If you're thinking about buying a business whose books don't match its tax returns, you should stop thinking about buying it. Gigantic red flag and gigantic audit risk.

Look at the cash balance per the following: the financial balance sheet, the statement of cash flows, the bank statements, and (if available or required) per the tax return's balance sheet. Depending on the size of the business and whether a corp. there will even be a reconciliation of book to tax income filed with the tax return. Beginning and ending cash balance for the year should match on all statements. That's a simple check.



The difference between accrual and cash basis accounting is simply timing. This is what the statement of cash flows proves and is the reconciliation of cash in/cash out for accrual basis accounting.


Additionally, the business should be able to ask their tax accountant for book to tax Reconciliations if not required to file with the tax return.


QofE is to strip out non ordinary and unusual accounting practices, i.e. to prove out the quality and reliability of the numbers reported and to bring the financials into compliance with GAAP (or whatever the required basis of accounting is)


As long as you can bridge tax to book, you should be OK.