United States

Financial statement audits versus quality of earnings analysis

WHITE PAPER  | 

Within a transaction, gaining confidence in the quality of a target’s financial information and an understanding of historical trends is critical in the decision. Both of these considerations can materially influence forward-looking analyses as well as the target’s perceived value.

With this in mind, the buyer or seller may consider an audit or a quality of earnings analysis of the target’s financial statements. While the audit and the quality of earnings analysis are different engagements, they are complementary, and it is important to understand their similarities and differences to make an informed decision during the acquisition process.

Read our white paper to learn more about the two engagements, and how they compare, including:

Importance of a financial statement audit: An audit provides an opinion that the financial statements present, in all material respects, the company’s financial position in conformity with applicable financial reporting frameworks such as U.S. GAAP.

Importance of quality of earnings: A quality of earnings analysis provides insight into other significant issues that an audit does not clearly identify and could be of significant interest to a buyer or seller.

Primary differences between audits and quality of earnings: While the audit is focused on a company’s conformity with a financial reporting framework, the quality of earnings analysis helps to evaluate and better understand a company’s historical financial performance and trends, working capital considerations, and key policies and accounting processes.

When buyers and sellers discuss the possibility of a transaction, they must understand the similarities and differences between audited financial statements and a quality of earning analysis and how both can play a crucial role in the overall transaction process.

RSM CONTRIBUTORS


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