAAP-aligned records help establish facts objectively.

Conclusion: Partnering with Experts for GAAP Due Diligence

Conducting GAAP-based financial due diligence is not about checking boxes—it is about safeguarding your business interests, ensuring full financial transparency, and enabling strategic decisions. It requires keen financial insight, technical knowledge, and an understanding of industry-specific nuances.
Vantage-CFO Financial Services specializes in delivering detailed, GAAP-aligned due diligence support tailored to your business needs. Whether you are an importer of craft spirits evaluating expansion or a service provider seeking investors, our team ensures that your financials are both accurate and investment ready.
Do not just prepare your numbers—make them work for your future. Contact Vantage-CFO today for expert due diligence that adds confidence to every decision.