What a quality of earnings report actually tests
It asks whether the earnings buyers are valuing are repeatable and supported.
A quality of earnings review is financial due diligence focused on the composition, consistency, and sustainability of earnings.
It typically begins with reported results and builds a bridge to normalized earnings before interest, taxes, depreciation, and amortization (EBITDA). The provider tests the underlying records, studies monthly trends, and evaluates proposed adjustments. It may also examine revenue by customer and product, gross-margin movement, seasonality, unusual transactions, and the timing of revenue and expenses.
The word “quality” does not mean good or bad in the abstract. It asks practical questions. How much revenue is recurring or repeatable? Are margins stable? Does one customer explain a large share of growth? Were expenses deferred or unusually low? Do earnings convert to cash? What level of working capital does the business normally require?
This work is different from a financial statement audit. An audit is designed to provide assurance on financial statements under an applicable reporting framework. A quality of earnings engagement is transaction-focused and is tailored to the questions relevant to a buyer or seller. Scope and procedures vary.
For an owner, the final report matters less than the underlying discipline: one reconciled set of numbers, clear definitions, documented adjustments, and explanations that remain consistent across management presentations, buyer models, and legal documents.