What Drives the Scope of a Quality of Earnings Engagement?

Why is there no single scope for a QoE?

Each quality of earnings engagement is tailored to the deal, the decisions it must support and the evidence available, so its cost follows the work required rather than a fixed package. Two acquisitions of similar value can need very different procedures because their accounting systems, business models and financing differ.

Start with the purpose: screening a target, approving an investment, supporting lender underwriting or negotiating price. Decide whether the work covers historical earnings only or also working capital, net debt and cash conversion. A narrow earnings review should not be mistaken for full financial due diligence just because both are called QoE.

When comparing proposals, use a common scope matrix listing entities, periods, workstreams, management access, report users and exclusions. Check whether findings will be supported by detailed schedules or only summarised. A fair comparison asks what evidence will be examined and which decisions the report can support.

How do deal size, entities and structure affect the work?

Deal size sets the context but does not on its own decide the workload. The number of entities, locations, business lines and the deal perimeter usually matter more. Multiple ledgers, currencies and intercompany balances must be reconciled before consolidated earnings and balance sheet positions can be analysed.

A single-entity business on one accounting system may still need significant work if its contracts are complex, while a group of several entities with orderly reporting may be analysed efficiently. Identify dormant companies, excluded operations, shared services and assets held outside the target so the scope matches what is being bought.

Carve-outs need extra attention to allocated costs, standalone staffing, shared contracts and opening working capital. Cross-border groups add accounting framework differences and currency translation. These affect both procedures and coordination with tax and legal advisers. Building a full standalone operating model is usually a separate assignment.

Why do data quality and the review period matter?

Data quality decides how much reconciliation is needed before analysis can be relied on, and the review period decides the volume of records. Longer periods reveal recurring items and seasonality, but only if the records are complete and comparable from one period to the next.

Useful inputs include monthly trial balances, general ledgers, financial statements, bank statements, sales listings and balance sheet schedules. Inconsistent account codes, unsupported opening balances and year-end entries that never reach monthly reports may need reconstruction. A large data room is not necessarily ready for analysis if the files do not reconcile.

Agree the historical years, the latest interim period and any trailing 12-month calculation. Note acquisitions, system changes or policy changes that break comparability. Agree whether later trading updates are included and when the cut-off falls, because adding months after reporting usually means fresh testing, not just replacing numbers.

How do add-backs and proof of cash expand the scope?

Complex add-backs increase the work when each needs transaction-level evidence, recurrence analysis or a replacement-cost assessment. Proof of cash adds procedures linking bank movements to the books. Both should be defined explicitly, because reviewing a management list of adjustments is very different from testing each one in detail.

For each material add-back, establish its nature, supporting documents, period and relationship to normal operations. Owner expenses, vacant roles, one-off projects and related-party arrangements need different evidence. Negative adjustments, missing accruals and recurring costs deserve equal attention, and buyer synergies stay separate from historical normalisation.

Proof of cash work grows with the number of bank accounts, payment gateways, currencies and transaction types. Agree whether it covers balance reconciliations, classification of all receipts and payments, matching collections to customers, or sample testing. The depth should follow the risks identified and the purpose of the report.

How do lender and SBA requirements affect the engagement?

Lender requirements can change the procedures, schedules, report format and who may rely on the report. For SBA-backed acquisitions in the US, the lender and the applicable SBA guidance may require a quality of earnings report for larger loans. Confirm the lender’s specific needs before the engagement starts.

Ask the lender which periods, schedules and procedures it expects, whether proof of cash is required, and whether it needs a reliance letter or a direct engagement. Different lenders apply SBA guidance differently, so do not assume one format satisfies every lender or every loan size.

Reliance terms, lender calls, responses to credit questions and update procedures between signing and closing all add work if they are not planned. Settle them in the engagement letter, together with who receives the report and whether a bring-down update will be needed before funding.

How does the timeline affect scope and effort?

The timetable affects how much work can be done and how it is staffed. A compressed deadline can require a larger team, staged reporting or a narrower scope, while delays in information extend the engagement. Agree key dates early and identify which open items could prevent a conclusion.

Plan the phases: scoping and data requests, data assessment, detailed analysis, management meetings and reporting. Agree turnaround times for information requests and who in management will answer questions. An early red-flag update can help the buyer decide whether to continue before the full report is ready.

If the deal timetable moves, revisit the scope rather than letting deadlines hide incomplete work. State clearly in the report which procedures were completed, which were limited and which questions remain open, so the buyer and lender understand the basis of the findings.

How can a buyer prepare to keep the engagement efficient?

A buyer can keep a quality of earnings engagement efficient by defining its key questions, obtaining clean monthly data early, confirming lender requirements upfront and nominating someone at the target to answer questions quickly. Most delays and scope increases come from missing information, changing deal terms or late lender requests.

Before the engagement starts, ask the seller for monthly trial balances, ledgers, bank statements, payroll summaries, sales by customer and product, and any management adjustments already proposed. Check that the monthly figures reconcile to the annual accounts. Early access to these files allows the team to identify problems quickly.

Agree the entities, periods and workstreams in writing, and confirm whether proof of cash, lender reliance or a bring-down update will be required. Changes made midway, such as adding an entity or extending the period, usually mean additional work and a revised timetable.

Keep communication structured. A shared request list with owners and due dates, regular status calls and an issues tracker help everyone see what is outstanding. Clear, timely responses from management let the team focus on analysis instead of chasing information.

Agree at the outset what the final report will look like: the schedules, the level of detail and who will receive it. A sample table of contents or an outline of the key schedules helps align expectations between the buyer, lender and the diligence team before fieldwork begins.

After the report is issued, plan how it will be used. Share the findings with legal advisers for the purchase agreement, with the lender for credit approval, and with the internal team that will integrate the business. A report that is understood and acted upon delivers far more value than one simply filed away.

Which factors drive the scope of a QoE engagement?