Financial Due Diligence
Quality of earnings: what it is, and who signs it.
A quality-of-earnings review is an accounting exercise that normalizes revenue and EBITDA and tests cut-off and accruals. It is performed by accountants, it produces an opinion a firm stands behind, and it sits outside Zoe’s boundary. This page exists to explain the work, not to claim it.
Why it matters
A QofE separates real earnings from accounting artifacts. One-time items, channel stuffing, extended payment terms, and revenue-recognition timing games can add 20 to 40 percent to reported EBITDA. Model the LOI headline without a QofE scrub and you are buying the seller’s narrative, not the business. It is table stakes in any deal of size: it tells you what the company actually earned, what should normalize going forward, and what adjustments your base case should assume. It is the diligence step that directly protects purchase price.
Where Zoe’s boundary sits
Zoe does not normalize revenue or EBITDA, test accruals, or issue any accounting opinion, and will not. What Zoe reads from the same accounting systems is operating behavior: how consistently the books close, how receivables age, how concentrated revenue is by account and owner. That behavioral signal complements a QofE; it never substitutes for one. The two workstreams read the same source and answer different questions.
References
- Financial statement audits versus quality of earnings analysis · RSM US (accessed August 2026)
- Quality of Earnings: Definition, Why It's Important, and Analysis · Investopedia (accessed August 2026)
- A Quality of Earnings Analysis: What It Is, and Why Buyers Need It · Carr, Riggs & Ingram (accessed August 2026)
- What Happens in a Quality of Earnings Analysis? · Warren Averett (accessed August 2026)
- Sell-side Quality of Earnings Can Help Close a Business Sale · CLA (CliftonLarsonAllen) (accessed August 2026)
- Quality of Earnings (QoE) Report: What It Is (and Why It Matters in M&A) · Anders CPA (accessed August 2026)