HOW TO AVOID THE “EMPTY NUMBERS” TRAP AND LEARN LESSONS ABOUT FINANCIAL TRANSPARENCY WHEN AN M&A DEAL LACKS AN AUDIT SAFEGUARD?

1. Summary of the Real-Life Situation

Mr. M and Mr. K are two founders who have been close neighbors for many years. In 2024, they pooled their capital to establish TechAcquire Digital Solutions Joint Stock Company. Mr. M served as Chief Executive Officer (CEO), responsible for external relations and M&A strategy, while Mr. K served as Chief Technology Officer, responsible for the company’s technology infrastructure. Because of their close relationship as neighbors, Mr. K entrusted Mr. M with full authority to negotiate the acquisition agreement with target companies and coordinate the company’s cash flows.

In early 2026, seeking to quickly acquire a warehouse management application and capture market share, Mr. M made a serious mistake. Driven by his desire to close the transaction rapidly and achieve short-term expansion targets, he unilaterally signed an agreement to spend VND 3 billion to acquire a software company outright. More importantly, in an attempt to save costs and accelerate the process, Mr. M carelessly bypassed the independent review process and did not engage a professional auditing firm to conduct Financial Due Diligence.

Immediately after the funds were fully transferred and the accounting system was taken over, Mr. K was shocked to discover the truth. The target company’s internal financial statements previously provided to TechAcquire contained fabricated figures and overstated fictitious revenue. In reality, the company was on the verge of bankruptcy, with enormous accumulated losses. The VND 3 billion investment was effectively lost, and the project collapsed.

The company suffered a severe cash-flow deficit and faced the risk of bankruptcy. Believing that Mr. M had acted negligently and autocratically, dissipating assets accumulated by his family, Mr. K became extremely angry. He demanded that Mr. M personally compensate the company for the entire economic loss. Their long-standing neighborly relationship immediately collapsed. The two families engaged in heated arguments and exchanged serious insults in the neighborhood. They even threw dirty substances into each other’s houses, causing public-order disturbances and forcing local police to intervene.

2. Legal Perspective – “A Strong Shield”

From the perspective of civil and corporate law, when a company manager independently authorizes a major acquisition payment without complying with necessary due diligence and accounting verification procedures, such conduct may constitute a breach of the duty of care and give rise to liability.

• Fraud in a civil transaction and invalidity: Under Article 127 of the 2015 Civil Code, where a party enters into a civil transaction as a result of fraud, that party has the right to request a court to declare the transaction invalid. The seller’s fabrication of accounting records and provision of false revenue figures for the purpose of obtaining an improper benefit from the transaction may constitute material fraudulent conduct that directly distorts the subject matter of the transaction. Under Article 122 of the 2015 Civil Code, the M&A share-transfer agreement may therefore be declared invalid, requiring the seller to return the money in accordance with Article 131 of the 2015 Civil Code.
• Breach of the duty of care by a company manager: Under Article 165 of the 2020 Law on Enterprises, company managers are required to exercise their assigned rights and perform their duties honestly and with the highest degree of care in order to protect the company’s legitimate interests. Mr. M’s exercise of managerial authority under Article 162 of the 2020 Law on Enterprises to unilaterally approve the disbursement of VND 3 billion without an independent audit report verifying the target company’s assets may constitute a serious failure to exercise due care. Under Articles 584 and 585 of the 2015 Civil Code, Mr. M may be required to bear liability for compensating the company for the damage caused by his conduct, subject to the applicable legal conditions.

3. Psychological – Educational – Management Perspective – “The Human Key”

Psychological and Educational Perspective

• The pursuit of short-term achievements creates complacency and encourages shortcuts: Mr. M was captivated by the prospect of quickly acquiring another company and increasing the startup’s perceived valuation. As a result, he chose to take shortcuts and ignored the costs associated with independent financial auditing. His short-term financial ambitions caused him to underestimate the systemic risks arising from the target company’s unreliable accounting records. When the incident occurred, Mr. K experienced panic and feared losing the intellectual and financial assets accumulated by the company. This triggered intense suspicion and ultimately destroyed the trust between the two long-standing neighbors.
• Insufficient education in mandatory financial-audit thinking: Many young entrepreneurs mistakenly believe that acquiring a company is safe as long as they can review internal financial statements bearing the counterparty’s official stamp and certification. They may therefore consider an independent post-verification audit an unnecessary expense. This reflects a lack of awareness regarding procedural compliance and the importance of the rule of law in corporate governance. Entrepreneurs may also confuse day-to-day commercial flexibility with the obligation to establish a legally secure framework for protecting an organization’s capital.

Management Perspective

• A critical failure in Financial Due Diligence risk management: Mr. M effectively placed TechAcquire’s survival on the target company’s unverifiable and insufficiently transparent financial information. Managing a company based solely on subjective trust is an extremely high-risk practice. The absence of an independent forensic audit process removed a critical layer of protection against fabricated financial data provided by the seller.