A quality of earnings review is an independent analysis, usually commissioned by the buyer, that tests whether a company's reported earnings are sustainable and accurately stated. It examines add-backs, revenue recognition, customer concentration, working capital trends and one-time items. Unlike an audit, it is not an opinion on the financial statements; it is an assessment of the earnings base the price is built on.
QoE versus audit
An audit opines on whether financial statements are fairly presented under accounting standards. A QoE asks whether the earnings a buyer is paying a multiple on will continue. A company can pass an audit and fail a QoE, and vice versa.
What the QoE tests
Every add-back, revenue recognition and cut-off, customer and supplier concentration, the trend in working capital, one-time versus recurring items, related-party transactions, and whether monthly results tie to the annual numbers.
How a seller prepares
Document every add-back with evidence. Reconcile monthly to annual. Explain every swing. Consider a sell-side QoE before going to market so the buyer's review confirms rather than discovers.
A sell-side QoE costs money and takes weeks. It usually pays for itself the first time a buyer's accountant tries to remove an add-back that has already been documented.
