Page 16 - NBIZ Magazine August 2023

What is a
QofE

and Which Business Owners Need One?

By Patrick Ungashick

frequent question we hear from business and reliable, while others may be subject to manipula-
owners contemplating a sale of their company is tion or distortion. Therefore, evaluating the quality of
“What is a Quality of Earnings (QofE) study?” earnings helps potential buyers better understand a
A Owners are asking because it has become company's underlying economic reality and make more
increasingly common that potential sellers are advised to informed investment decisions.
get a QofE study as part of their preparations. This article Several factors can influence a company’s quality
explains the concept of quality of earnings, shows how of earnings:
a QofE study is different from an audit, and highlights
the significant advantages that business owners create by Revenue Recognition: The timing and accuracy of
securing a QofE study before launching a process to sell revenue recognition are crucial. Companies should follow
their business. appropriate accounting standards and policies to recog-
nize revenue when it is earned and realizable. Aggressive
What is the Quality of Earnings About? revenue recognition practices or manipulations can
Quality of earnings (QofE) refers to the extent to which a inflate earnings artificially.
company's reported earnings accurately reflect its true finan-
cial performance and the sustainability of its earnings over Expense Recognition: Similar to revenue recognition,
time. It is a measure used by buyers to assess the reliability expenses should be recognized in the appropriate period
and integrity of a company's financial statements. and matched with the related revenue. Delaying or manip-
The concept of QofE recognizes that not all earnings ulating expenses can boost earnings in the short term but
are created equal. Some earnings may be more sustainable may not reflect the true cost of generating revenue.

16 NBIZ ■ August 2023