You may have read varied analyses and opinions on the recent FTX debacle including the due diligence failures and impacts highlighted in the Intelligence Online snippet captured in the picture below.
The flip side of a coin is the wake up call that pre-transaction due diligence must be more exhaustive and deep-dive to leave no stone unturned, and no longer a stroll-in-the-park, check-the-boxes exercise.
Whether confidence has taken a nosedive or demands (on due diligence) have been boosted depends on who’s talking but to borrow an old adage, if I may: It takes two to Tango. And in this case, the dancers are the investigator/consultant and the client.
The investigator/due diligence specialist brought onboard has a professional duty and obligation to give the best advice to the client. And as much as he/she wants the client to go “all out”, the reality is the client has constraints like budget, time, resources, etc, compliance and regulatory requirements aside. Hence the burden on the investigator is to work closely with the client and find the best cost-effective approach, ie. “according to budget”.
The client simply wants the best solution for what’s on the table, ie. The pivotal findings to decide on whether to proceed or to kill the (pending) transaction. The last thing the client wants is to be in the front page of the newspapers for all the wrong reasons.
Which brings me back to the case of Temasek, the state holding company owned by the Government of Singapore.
I wrote in a previous post how the global investment company with a portfolio of over S$400 billion defended in a statement its “extensive due diligence process on FTX” spanning around 8 months – how it reviewed FTX financials, the regulatory risks, etc, and the “qualitative feedback on the company and management team based on interviews with people familiar with the company, including employees, industry participants, and other investors”.
The statement added:
We recognise that while our due diligence processes may mitigate certain risks, it is not practicable to eliminate all risks.
Reports have since surfaced that customer assets were mishandled and misused in FTX. If these statements are true, then this amounts to serious misconduct or fraud at FTX. All of this is currently being investigated by the regulators.
It is apparent from this investment that perhaps our belief in the actions, judgment and leadership of Sam Bankman-Fried, formed from our interactions with him and views expressed in our discussions with others, would appear to have been misplaced.
The last paragraph above highlights something interesting.
Yes due diligence comes in many favors and the statement suggests Temasek did focus heavily on financial, legal and regulatory due diligence, and they also gathered “qualitative feedback” on the company and management team.
But that paragraph seems more of a defense and pushing the blame on FTX founder Sam Bankman-Fried, and it suggests two things: Temasek and their investigators overlooked Key Man Risk and had the Wrong Focus in their due diligence.
It’s fair to say everyone benefits from hindsight but I have elaborated in a previous post the Key Man Risk involved with a case like FTX.
Yes it takes two to Tango. The investigator and client should have recognized (with experience) from the outstart there is a potential Key Man Risk based on the background materials and knowledge of the FTX setup. That’s not to say financial (and other) due diligence are irrelevant – you may be familiar with the perils of auditing from “second or third” set of accounts?
If the due diligence have paid due attention to Key Man Risk, the public records and open source intelligence (OSINT) research and the human intelligence (HUMINT) gathering (what Temasek referred to as “qualitative feedback”) would have smoked out at least some of the staggering FTX failings that have now emerged – missing funds through “back doors”, imprecise accounting of the value of FTX’s crypto assets, unacceptable management practices, using corporate funds to buy homes in the personal name of employees, etc.
Temasek has seemingly suffered from missing leads and glaring red flags they could have gotten from a due diligence focused on the Key Man Risk with FTX.
Yes the FTX collapse has delivered a blow to the corporate intelligence world. An extensive and expensive due diligence over eight months is a luxury many investors could not afford. Corporate investigators may be happily billing the clients with cookies-cutter approach that serves no purpose if the due diligence has the wrong focus. In the Temasek case, the due diligence approach as they have explained could run well beyond eight months to a year or two and they would still not find any red flags with FTX if they had the wrong focus – for example, what’s the point if exhaustive financial due diligence is examining cooked accounts?
The FTX collapse is a wake up call for all parties involved.
Source: Intelligence Online