During our buy-side Quality of Earnings review, the auditor is adjusting our revenue downward by moving completed milestone billings into deferred revenue under percentage-of-completion rules, cutting our TTM EBITDA. How do we defend our historical revenue recognition methodology?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings auditors frequently attack milestone billings in project-based or service companies. Their objective is to find unearned revenue and shift revenue out of the trailing twelve months, which reduces your baseline EBITDA and drops your purchase price.

You must defend your position using concrete operational proof of delivery rather than abstract accounting theory. The auditor is attempting to apply ASC 606 standards by asserting that performance obligations were not satisfied when milestone invoices were generated.

To counter this, produce an audit trail matching each invoice directly to signed client milestone approvals, time logs, and delivered project phases. If your contract terms define milestones as non-refundable payments tied to specific deliverables that have been accepted by the customer, gather those customer sign-offs immediately. Show that the economic benefit and risk of the deliverable transferred cleanly to the client before the billing date.

Second, analyze the offsetting costs. If the auditor insists on deferring revenue into future periods, they must also defer the associated labor and subcontractor costs incurred to hit that milestone. Auditors often defer revenue while leaving project fulfillment expenses in the historical period, artificially suppressing historical gross margin.

Use an IDS session with your Chief Financial Officer and transaction CPA to rebuild the project margin schedules. If percentage-of-completion accounting is genuinely required, recalculate the entire three-year historical period under that exact method. A standardized application often reveals revenue shifting forward from earlier quarters, restoring your trailing twelve-month adjusted EBITDA number.