What does a quality of earnings review actually test?
A quality of earnings review tests whether reported profit is recurring, transferable and actually collected in cash. The most precise published description of the work comes not from the accounting profession but from a federal lending rule that is published and takes effect on 1 October 2026: SBA Standard Operating Procedure 50 10 8.1, Appendix 15, Credit Standards, defines a quality of earnings analysis as “a financial due diligence report that examines the reliability, sustainability, and accuracy of a business’s historical and projected earnings,” and requires that the report “reconcile the business’s accountant-prepared financial statements, tax returns, internal financial statements, and IRS transcript data to produce a normalized, adjusted earnings figure that reflects recurring, arm’s-length operations.” That sentence contains the three moves that separate this work from a careful reading of the statements: reconciliation across independent sources, normalization, and a test of whether the transactions were at arm’s length.
The same paragraph names the adjustments the report must surface: “all add-backs and adjustments to the seller’s reported earnings, including non-recurring revenue or expenses, above- or below-market owner compensation, related-party transactions, deferred maintenance, and accounting methodology differences between cash-basis and accrual-basis reporting.” Three of those five concern the owner rather than the business: what they paid themselves, what they transacted with entities they control, and what they chose not to spend. Revenue is then tested on a second axis, durability, because the SOP separately requires the report to “assess the quality and sustainability of the business’s revenue base, including customer concentration risk, contract continuity, and the likelihood that existing revenue and margins will be maintained post-sale.” Concentration sits inside the definition of earnings quality rather than beside it; what it means elsewhere in a diligence program is covered at Commercial & customer diligence.
One thing buyers associate with the work is absent from that federal list. Working capital appears nowhere in the SOP’s required contents, because it is settled elsewhere: the normalized target, and the mechanism that trues it up after closing, live in the purchase agreement rather than in a lender’s credit file. A buy-side review can be scoped to develop the evidence for that target, and many are, but no external rule requires it. See Quality of earnings for the mechanism and The letter of intent for the point at which it usually gets fixed.
How is a quality of earnings report different from an audit?
They are performed under different bodies of professional standards, and every practical difference follows from that. An audit is conducted under generally accepted auditing standards, issued by the AICPA’s Auditing Standards Board and codified into AU-C sections. AU-C section 200 states at .15 that “[t]he auditor must be independent of the entity when performing an engagement in accordance with GAAS,” and that where the two narrow exceptions do not apply “the auditor is precluded from issuing a report under GAAS.” AU-C section 700, Forming an Opinion and Reporting on Financial Statements, effective for audits of financial statements for periods ending on or after 15 December 2021, sets the objectives at .09: to “[f]orm an opinion on the financial statements based on an evaluation of the audit evidence obtained” and to “[e]xpress clearly the opinion on the financial statements through a written report.” An audit is a conclusion about someone else’s statements, reached by someone required to be independent of them, published in a prescribed form.
A quality of earnings review is ordinarily none of those things. It is a consulting engagement under AICPA CS section 100, Consulting Services: Definitions and Standards, effective for engagements accepted on or after 1 January 1992 and revised in January 2015. Paragraph .02 draws the line: “In an attest service, the practitioner expresses a conclusion about the reliability of a written assertion that is the responsibility of another party, the asserter. In a consulting service, the practitioner develops the findings, conclusions, and recommendations presented.” Paragraph .05 names the category an acquisition review falls into, “Transaction services,” whose examples include “analysis of a potential merger or acquisition,” and its footnote 1 completes the boundary by excluding from consulting services anything “subject to other AICPA professional standards such as Statements on Auditing Standards (SASs), Statements on Standards for Attestation Engagements (SSAEs), or Statements on Standards for Accounting and Review Services (SSARSs).”
Assurance is the word most often misused here, and the attestation standards define it narrowly enough to settle the question. The AT-C Glossary defines an attestation engagement as “[a]n engagement performed under the attestation standards” and separates its types by the assurance obtained: an examination obtains “reasonable assurance,” a review “limited assurance.” A consulting engagement is outside that framework and produces neither. The ceiling deserves the same accuracy, since AU-C section 200 defines reasonable assurance, in the context of an audit, as “a high, but not absolute, level of assurance.” Neither engagement substitutes for the other, and a clean audit opinion says nothing about whether owner compensation is at market, whether a customer is about to leave, or whether a cost the current owner absorbs personally becomes a line item after closing.
Who performs a quality of earnings review, and do they have to be a licensed CPA?
No accounting license is required for the work itself, and in practice it is done by transaction advisory groups inside accounting firms and by independent financial professionals. The model law the state boards work from reserves licensing for attest services, and a quality of earnings review is not one of them. The Uniform Accountancy Act, Ninth Edition, issued July 2025 by the National Association of State Boards of Accountancy and the AICPA, defines “attest” at Section 3(b) to mean “any audit or other engagement to be performed in accordance with the Statements on Auditing Standards (SAS),” together with financial statement reviews under the SSARSs, examinations of prospective financial information under the attestation standards, engagements performed under the standards of the Public Company Accounting Oversight Board, and other examination, review or agreed-upon procedures engagements under the attestation standards. Its summary of the key features of the Act then states the consequence: “[a]nyone, whether licensed or not, may offer and perform any other kind of accounting service, including tax services, management advisory services, and the preparation of financial statements as permitted under Section 14(a).”
