What Is a Quality of Earnings Report? The Complete Guide
Updated February 2026
The financial equivalent of a home inspection — what's behind the walls? A QoE report tells you whether the earnings you're buying are real, recurring, and sustainable.
$20K+
Traditional CPA QoE cost
2–4 hours
AI-assisted initial analysis
$2,000
Starting price per project
What Is a Quality of Earnings Report?
A Quality of Earnings report is a detailed financial analysis that goes beyond the face value of a company's income statement to determine whether reported earnings are sustainable, recurring, and accurately stated. It's the financial equivalent of a home inspection before purchasing a property — you want to know what's behind the walls.
At its core, a QoE analysis answers one fundamental question: "If I buy this business, what earnings should I actually expect going forward?"
The report accomplishes this by identifying and categorizing adjustments to the company's reported EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), resulting in an adjusted or normalized EBITDA figure that more accurately reflects the business's true earning power.
Why Quality of Earnings Matters in M&A
In any acquisition, the purchase price is typically derived from a multiple of earnings — usually EBITDA. This means that every dollar of earnings misstatement is amplified by the valuation multiple. If EBITDA is overstated by $100,000 and the deal is priced at 5x EBITDA, the buyer overpays by $500,000.
Validates reported earnings
Confirms that revenue and expenses are accurately recorded
Identifies non-recurring items
One-time costs, unusual revenue, extraordinary events
Normalizes owner expenses
Above-market compensation, personal expenses run through the business
Reveals accounting choices
Aggressive revenue recognition, deferred maintenance, capitalization practices
Quantifies working capital
DSO, DPO, DIO trends and their impact on cash requirements
Surfaces risks & red flags
Customer concentration, related-party transactions, pending liabilities
When Do You Need a Quality of Earnings Report?
Acquiring a business
Whether a $500K SMB or a $500M enterprise
Selling a business
Sell-side QoE helps sellers control the narrative and accelerate timelines
Securing financing
Lenders and SBA require QoE to underwrite loans
Evaluating deal terms
Earnouts, seller notes, and equity rollovers depend on accurate earnings
Screening targets
Searchers and PE firms use QoE to quickly evaluate deal quality
Key Components of a QoE Report
Adjusted EBITDA Bridge
Starts with reported earnings and systematically adds or subtracts adjustments to arrive at normalized EBITDA.
Revenue Analysis
Examines sustainability, customer concentration, pricing trends, and revenue recognition policies.
Expense Analysis
Reviews COGS, operating expenses, and overhead to identify trends, anomalies, and misclassifications.
Working Capital Analysis
Evaluates AR, inventory, AP, and other current items to determine normalized working capital needs.
Balance Sheet Review
Examines unrecorded liabilities, asset quality, debt-like items, and off-balance-sheet obligations.
Who Provides Quality of Earnings Reports?
Historically, QoE reports have been provided by:
- Big 4 accounting firms — for large-cap and upper-middle-market transactions
- Regional CPA firms with M&A practices — for mid-market and lower-middle-market deals
- Boutique transaction advisory firms — specialized QoE providers for various deal sizes
More recently, AI-assisted platforms like Shepi have emerged to democratize access to QoE analysis, enabling independent searchers, smaller PE firms, and deal advisors to conduct professional-grade analysis at a fraction of the traditional cost and timeline.
The Quality of Earnings Process
Whether conducted by a CPA firm or through an AI-assisted platform, the QoE process generally follows these steps:
Data gathering
Collecting trial balances, financial statements, bank statements, tax returns, and supporting documents
Account mapping
Organizing chart of accounts data into standardized income statement and balance sheet formats
Trend analysis
Reviewing multi-period financial data for patterns, anomalies, and inconsistencies
Adjustment identification
Flagging items that require normalization and categorizing them
Adjustment quantification
Calculating the dollar impact of each adjustment with supporting documentation
Working capital analysis
Determining normalized working capital target and peg
Report preparation
Compiling findings into a clear, defensible format
Cost & Timeline
Traditional QoE reports from CPA firms typically cost $20,000+ and take 4+ weeks to complete. The cost depends on deal size, business complexity, data quality, and the firm's billing rates.
AI-assisted platforms like Shepi can deliver initial analysis in 2–4 hours at a starting price of $2,000 per project, making QoE accessible for deals of all sizes. See our AI QoE vs. Traditional comparison for a detailed breakdown.