Quality of Earnings vs Audit: What a QoE Report Is
How a Quality of Earnings report differs from an audit, what it contains, when buyers and sellers commission one, and what it typically costs.
A Quality of Earnings (QoE) report is the financial core of most M&A due diligence. It is frequently confused with an audit, and the confusion costs deals: a buyer relies on audited accounts and discovers after completion that reported EBITDA included a one-off grant, an owner’s salary at half the market rate and a stock build that reversed in month one.
Audit versus QoE
An audit gives an opinion on whether financial statements are prepared in accordance with an accounting framework and are free from material misstatement. It is retrospective, framework-bound, and performed for shareholders in general.
A QoE asks a different question: what is the sustainable earnings power of this business, on a basis a buyer would use to value it? It is performed for a specific party (buyer, seller or lender), it adjusts reported results rather than opining on them, and it goes below the audit’s materiality threshold because small recurring items change a multiple-based price.
| Audit | Quality of Earnings | |
|---|---|---|
| Purpose | Opinion on financial statements | Assess sustainable earnings for a transaction |
| Standard | Accounting and auditing standards | Scope agreed with the client |
| Output | Audit opinion | Report with adjusted EBITDA, NWC, net debt analysis |
| Materiality | Set for the statements as a whole | Anything that moves price |
| Time frame | Historical period | Historical plus run-rate and forecast review |
| Reliance | Shareholders | Named parties to the transaction |
What a QoE report contains
A typical buy-side QoE report on a mid-market target covers:
- Adjusted EBITDA. Reported to adjusted, with each adjustment evidenced and categorised. The centrepiece.
- Revenue quality. Customer concentration, churn, pricing versus volume, contract terms, recurring versus non-recurring revenue.
- Cost base. Fixed versus variable, headcount and staff costs, related-party costs, standalone cost estimates for carve-outs.
- Net working capital. Monthly analysis, seasonality, KPIs and a view on the peg.
- Net debt and debt-like items. Everything that will be deducted from enterprise value to reach equity value.
- Cash flow and cash conversion. How much of adjusted EBITDA turns into cash.
- Forecast review. Reasonableness of the budget and business plan against historical performance.
- Management questions and responses. The log of what was asked and what was said.
Who commissions one and when
Buyers commission QoE after signing a letter of intent and before final price. It informs the SPA (price adjustment mechanisms, warranties, indemnities) as much as the number.
Sellers commission vendor due diligence or a sell-side QoE before launching a process, to control the narrative, pre-empt buyer findings and keep multiple bidders from each running their own diligence on management’s time.
Lenders require QoE-type analysis for leveraged financings, focused on cash flow and covenant capacity.
What it costs and how long it takes
Fees scale with the target’s complexity more than its size. Indicative ranges for a single-entity mid-market business with a clean finance function: a boutique might quote from the low tens of thousands of dollars; a Big 4 team would be several multiples of that. Multi-entity, carve-out or poor-records situations move fees up quickly. Elapsed time is typically three to six weeks, driven by management’s ability to produce information and answer questions.
Where the hours go
Roughly, on a conventional engagement:
- 30% information gathering, mapping and databook build.
- 30% finding and evidencing adjustments.
- 20% working capital, net debt and cash flow analysis.
- 20% report drafting and review.
Only the second and fourth of those require experienced judgement throughout. The first and third are largely mechanical once the trial balance is mapped, which is why they are the first parts of the work to be automated.
How AI tooling is changing the economics
Two models have emerged. Cloud platforms take the data room and return a draft report; they suit firms that want throughput and have budget for platform fees. Excel-native tools automate the mechanical stages inside the analyst’s workbook: mapping, databook, candidate adjustments, bridge, NWC, first-draft commentary, at a per-seat price a boutique can absorb.
Either way, the effect on the engagement is the same: the information-gathering and build weeks shrink, the judgement hours do not, and the report is produced by people who spent their time on the parts that matter. For a boutique competing with larger firms, that is the difference between quoting a fee that wins and one that does not.
ZAF Tools is the Excel-native version of this. See how a QoE runs inside Excel.
About the author. Abhishek Bhandari is a financial due diligence practitioner with 15+ years in FDD and M&A advisory at EY and Grant Thornton, working on Nordic and DACH mandates. He founded ZAF Tools to automate the parts of an FDD engagement that do not need a human, and Zion Advisor, an offshore FDD and Quality of Earnings practice.