due diligence
Encyclopaedia Britannica's editors oversee subject areas in which they have extensive knowledge, whether from years of experience gained by working on that content or via study for an advanced degree. They write new content and verify and edit content received from contributors.
Karl Montevirgen is a professional freelance writer who specializes in the fields of finance, cryptomarkets, content strategy, and the arts. Karl works with several organizations in the equities, futures, physical metals, and blockchain industries. He holds FINRA Series 3 and Series 34 licenses in addition to a dual MFA in critical studies/writing and music composition from the California Institute of the Arts.
Due diligence is a standard of caution, attentiveness, and care exercised in various professional and social settings. Due diligence procedures are often applied with a reasonable degree of prudence. This ensures that due diligence appropriately matches the needs of particular circumstances (no more, and no less).
Due diligence in professional and business settings
Due diligence is a common expectation in most professional and business settings, particularly in situations where service providers are legally obliged to adhere to a certain set of established standards (aka, a “duty of care”).
For example, doctors must exercise due diligence when prescribing medications. The goal is to ensure that no harmful interactions (such as with other medications) result from a prescription.
Lawyers, psychologists, and consultants exercise due diligence to protect their clients’ confidentiality, sensitive information, and privacy.
In the accounting profession, due diligence is often exercised to ensure the regulatory compliance of various financial records and documents.
In commercial real estate, due diligence plays a critical role in the investment process. For example, potential investors must consider several factors in addition to location, such as a building’s structural soundness, its adherence to zoning laws, and its compliance with environmental laws.
Due diligence as an ethical standard
Due diligence can help prevent companies from providing false or misleading information to customers and stakeholders. This makes due diligence a guideline for responsible business practice, as well as a measure of ethical accountability. To that end, various companies have included due diligence considerations in their strategic planning processes.
Due diligence as a safeguard in business transactions
Although due diligence is carried out in various forms across multiple industries, its most common application is in the domain of business transactions.
In every transaction, buyers and sellers alike are expected to exercise their own due diligence before a sale. This helps ensure that all relevant facts about a given product have been disclosed by the seller and considered by the purchaser.
As a transactional safeguard, the due diligence process is a common feature in nearly all industries, from small business ventures to financial institutions to large-scale corporate mergers and acquisitions.
Due diligence expectations and enforcement
In the United States, due diligence standards and expectations are enforced by common law (laws based on past court decisions versus those written and passed by government) and can also be applied to federal statutes (recognized and enforced on a federal level).
Let’s take Section 11 of the Securities Act of 1933 as an example. Suppose a company issuing publicly traded stock makes an inaccurate statement related to its business. If the company can prove that it exercised due diligence in its efforts to verify the accuracy of its statement prior to release, it may be able to protect itself from liability.
Another example is Chapter 8 of the Federal Sentencing Guidelines. Suppose an organization is sanctioned for a violation. That organization may have its sanctions reduced if it exercises due diligence by establishing a compliance and ethics program.