Two qualifications belong with that. The Uniform Accountancy Act is a model statute and is not law by its own force anywhere; what is restricted in a particular state is a question of that state’s own accountancy act, decided by its board of accountancy and its courts. Running the other way, CS section 100 applies “to any AICPA member holding out as a CPA while providing consulting services,” so when a CPA firm does the work, the consulting standards and the Code of Professional Conduct bind it even though no license was required for the engagement.
Where a lender is involved, the identity of the client can be prescribed even when the credential is not. SBA SOP 50 10 8.1, Appendix 15, Credit Standards, under “Quality of Earnings,” requires from 1 October 2026 that the report “be performed by an independent, experienced financial professional” and “be conducted for the benefit of the Lender,” and that “[a]s the QoE is part of the financial due diligence of the transaction, the report may not be prepared by or for the borrower or seller.” That rule regulates who the report is for, not what its author is accredited in. The contrast sits in the same appendix: for the separate business valuation, a “Qualified Source” must hold one of five named accreditations. There is no equivalent list for the quality of earnings provider.
What is a proof of cash in a quality of earnings review?
A proof of cash reconstructs what actually moved through the bank and compares it against what the income statement and the tax return say happened. SBA SOP 50 10 8.1, Appendix 15, Credit Standards, defines the term for its own purposes and, from 1 October 2026, requires it: “a Cash Proof is a financial analysis that reconstructs cash receipts and disbursements by reconciling bank statement data to the income statement and tax return for each period under review.” It states the purpose — the analysis “is designed to identify discrepancies in income and undisclosed expenses” — and fixes the period, requiring that it “be performed on both a trailing 12-month basis and the last two fiscal years.”
The technique matters in owner-operated companies because it leans on records the seller did not prepare: bank statements come from a third party with no stake in the sale, and reconciling them to internal statements, tax returns and IRS transcript data converts a question about representations into a question about whether independent records agree. Two symmetrical problems surface here, and they are not equivalent. Undisclosed expenses are what the rule names. Unreported revenue runs the other way and a proof of cash cannot cure it, since the reconciliation shows what was deposited and the return shows what was declared. What either finding means legally is a question for the buyer’s own counsel and tax adviser, not for a diligence provider or for this Institute.
Does an SBA 7(a) loan require a quality of earnings report?
From 1 October 2026, on some acquisitions, yes. SBA Standard Operating Procedure 50 10 8.1, Lender and Development Company Loan Programs, was issued by SBA Information Notice 5000-880695, published 14 August 2026, and takes effect on 1 October 2026 for all applications issued an SBA loan number on or after that date. Appendix 15, Credit Standards, provides under “Quality of Earnings” that “[f]or Business Expansion and Initial Acquisition transactions where the Purchase Price as defined in Paragraph A.1 is equal to or greater than $3 million, the Lender must also obtain a Quality of Earnings (QoE) in addition to the required Business Valuation,” measured “before the application of buyer equity, seller debt, or other financing sources.” Two of the four categories are excluded: “Owner Buyout and ESOP & Cooperative transactions are not subject to the QoE requirement.”
The requirement has consequences because the SOP ties the report to the loan amount rather than parking it in a file. Appendix 15 states that “[t]he Lender must use the earnings from the QoE in the Debt Service Coverage (DSC) determination,” and provides in the same appendix, at Section A, that where a QoE report is required “the Lender must use the report’s findings to calculate the Debt Service Coverage” and that “[i]f that Debt Service Coverage does not support the business valuation and proposed debt structure, the loan amount must be reduced accordingly.” An add-back that does not survive the review lowers normalized earnings, which lowers coverage, which lowers what can be borrowed. That chain is described from the financing side at Acquisition financing.
Until 1 October 2026 the position is different, and this is the position an application made today is in. The version in force now, SOP 50 10 8, effective 1 June 2025, contains no quality of earnings requirement at all; what it requires for a change of ownership is a business valuation meeting Section B, Chapter 1, Paragraph C.3.d.v, together with lender verification that the financial information the valuation relied on agrees with the seller’s IRS transcripts. Neither version requires anything of a buyer who is not borrowing under the program, and neither says a report of this kind is sufficient diligence. The SOP is a lender’s underwriting manual, not a buyer’s checklist.
What can a quality of earnings report not tell a buyer?
It cannot say the financial statements are right, because nobody performing it has undertaken to say so. That conclusion belongs to an independent auditor issuing an opinion under AU-C section 700; a consulting engagement under CS section 100 produces findings developed by the practitioner, not a conclusion about the reliability of an assertion made by someone else. The absence of an audit opinion is not a softer audit opinion. It also cannot say what the business is worth: normalized earnings are an input to a valuation and are not one, and under SOP 50 10 8.1 the two are separate deliverables. This Institute publishes no multiple, no range and no valuation of any company; how private-company pricing is built is covered at Valuation & multiples.
It also cannot tell a reader whether the report in front of them examined the things they care about, unless they read the scope. CS section 100.07 requires only an understanding about “the nature, scope, and limitations of services to be performed,” and .08 is explicit that it “may limit the practitioner’s effort with regard to gathering relevant data” and that the practitioner “is not required to decline or withdraw” when the agreed scope includes such limitations. A narrow engagement is not a defective one, and the narrowness appears in the scope section rather than in the findings. Nor can any such report say whether the earnings will continue: the SOP asks its provider only for an assessment of “the likelihood that existing revenue and margins will be maintained post-sale.” Every standard, statute and lending rule cited on this page was read in a primary source on 15 September 2026, and SBA rules change on published effective dates, so check the version in force before relying on any of it.