Quality of Earnings

Definition

A Quality of Earnings (QofE) report is a financial analysis performed by an independent accounting firm during due diligence that validates the accuracy and sustainability of a company's reported earnings. It identifies adjustments to reported financials — normalizing for one-time items, owner-specific expenses, and accounting irregularities — to determine the company's true recurring earnings power.

Context

In Ep. 23, QofE work is discussed as part of the COI ecosystem. Chris Reilly notes that boutique banks frequently recommend QofE providers to their clients, meaning accounting firms receive more referrals than they generate. Some accounting firms have developed internal investment banking capabilities, creating potential conflicts — but many remain valuable referral sources in the COI network.

Related Terms

• Due Diligence — the broader investigation in which QofE sits
• Centers of Influence — accounting firms that provide QofE are Tier 2 COIs
• Confidential Information Memorandum — the CIM provides initial financials that QofE validates