The Hidden Value of a QoE: Better Diligence, Better Audits

For searchers, a Quality of Earnings (QoE) engagement does more than support a transaction. It sets the foundation for smoother financial reporting and prepares the company for its first audit post-close. While QoE and audit engagements both analyze financial information, they serve very different purposes.

Understanding how they complement each other can help new owners anticipate challenges, strengthen internal processes, and reduce friction during the first financial-statement audit.

How a QoE Engagement Differs from a Financial Statement Audit

At the highest level, a QoE report is transaction-focused, while an audit is compliance-focused.

Purpose - A QoE engagement evaluates the sustainability and quality of earnings, adjusted EBITDA, and working capital as part of a transaction process. An audit, by contrast, provides reasonable assurance that financial statements are free from material misstatement under a recognized framework such as GAAP.

Scope - QoE engagements look closely at normalized earnings, run-rate performance, and one-time adjustments to help investors understand the true economic picture. Audits assess internal controls, account balances, disclosures, and financial reporting as a whole. A QoE report is not an audit or review and does not provide assurance on the accuracy of financial statements.

Standards - Audits follow strict professional standards (e.g., AICPA). QoE engagements follow consulting standards and can be tailored to investor needs. They may reflect historical accounting approaches like cash basis rent expense, if it helps assess true profitability.

What to Review in a QoE Report to Prepare for an Audit

A strong QoE report surfaces operational and accounting issues early, often long before an auditor arrives. Because QoE engagements analyze monthly trends rather than just annual periods, they often reveal patterns and risks not visible in year-end statements.

To prepare for a successful first audit, pay attention to five key areas:

1. Normalized EBITDA Adjustments - Review all EBITDA adjustments: true-ups, non-recurring items, discretionary spending, or non-cash activity. While these may not impact GAAP earnings, they often point to inconsistencies in accrual methodology, cutoff issues, or classification errors that auditors will scrutinize.
   
   
2. Revenue Recognition Methods - Confirm how revenue is recognized, especially if the business uses multiple methods based on product, service, or contract type. This helps prepare for ASC 606 requirements around performance obligations, variable consideration, and timing.
   
   
3. Working Capital Calculations - Understand the QoE team’s working capital baseline and any seasonal or pro forma adjustments. Auditors will focus on cutoff, classification between current/non-current assets and liabilities, and whether balances reflect GAAP requirements.
   
   
4. Owner-Related or Non-Recurring Expenses - Above-market compensation, personal expenses, and related-party transactions often appear in QoE adjustments. While auditors may not adjust GAAP balances for these, they can assist in identifying related party transactions, which impact financial reporting.
   
   
5. Accounting Policy Consistency - Identify areas where accounting policies are inconsistent, loosely applied, or materially different from GAAP. QoE engagements often highlight these early, which helps management prepare for more rigorous audit expectations.

Impacts of Non-Quantifiable Adjustments on a Future Audit

QoE reports frequently include narrative findings and risks that aren’t tied to specific dollar amounts but still elevate audit risk. Common examples include:

• Loose cutoff procedures
• Lack of documented accounting policies
• Weak support for accruals or reserves
• Inventory costing issues
• Long-term contract costing methods
• Revenue recorded before contractual support

While not quantified, these issues often lead auditors to expand their procedures. During the first audit, this can result in:

• Additional documentation requests
• Increased sample sizes and more detailed testing
• Potential audit adjustments
• Delays in audit completion
• “Expanded scope” billings due to increased effort

Addressing these items early, before the audit begins, can dramatically reduce cost, time, and disruption.

Use QoE as an Audit Readiness Tool

A well-prepared QoE report does more than support due diligence. It gives new owners a roadmap to strengthen financial processes, identify control gaps, and prepare for a smoother first-year audit. By proactively addressing EBITDA adjustments, revenue recognition, working capital mechanics, policy inconsistencies, and qualitative risks, companies can reduce surprises, accelerate audit fieldwork, and build trust with auditors and stakeholders.

A QoE isn’t just a transaction tool. It’s an opportunity to walk into your first audit ready, informed, and two steps ahead. If you’d like support preparing for that process, our team is here to help. Let’s talk through how to put those insights to work for you.