Vetting

A process in which a background check is conducted before deciding on a specific item of action

What is Vetting?

Vetting is a process in which a background check is conducted before deciding on a specific item of action. Vetting occurs throughout various professions and is a critical process in which various decisions of different sizes are appraised.

 

Vetting

 

Fact-checking through the vetting process allows for informed decision-making, long-term strategic planning, and protection against controversy and scandal.

Successful companies generally set up extensive vetting processes that are built into the operational principals of all departments to create risk management guidelines to prevent errors and reduce instances of fraud. How a company executes its internal vetting processes is critical to its success in making decisions that expose them to risk.

 

Summary

  • Vetting occurs when a process or individual is fact-checked and verified for suitability. It occurs throughout various professions and is a critical part of the decision-making process.
  • Vetting is done to protect a company from reputational damage, as well as to ensure it limits their exposure to potential legal liability.
  • Due diligence with regards to assets, individuals, or processes is often required by law and is built into internal corporate regulations and guidelines.

 

Origins of the Term

The term vetting can trace its roots back to the 1800s with regards to horse racing. It is a shortened version of the word “veterinarian,” as it was often the process by which a veterinarian would give their approval and “check” an animal.

To vet a horse would be to check it for its health and wellness. It would help determine its overall suitability to ride and race.

 

Vetting in the Hiring Process

When potential employment candidates present themselves for consideration for a role at a company, the human resources department will generally conduct an extensive vetting process of the candidate.

Often, a candidate’s employment history will be checked. It is completed to verify that the previous roles and duties they report to doing are true.

For technical positions or those that require extensive educational qualifications, transcripts and diploma/degree verification will also be conducted to verify that the candidate’s obtained the necessary qualifications to perform the role successfully.

It is done to both protect the company from reputational damage, as well as to ensure it limits their exposure to potential legal liability through a negligent vetting process.

 

Vetting in Finance

The vetting process in finance can be the process by which different securities or financial instruments are examined for their feasibility or risk potential.

When a company is analyzed by an institutional investor, for example, various financial ratios – like a P/E ratio or overall liquidity position – is conducted. It can help determine whether the company is on the brink of scandal or collapse.

Banks and other financial institutions are required to extensively vet other companies when determining whether to place them into a fund or recommend their purchase to clients.

Vetting can also be done by audit professionals to determine whether specific financial processes leave the company open to potential loss or fraud.

The vetting of processes is just as critical for a company as the vetting of individuals. It ensures that best practices are put into place, and the company operates with integrity and accountability to its shareholders.

 

Vetting as Part of Due Diligence

Due diligence with regards to assets, individuals, or processes is often required by law or internal guidelines. Different organizations outside the world of publicly-traded companies and human resources use vetting processes to determine candidate eligibility and/or suitability.

One such example is in the political process. Candidates and nominees are vetted by the political party they aim to represent to ensure that they embody the party’s values and core ethos. It helps to avoid political scandal and ensure the maximum chance or likelihood that a party’s vetted political candidate is elected to political office.

 

Related Readings

CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Due Diligence
  • Employee Background Check
  • Analysis of Financial Statements
  • Due Diligence Checklist

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!