What a quality of earnings report is, and why a lender will not take yours.

The definition

A quality of earnings report is an independent analysis of what a business actually earns, as distinct from what it reports. A firm of certified public accountants traces reported revenue and expenses to bank records, tax filings and source documents, identifies the items that are non-recurring, nonoperating or personal, and produces a normalized earnings figure, usually adjusted earnings before interest, taxes, depreciation and amortization, that a buyer or a lender can underwrite. It also reads the quality of the revenue behind that figure: customer concentration, retention, contract terms and the working capital the business needs to run.

In a national certified public accounting firm’s words, a quality of earnings study is not an audit; it is a consulting engagement, which gives it flexibility of scope. An audit forms an opinion on whether financial statements are fairly presented under an accounting framework. A quality of earnings report asks a different question: whether the earnings are real, recurring and supported, and what a buyer can rely on going forward.

What the other words mean

• Compilation. A certified public accountant presents the financial statements from the company’s records and provides no assurance on them.
• Review. A certified public accountant provides limited assurance that the statements contain no material misstatement. The certified public accountant must be independent.
• Audit. A certified public accountant provides high, though not absolute, assurance and issues an opinion. The certified public accountant must be independent.
• Quality of earnings. A consulting engagement under the AICPA’s Statement on Standards for Consulting Services, CS section 100, whose list of transaction services includes the analysis of a potential merger or acquisition and the preparation of information for obtaining financing. It is not an attestation engagement, and the words attest, assurance, examination and opinion do not apply to it unless the engagement letter provides for an agreed-upon procedures report, which is a different engagement with a different report.
• Business valuation. A conclusion of value, prepared by an accredited valuator. A quality of earnings report supplies the earnings the valuation rests on; it is not itself a valuation.

Independence under the AICPA code is required for attest work. For consulting work it is not, so the independence of a quality of earnings preparer is imposed by the party relying on the report: a buyer commissions the report from a firm that does not act for the seller, and a lender commissions it from a firm that acts for the lender alone.

The rule that changed on October 1, 2026

Under SBA Standard Operating Procedure 50 10 8.1, for a 7(a) loan that finances an initial acquisition or a business expansion where the business purchase price is $3 million or more, the lender must obtain a quality of earnings report in addition to the required business valuation. The threshold is measured before buyer equity, seller debt or any other financing is applied. The report must be performed by an independent, experienced financial professional and conducted for the benefit of the lender; it must not be prepared by or for the seller. A report the buyer commissioned may be used only after one of the lender’s approved vendors has reviewed it. The report must include a cash proof that reconstructs receipts and disbursements from bank statements to the income statement and the tax return, on a trailing twelve-month basis and for the last two fiscal years, and the lender must use the earnings it produces in the debt service coverage calculation. If those earnings do not support the price and the debt, the loan amount is reduced.

The rule is written for loans the government guarantees. It sets the lowest point at which any lender in the market is now required to commission one. Above that point the practice already runs ahead of the rule: practitioners estimate that at least nine in ten private-equity-backed deals use a sell-side report and about half of founder-led lower-middle-market sellers commission one, and GF Data’s record of 360 private equity transactions since the third quarter of 2024 shows sellers with a sell-side report averaging 7.4 times adjusted earnings against 7.0 times without. That is a correlation, concentrated in larger deals, and we do not read it as a promise.

Can software do it instead?

Software already does part of it. A national certified public accounting firm describes its transaction teams using AI to map trial balances, produce the first version of schedules, identify trends and anomalies, perform and review reconciliations, and draft the questions for management. The audit regulator’s own survey of the profession found generative AI in use for research, drafting and account reconciliations. The work of tracing is faster than it was.

What software cannot do is sign. Four facts decide that, and none of them is about capability.

• Licensure. In California, no person may practice public accountancy without a permit from the Board of Accountancy, and no person other than a licensee or a registered firm may use the title certified public accountant or any designation likely to be confused with it. A report issued by a certified public accountant means a licensed natural person or a registered firm took responsibility for it.
• Responsibility. The AICPA’s Professional Ethics Division states the rule plainly: whether the AI was built in-house or comes from a provider, the responsibility for the final work product rests with the certified public accountant, who must undertake only services they can complete competently and with due care, and who must treat the tool as an assistant rather than a substitute for judgment. The PCAOB’s staff found that generative AI output may not always be reliable, that it may be skewed or biased, and that human involvement remains essential to review it.
• Independence and liability. A lender relies on a report because a firm that is independent of the parties, carries professional liability for its work, and can be questioned by the credit committee stands behind it. Software holds no license and cannot sign an engagement letter.
• The rule itself. The SBA requires an independent, experienced financial professional, for the benefit of the lender. Buyer- and seller-prepared reports do not satisfy it, and a report prepared by anyone else must be reviewed by the lender’s own vendor.

The cost of getting this wrong has a published example. In 2025 a Big Four firm agreed to refund part of a government contract after a report it delivered was found to contain fabricated references and a fabricated quotation from a court judgment, with the use of a generative model disclosed only in the corrected version. The report was not financial analysis; the lesson is the same.

What it costs in time

A sell-side quality of earnings engagement runs four to eight weeks of fieldwork and six to eleven weeks to a final report, and the practitioners who do the work recommend commissioning it three to six months before going to market. Published planning ranges from advisors run from about $25,000 to $150,000 depending on size, complexity and the state of the books; those are ranges, not quotes, and the firm of certified public accountants prices the engagement.