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By Emily Wilson•Last Updated July 30, 2025

Understanding QoE in Finance: The Role and Value of Quality of Earnings Reports

Introduction: Decoding QoE in Finance

In financial circles, QoE stands for Quality of Earnings . This term is most commonly used in the context of mergers and acquisitions (M&A), private equity, and investment due diligence. A Quality of Earnings (QoE) report is a specialized financial analysis designed to assess not just the amount of reported earnings but their
accuracy, consistency, and sustainability
-critical factors for anyone considering buying, selling, or investing in a business [3] . Understanding what a QoE report is, why it matters, how it’s prepared, and how you can access one is essential for informed decision-making in today’s transaction-driven markets.

What is a Quality of Earnings (QoE) Report?

A Quality of Earnings report is a comprehensive financial analysis tool used during due diligence-often when a company is being considered for acquisition or investment. Unlike basic financial statement reviews, a QoE report dives deep into the core drivers of a company’s profitability. It evaluates the quality, reliability, and sustainability of earnings under Generally Accepted Accounting Principles (GAAP) and investigates whether reported profits reflect real, consistent business performance or are distorted by one-time events, accounting adjustments, or other anomalies [4] .

The key goals of a QoE report are to:

Verify the accuracy of reported earnings
Clarify the sustainability of profits moving forward
Identify non-recurring or unusual items affecting income
Assess the consistency of accounting policies
Spot risks and opportunities in cash flow and working capital

This enables buyers, investors, and lenders to make more informed decisions and negotiate with confidence.

Key Components of a QoE Report

A standard QoE report typically includes:

Analysis of Financial Statements: In-depth review of the income statement, balance sheet, and cash flow statement for accuracy and consistency.
Adjusted EBITDA: Calculation of earnings before interest, taxes, depreciation, and amortization, adjusted for one-off items and management judgments [3] .
Working Capital Review: Assessment of current assets and liabilities to ensure the company has sufficient liquidity to operate post-transaction.
Revenue Recognition and Expense Analysis: Verification of key revenue streams and expenses, identifying any irregularities or potential issues [5] .
Accounting Policy Consistency: Evaluation of whether the company applies accounting policies consistently or uses aggressive practices to inflate earnings.
Identification of Non-Recurring Items: Separation of one-time gains or losses from core operating results to provide a clearer view of sustainable earnings.

Some reports may also include cash proofs, annual recurring revenue (ARR) roll-forwards, revenue retention analysis, and project costing analysis, depending on the industry and transaction specifics [3] .

Who Uses QoE Reports and Why?

QoE reports are especially critical for:

Private Equity Firms: To assess acquisition targets and ensure earnings are sustainable before investing [4] .
Strategic Buyers: To identify value drivers and risks that could influence deal terms.
Business Owners: To prepare for a sale or capital raise, demonstrating transparency and reliability to potential investors.
Lenders and Financial Institutions: To evaluate a borrower’s ability to service debt based on true, recurring earnings.

In all cases, a QoE report helps establish trust, uncover hidden issues, and support negotiation of fair transaction terms.

How is a QoE Report Prepared? Step-by-Step Guidance

Preparing a QoE report involves several structured steps:

Scoping the Engagement: Define the goals of the analysis with client input, focusing on what matters most for the transaction (e.g., revenue streams, cost structures, or working capital).
Data Collection: Gather financial statements, management accounts, contracts, and relevant operational data.
Analytical Procedures: Conduct a detailed review of accounting policies, revenue recognition practices, and historical results. Analysts may interview key management to clarify unusual items or business drivers.
EBITDA Adjustments: Identify and adjust for non-recurring, non-cash, or management-discretionary items to arrive at a normalized earnings figure.
Working Capital and Cash Flow Analysis: Examine trends and seasonality in working capital, as well as cash flow sustainability.
Reporting: Summarize findings in a detailed written report, highlighting key issues, risks, and recommendations for buyers or investors.

Throughout the process, professional skepticism and experience are vital for uncovering subtleties that may impact a deal’s value.

Real-World Example: QoE in Action

Consider a private equity firm evaluating a mid-sized software company for acquisition. A QoE report reveals that a significant portion of the company’s recent profits come from a one-off licensing deal, not recurring subscription revenue. The analysis also uncovers aggressive revenue recognition policies and unrecorded liabilities related to deferred maintenance costs. As a result, the buyer renegotiates the purchase price to reflect only sustainable earnings, avoiding an overvalued transaction [3] .

In another scenario, a business owner uses a QoE report to prepare for sale, addressing potential buyer concerns in advance and supporting a higher valuation with transparent, verified financials.

Types of QoE Reports: Comprehensive vs. Limited Scope

Not every deal requires a full-scale QoE. Limited scope QoE reports focus on specific financial areas-such as revenue or a key expense category-providing a faster and more cost-effective solution for buyers who already have deep familiarity with the business. This approach is increasingly common in competitive middle-market deals or where time and budget are limited [5] .

When deciding which type of QoE is appropriate, consider:

The size and complexity of the transaction
The buyer’s familiarity with the target business
The specific risks or deal-breaker issues involved

Engaging with experienced professionals who can tailor the scope to your needs is key for maximizing value.

How to Access a QoE Report: Practical Steps

If you are a buyer, investor, or business owner considering a QoE report, here’s how you can proceed:

Identify experienced financial advisory or accounting firms specializing in transaction due diligence. Major firms like the Big Four (Deloitte, PwC, EY, KPMG) and reputable regional consultancies offer QoE services. You can search for “quality of earnings providers” alongside your industry or location.
Request proposals or consultations to discuss your specific needs, transaction size, and timeline. Ask for references and sample deliverables to gauge expertise.
Define the scope of work: Decide whether you need a full QoE or limited scope analysis, and clarify which financial areas are most relevant.
Engage the provider: Upon agreement, supply the necessary documentation and coordinate with your internal finance team.
Review the draft report, request clarifications, and use the final results in your decision-making and negotiations.

For smaller businesses or early-stage companies, many boutique firms offer tailored QoE services at accessible price points. Consider reaching out to your CPA, business broker, or a trusted M&A advisor for recommendations if you are unsure where to begin.

Potential Challenges and Solutions

While QoE reports are invaluable, challenges may arise, such as:

Data Availability: Incomplete or disorganized records can delay analysis. Solution: Start organizing financials early and communicate transparently with your advisor.
Subjectivity in Adjustments: Some EBITDA adjustments require judgment. Solution: Seek advisors with deep industry experience and insist on clear, documented rationales for all adjustments.
Cost and Time Constraints: Full QoE reports can be expensive and time-consuming. Solution: Consider limited scope options or phased analysis when appropriate.

Regardless of the approach, clear communication and defined objectives are critical for meaningful results.

Alternative Approaches and Complementary Analyses

While QoE reports are the gold standard for transaction diligence, alternative or complementary analyses include:

Financial Statement Audits: These provide assurance on historical statements but do not address sustainability or recurring earnings.
Operational Due Diligence: Examines business processes, management, and market position to complement financial findings.
Cash Flow Forecasting: Projects future liquidity and profitability, often used alongside QoE to validate business models.

Combining these approaches provides a holistic picture of business health and transaction risk.

Summary and Key Takeaways

Quality of Earnings (QoE) is a critical tool in financial due diligence, enabling buyers, sellers, and investors to make informed decisions based on accurate, sustainable, and risk-adjusted earnings data. Whether you pursue a full or limited scope report, engaging experienced professionals, understanding the process, and preparing your data in advance are the keys to unlocking value and minimizing risk in any transaction.