Quality of earnings engagement letter: buy-side and sell-side scope
By Arthur Teboul, DokuTrak · Published
In brief
A quality of earnings engagement letter sets the scope of a QoE review of a deal target: the earnings, working capital and cash tests, the data the target provides, and who may rely on the report. It should say the work is consulting, not an audit, and carries no opinion.
The template: Quality of earnings engagement letter
Pick the buy-side or sell-side party block, tick the scope items you will perform and fill in each [placeholder]. Align the confidentiality clause with the deal NDA and have counsel review the template once.
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[Firm name] [Firm address] [Date] [Engaging party legal name] ([buyer / seller]) Attention: [Name, title] Re: Quality of earnings analysis of [Target legal name]
Dear [Name],
Parties and purpose
[Buy-side: You are considering the acquisition of (Target legal name) (the “Target”) and have asked us to analyze its earnings and working capital to support your diligence.] [Sell-side: You have asked us to analyze the earnings and working capital of (Target legal name) before you offer it for sale.]
Nature of our work
We will perform this engagement as a consulting service under the AICPA Statement on Standards for Consulting Services. We will not audit, review or compile any financial statements, and we will not express an opinion, a conclusion or any other assurance. We will rely on information provided by the Target’s management and will not verify it, except as described in the scope.
Scope
Covering the fiscal years ending [dates] and the trailing twelve months to [date], by month, we will: [ ] adjust reported EBITDA for owner compensation, one-time and out-of-period items; [ ] analyze revenue by customer, including concentration and cutoff; [ ] trend net working capital to support a peg; [ ] perform a proof of cash for [months]; [ ] list debt and debt-like items; [ ] identify tax filing gaps and exposures; [ ] summarize headcount and payroll.
Agreed-upon procedures(optional)
If you ask us to perform any procedure under the AICPA attestation standards, we will agree on it in a separate letter under AT-C 215.
Data the Target will provide
The Target will open the data room by [date] with: monthly trial balances and general ledger detail; bank statements for each proof-of-cash month; receivable and payable agings; payroll registers and a headcount roster; customer contracts, leases and debt agreements; federal and state tax returns and notices for open years; and, for an asset deal, the draft purchase price allocation. The Target will answer our questions within [number] business days.
Access to management
The Target’s CFO and controller will be available for interviews during [dates]. You will arrange that access through [deal contact].
Deliverables and timing
We will deliver a databook and a written report in draft by [date] and in final by [date]. These dates assume the data and access described above. Delays move the dates, and time spent waiting is billed.
Use of the report and third parties
The report is for your use in evaluating the transaction. You may share it with [lenders / investors / advisers] only after each signs our access letter, which confirms that it may not rely on the report or bring claims against us. Any reliance letter requires our separate written agreement.
Independence check(optional)
[We do not provide attest services to the Target.] / [We audit the Target; we have checked that this engagement is permitted under the AICPA independence rules and we will not assume any management responsibility for the Target.]
Confidentiality
We will keep all deal information confidential under the terms of [the NDA dated (date)], which this letter adopts, and use it only for this engagement.
Fees and a terminated deal
Our fee is [fixed amount for the scope ticked / hourly at (rates), capped at (amount)]. A retainer of [amount] is due on signing. If the transaction ends before we finish, we will bill work performed to that date, and the draft report will be released only after payment.
Limitation of liability(optional)
Our total liability for any claim relating to this engagement is limited to the fees paid to us under this letter, except where the law does not allow such a limit. We owe no duty to any third party who has not signed an access or reliance letter.
Governing law and disputes
This letter is governed by the laws of [state]. Any dispute about our services will first go to non-binding mediation in [city, state] before either party starts other proceedings.
Acceptance
Please countersign to confirm the scope and terms. We will request data room access once we receive your signature.
Regards, [Firm name] [Partner name], Transaction Advisory Signature: ____________________ Date: __________ Agreed for [Engaging party legal name]: [Officer name], [Title] Signature: ______________ Date: ________
A QoE is not an audit: name the basis
A quality of earnings report is an analysis of how much of a company’s reported earnings are recurring and supported by cash, prepared for a buyer, a seller or a lender in a deal. No auditing standard governs it. A CPA firm usually performs it as a consulting engagement under the AICPA consulting standards, CS 100 (AICPA Statement on Standards for Consulting Services No. 1 (CS section 100)).
CS 100 asks the practitioner to establish a written or oral understanding with the client about each party’s responsibilities and the nature, scope and limits of the work (AICPA Statement on Standards for Consulting Services No. 1 (CS section 100)). The letter is that understanding. It should also say plainly that the firm will not audit or review the numbers and will express no opinion.
Some buyers or lenders want a few tests done to attestation standards. Those can be scoped as agreed-upon procedures under AT-C 215, with their own letter terms and an independence requirement (AICPA SSAEs, AT-C 215 Agreed-Upon Procedures).
