AUP vs. QofE Reports in Business Acquisitions

Could Agreed-Upon Procedures (AUPs) serve the purpose of a Quality of Earnings (QofE) report for certain business acquisitions? 

Buyers engaging in or evaluating potential transactions, mergers, or acquisitions (M&A) need to assess the true value of a business’s assets, liabilities, and intellectual property. Proper due diligence can be used to pinpoint synergies among entities, offer transparency into a company’s tax position, uncover tax benefits and liabilities, and elevate stakeholder confidence. While bankers and attorneys frequently default to QofE reports, AUPs can be a suitable and, in many cases, more favorable alternative for certain M&A transactions. 

AUP engagements are conducted by qualified CPAs, verifying important aspects of a transaction or identifying specific problems that require discussions between buyer and seller. Afterward, the buyer is presented with a report outlining findings along with the procedures performed to derive that data. Buyers can then draw their own conclusions based on that analysis. 

AUPs support many asset or stock purchases that don’t require a comprehensive QofE report by confirming certain aspects of the deal or uncovering potential red flags and giving buyers increased comfort in the reasons they have chosen to purchase from the seller. Buyers using AUPs are given the flexibility to target a broad range of financial and nonfinancial information depending on what is most important to them. This may include net working capital, revenue contracts, and internal controls, accounts receivable quality, Generally Accepted Accounting Principles application, payroll, overtime—even tax compliance and/or exposures. 

AUP engagements may be a more cost-efficient alternative to the full QofE report given the ability to target only those procedures most important to you. Buyers appreciate that cost benefit along with the freedom to narrow findings around specific strategies, whether evaluating a contractor for major work, purchasing subsidiaries, deciding whether to use a vendor, or offering an advisory alternative through buy-side due diligence procedures. 

AUPs are particularly effective for mergers and acquisitions when the transaction involves a strategic versus a financial buyer. Beyond this, they are well suited for parties already in a relationship with the target company versus transactions among two entities that might not know much about one another. Whereas a private equity firm might not choose an AUP, a smaller, more closely held acquisition or a buyer in need of SBA loan backing might. Keep in mind, though, that while an AUP can be an effective substitute for a QofE, an effective due diligence process also includes tax inquiries and review. 

How We Help 

AAFCPAs works closely with clients to provide greater flexibility through AUP engagements. We develop and tailor procedures to best suit a buyer’s specific business or transactional needs. This might include recalculation of net working capital and EBIDTA or a focus on revenue and accounts receivable, current assets and liabilities, payroll, inventory, cost of sales, or cut-off and completeness testing procedures to pinpoint unrecorded liabilities. In addition to AUPs, AAFCPAs’ Business Transaction Advisory Practice helps clients make informed decisions and execute transactions through all stages of the deal cycle. 

If you have questions, please contact Destiny J. Flood, CPA, Commercial Partner, Outsourced Accounting & Finance at 774.512.4151 or dflood@nullaafcpa.com, Janice O’Reilly, CPA, CGMA, Partner at 774.512.9046 or joreilly@nullaafcpa.com, Richard Weiner, CPA, MST, CM&AA, Tax Partner at 774.512.4078 or rweiner@nullaafcpa.com—or your AAFCPAs Partner.