Normalise reported EBITDA by identifying and testing non-recurring and non-operating add-backs.
Finance & Banking
Quality of Earnings Analysis and Red Flags of Aggressive Accounting
Learn to normalise EBITDA, test revenue recognition and spot the red flags of aggressive accounting that inflate earnings before a deal, loan or investment decision is made.
🗓️Duration5 training days
📚Content4 modules · 8 sessions
🎓On completionAccredited attendance certificate
About the programme
Course Overview
Reported profit is an opinion shaped by accounting choices, and a quality of earnings review exists to test how far that opinion can be trusted before a transaction, loan or investment closes. This course works through the full toolkit: normalising EBITDA by identifying and evidencing add-backs, testing revenue recognition against contract terms and shipping records, and recognising the classic red flags of aggressive accounting such as channel stuffing, bill-and-hold arrangements, capitalised costs that should have been expensed, and cookie jar reserves built to smooth future results. Participants also learn to trace off-balance-sheet financing and related party transactions, reconcile net income to operating cash flow using accruals-based indicators, and calculate a normalised working capital target for a sale and purchase agreement. Each technique is grounded in the documents a due diligence team actually receives: trial balances, contracts, ageing schedules and board minutes. The course closes with structuring a quality of earnings report itself, building an EBITDA bridge that a counterparty can follow, and presenting findings with materiality thresholds that support price or warranty negotiations rather than vague concerns.
Expected Learning Outcomes
Detect premature or manipulated revenue recognition using contract and shipping documentation.
Identify channel stuffing, bill-and-hold and contract modification practices that distort reported sales.
Test capitalisation policies and provisioning levels for signs of aggressive or opportunistic accounting.
Trace off-balance-sheet financing and related party transactions that obscure a company's true position.
Reconcile net income to operating cash flow and apply accruals-based earnings quality indicators.
Structure a quality of earnings report with a defensible EBITDA bridge and working capital adjustment.
Who Should Attend
Transaction services and financial due diligence professionals supporting mergers and acquisitions.
Corporate development staff assessing acquisition targets before submitting a binding offer.
Private equity and credit fund analysts screening investment opportunities for accounting risk.
Lenders and credit officers assessing borrower financial statements before underwriting facilities.
Internal audit and forensic accounting staff investigating suspected earnings manipulation.
Equity research analysts testing the sustainability of a covered company's reported earnings.
Course Modules
Select any module to see its sessions and points.
01Foundations of Quality of Earnings Analysis
2 sessions · 8 points
Session 1Purpose and Scope of a Quality of Earnings Review
- Define the objectives of a quality of earnings review within a broader financial due diligence engagement.
- Distinguish quality of earnings analysis from a statutory audit and from a full scope due diligence review.
- Map the data request list needed to support a quality of earnings review, including trial balances and contracts.
- Identify the key stakeholders who rely on quality of earnings findings, from deal teams to lenders.
Session 2Normalising EBITDA and Testing Add-Backs
- Normalise reported EBITDA by removing non-recurring, non-operating and owner-specific items.
- Test each proposed EBITDA add-back against supporting documentation before accepting it into the adjusted figure.
- Recalculate run-rate EBITDA for recent acquisitions, disposals or major contract wins and losses.
- Build a bridge from reported net income to adjusted EBITDA that a counterparty can follow line by line.
02Revenue Recognition Red Flags
2 sessions · 8 points
Session 1Detecting Premature and Manipulated Revenue Recognition
- Test revenue recognition timing against contract terms and the relevant performance obligations under IFRS 15.
- Identify premature revenue recognition through sample testing of shipping documents and acceptance records.
- Analyse the relationship between revenue growth and accounts receivable growth to flag possible overstatement.
- Recalculate percentage-of-completion estimates on long-term contracts against underlying cost-to-complete data.
Session 2Channel Stuffing, Bill-and-Hold and Contract Modifications
- Identify channel stuffing by comparing period-end sales spikes with subsequent period returns and credit notes.
- Detect bill-and-hold arrangements that recognise revenue before the customer has taken control of goods.
- Assess side letters and verbal contract modifications that alter the substance of recognised revenue.
- Test sales cut-off around period end using shipping and delivery evidence rather than invoice dates alone.
03Expense, Reserve and Balance Sheet Manipulation
2 sessions · 8 points
Session 1Capitalisation Versus Expensing and Cookie Jar Reserves
- Distinguish costs that meet capitalisation criteria from costs that should be expensed as incurred.
- Identify capitalised software, development and marketing costs that inflate reported profitability.
- Test provisions and reserves for evidence of cookie jar accounting used to smooth future earnings.
- Recalculate bad debt and warranty provisions against historical loss experience to test adequacy.
Session 2Off-Balance-Sheet Financing and Related Party Transactions
- Map off-balance-sheet arrangements, including operating leases before capitalisation and special purpose entities.
- Assess related party transactions for pricing that differs from arm's length market terms.
- Trace guarantees, factoring arrangements and supply chain financing that shift debt off the reported balance sheet.
- Evaluate disclosure notes for contingent liabilities that management has not reflected in recognised provisions.
04Cash Flow Analysis and Due Diligence Reporting
2 sessions · 8 points
Session 1Reconciling Earnings to Operating Cash Flow
- Reconcile net income to operating cash flow and quantify the accruals component of reported earnings.
- Apply an accruals ratio to flag companies where earnings substantially exceed operating cash generation.
- Analyse free cash flow conversion trends over multiple periods to test earnings sustainability.
- Investigate divergences between reported profit growth and cash tax payments for inconsistencies.
Session 2Writing the Quality of Earnings Report and Working Capital Adjustment
- Calculate a normalised working capital target and quantify the adjustment required at completion.
- Draft a quality of earnings report structure covering scope, findings, adjusted EBITDA bridge and net debt.
- Present red flag findings with materiality thresholds and recommended purchase price or warranty responses.
- Prepare a findings summary that links each adjustment back to supporting evidence for negotiation use.
What the participant receives
4 course modules
A structured syllabus
8 training sessions
across 5 days
32 detailed points
Applied, detailed content
Accredited attendance certificate
On completing the programme
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