The scope menu, and who it is for
Buy-side and sell-side letters share a scope menu but differ on who hires the firm and who may rely on the report. Adjusted EBITDA is earnings before interest, taxes, depreciation and amortization, after removing items that will not recur under a new owner, such as the seller’s above-market salary. A sell-side QoE is one the seller commissions before going to market, to find issues first. A buy-side QoE is commissioned by the buyer during diligence. Tick the items you will do and price each one.
| Scope item | What the firm does | Data it needs |
|---|---|---|
| Adjusted EBITDA | Normalizes owner pay, one-time items and out-of-period entries | Monthly trial balances, general ledger detail |
| Revenue quality | Tests customer concentration, churn and cutoff | Sales by customer and month, customer contracts |
| Net working capital | Builds a monthly trend to support the peg | Receivable and payable agings, inventory listings |
| Proof of cash | Ties book revenue and expenses to bank activity | Bank statements for the months tested |
| Debt and debt-like items | Lists loans, leases, deferred revenue and accrued bonuses | Debt agreements, leases, payroll registers |
| Tax exposures | Flags filing gaps and sales or payroll tax risk | Tax returns and notices for the open years |
The data request: periods and turnaround
Proof of cash is a test that ties the revenue and expenses in the books to the deposits and payments on the bank statements, month by month. It is often the item that finds the biggest surprises, so ask for bank statements first. Deal timelines are short, so the letter should hold the target to dates. State the period up front, for example the last two fiscal years plus the trailing twelve months, monthly. Then list the data, give a data room date, and set a turnaround for follow-up questions.
Add a clause on what happens when data is late: the report date moves, and work spent waiting is billable. In an asset deal, both the buyer and the seller of a group of assets that makes up a trade or business file Form 8594 with the IRS (IRS, About Form 8594, Asset Acquisition Statement). Ask early for the draft purchase price allocation, so the tax exposure work uses the same numbers.
- Monthly trial balances and general ledger detail for the full period.
- Bank statements for every proof-of-cash month.
- Receivable and payable agings at each month end.
- Payroll registers and a headcount roster.
- Customer contracts, leases and debt agreements.
- Federal and state tax returns, with any notices, for the open years.
Reliance letters, independence and a dead deal
Lenders and investors often want to read the report. The letter should say it is for the engaging party only. Anyone else gets it only after signing an access letter. An access letter is a short agreement in which a third party accepts that it cannot rely on the report or sue the firm over it. A reliance letter is the stronger version, which a firm may agree to or refuse.
Check independence before you accept. CS 100 says consulting for an attest client does not by itself impair independence, but the firm must still follow the AICPA independence rules (AICPA Statement on Standards for Consulting Services No. 1 (CS section 100)). If the firm audits the target, taking on management responsibilities for it would impair independence (AICPA Code of Professional Conduct, ET 1.295).
Finally, deals die. Write a break clause: work to date is billed at agreed rates, and the draft report is not released without payment.
Scope also tends to grow mid-deal, for example when the buyer’s lender adds questions about a customer contract. Say that added items need a written change, with a price, before the work starts. That keeps the fee tied to the menu the client ticked.
Questions people ask
Is a quality of earnings report an audit?
No. A QoE is usually a consulting engagement under the AICPA consulting standards, with no opinion on the financial statements (AICPA Statement on Standards for Consulting Services No. 1 (CS section 100)). The engagement letter should say so in plain words.
Can a lender rely on a buy-side QoE report?
Only on the terms the firm agrees to. A typical letter limits the report to the engaging party and lets others see it only after signing an access or reliance letter.
What data does the target have to provide for a QoE?
Usually monthly trial balances and ledger detail, bank statements for proof of cash, agings, payroll registers, contracts, leases, debt agreements and tax returns. The letter sets the period and the due date.
Can the firm that audits the target also do the QoE?
Possibly, but it must follow the AICPA independence rules and avoid management responsibilities for the target (AICPA Code of Professional Conduct, ET 1.295). A buyer may still prefer a firm with no tie to the target.
Sources
- AICPA Statement on Standards for Consulting Services No. 1 (CS section 100): Consulting engagements need a written or oral understanding of responsibilities, scope and limits, and consulting for an attest client must still follow independence rules.
- AICPA SSAEs, AT-C 215 Agreed-Upon Procedures: Agreed-upon procedures are attestation engagements under AT-C 215 with required letter terms and an independence requirement.
- AICPA Code of Professional Conduct, ET 1.295: Assuming a management responsibility for an attest client impairs independence.
- IRS, About Form 8594, Asset Acquisition Statement: Both the seller and the purchaser of a group of assets that makes up a trade or business use Form 8594.
About the author
Arthur Teboul (Founder, DokuTrak) is building DokuTrak after watching professionals lose hours chasing clients for documents over email. Arthur Teboul.
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How this page was made (methodology): it is built from the primary sources listed under Sources, and every rule and figure on it links to the source it comes from. Last updated October 25, 2026. Spotted an error or a rule that changed? Contact us.
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