During the buy-side Quality of Earnings audit, the buyer's accounting team reclassified our Work In Progress and unbilled revenue as high-risk accruals, shaving four hundred thousand dollars off adjusted EBITDA. How do we defend our revenue recognition methodology?

Question

Tyler Smith · Accepted Answer

Buy-side Quality of Earnings teams routinely target Work In Progress (WIP) and unbilled revenue accruals because percentage-of-completion accounting is prone to subjective management estimates. If the auditors reclassify unbilled revenue as premature or uncollectible, they strip the associated revenue from the historical period, drop your EBITDA, and simultaneously reduce your closing cash by shifting working capital out of your favor.

To defend your revenue recognition and restore your EBITDA, you must replace subjective estimations with verifiable milestone proof points:

- Produce historical retrospective conversion data. Run a comprehensive historical audit of the prior twenty-four to thirty-six months comparing every unbilled revenue and WIP accrual against the subsequent realized cash collections. If you can prove that 98 percent of historical unbilled balances converted into collected cash without write-downs or dispute credits, you destroy the auditor premise that your accruals are high-risk.
- Align project accounting with contractual milestones. Present the underlying master services agreements and statements of work to show that billing triggers are tied to objective deliverables rather than arbitrary calendar dates. Provide time-tracking logs, ticket completions, and formal client sign-off notices verifying that the services were fully rendered during the period.
- Standardize project tracking on your Scorecard. Demonstrate to the buyer that WIP is not a year-end accounting adjustment, but an operational metric tracked weekly in Level 10 Meetings. Show that project managers monitor project velocity, labor burn, and completion percentages in real time.

If the buyer continues to challenge specific WIP projects, do not accept a permanent EBITDA cut. Carve those specific contracts out of the historical calculation and establish a dollar-for-dollar cash escrow that releases to you immediately as each contested contract is billed and collected post-close.