Business owners often assume a financial statement audit and a Quality of Earnings (QoE) analysis provide the same level of insight. While both involve a review of financial information, they serve very different purposes.
A financial statement audit is designed to determine whether historical financial statements are fairly presented in accordance with applicable accounting standards. A Quality of Earnings, or QoE, analysis is more transaction-focused. It evaluates the sustainability and quality of the earnings that drive business value, particularly in the context of a potential sale, acquisition, or financing event.
| Audit | Quality of Earnings (QoE) |
| Focuses on whether financial statements are fairly presented in accordance with accounting standards | Focuses on the sustainability and quality of earnings that drive business value |
| Historical in nature | Forward-looking with a transaction focus |
| Provides reasonable assurance over the financial statements | Analyzes normalized EBITDA, cash flow, working capital, and earnings adjustments |
| Intended for shareholders, lenders, boards, and other stakeholders | Intended for buyers, sellers, lenders, investors, and private equity groups |
| May identify accounting errors or control deficiencies | Identifies deal risks, opportunities, add-backs, and value drivers |
A common misconception is that a company with audited financial statements does not need a QoE. In reality, most M&A transactions still require a QoE because buyers are trying to understand not only whether the numbers are fairly stated, but also what level of earnings and cash flow is likely to continue after closing.
Both can be valuable, but they are not substitutes for one another.
The Johnson O’Connor transaction advisory team has extensive experience assisting buyers, sellers, lenders, and investors throughout the M&A process. We would welcome the opportunity to discuss how a Quality of Earnings analysis can support your goals.