Due Diligence – Quality of Earnings or Audit?

Audit (and review) reports (collectively, “attestation engagements or reports”) serve a purpose different than QoE/due diligence. Items that are correct based on GAAP may still create deal issues or valuation misinterpretations.

Attestation engagements do not focus on all issues that may be important to a buyer such as customer sales trends, cost structure, business developments, non-recurring events, and operating relationships. Additionally, attestation reports look solely over an annual period and do not show recent trends.

Buyers typically rely on most recent information, particularly, trailing 12-month data when determining values and underwriting. Lastly, auditors will typically only look at the numbers solely on an annual basis, while a QoE looks at numbers on a monthly basis, which provides a more refined accuracy.