The buy-side Quality of Earnings auditor is trying to reclassify our internal software development costs from capitalized software asset creation to standard operating expenses, which drops our EBITDA. How do we defend these capital expenditures during the QofE audit?

Question

Tyler Smith · Accepted Answer

When a buy-side Quality of Earnings auditor looks at your financials, their job is to find reasons to normalize your EBITDA downward. They will target any internal software development costs you have capitalized, arguing that these hours should have been expensed as standard operating costs. To defend this asset creation, you must provide rock-solid operational proof of what your team actually built.

Do not rely on vague timesheets. Instead, pull the records of your weekly Level 10 Meeting agendas and your quarterly Rocks. Use your EOS Accountability Chart to show that the developers in question have a clear seat dedicated solely to internal product architecture, not day-to-day client support.

You must demonstrate that these developers pass the GWC test (Get It, Want It, Capacity to Do It) specifically for software creation, and show that their output has generated a distinct, long-term asset that drives operating leverage.

Present your sprint logs, code repository commits, and project roadmaps tied directly to your V/TO (Vision/Traction Organizer). Show how these internal tools have automated workflows, cut administrative costs, and permanently improved your operating margins.

When you show the auditors that these development hours produced a discrete tool with a measurable return on investment, you transform a subjective accounting debate into an objective operational reality. This keeps your capitalized expenses on the balance sheet and protects your EBITDA valuation.