QoE vs audit, explained simply
A company can apply every accounting rule correctly and still report earnings that will not recur. A gain on the sale of equipment is properly recorded and audited, yet a buyer should not capitalize it at a multiple.
The audit looks backward at compliance. The QoE looks forward at earnings power.
Audit and QoE compared
IllustrativeThe two engagements answer different questions for different users.
Side by side
| Audit | Quality of earnings | |
|---|---|---|
| Purpose | Opinion on fair presentation | Sustainable earnings for a transaction |
| Standards | AU-C (AICPA); PCAOB for public companies | Consulting engagement; no single standard |
| Assurance | Reasonable assurance | None; analysis and findings |
| Period | Usually one fiscal year | Two to three years plus LTM, by month |
| Adjustments | Correct departures from the framework | Also remove one-off items and normalize owner costs, even where properly recorded |
Worked example
Alder Creek has a clean audit opinion for 2025. The $0.6 million gain on the equipment sale was recorded correctly, so the audit raises no exception. The QoE still removes it from EBITDA, because the gain will not recur and should not be capitalized at 8.0x.
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Why it matters in a deal
Audited statements are not a substitute for diligence. They confirm that the past was reported correctly but do not identify the earnings a buyer should pay for.
Red flags
- Price set on audited figures alone
- Material differences between audited results and monthly management accounts