Due Diligence Finance Interview Coach
This conversation was generated using Cook'd AI's career assistant and reviewed by Fallon Han from our editorial team for accuracy.
I'm a final-year undergraduate in the Netherlands and I'm preparing for transaction services interviews at Big Four firms. Please question me on due diligence work, QoE concepts, and spotting red flags in financial statements. I want you to assess my technical accuracy.
Absolutely. I will keep this process-oriented and treat it like a real transaction services screen.
First question: imagine you are reviewing a target's historical financials for a buy-side due diligence assignment. Walk me through the steps you would take to assess quality of earnings, and explain what you are trying to prove at each step.
I would start by understanding the business model, revenue streams, and reporting periods. Then I would compare monthly and yearly performance to find unusual trends, such as seasonality or one-off items. I would reconcile reported EBITDA to underlying EBITDA by removing non-recurring income and expenses, and I would focus on whether earnings are repeatable. I would also check working capital trends and compare the numbers to management's explanations and the external market context.
Good structure. You covered the main logic, but I want more precision.
A strong answer should explicitly mention:
- normalizing EBITDA for non-recurring, non-operational, and owner-related items
- analyzing revenue recognition and cutoff risk
- reviewing gross margin, SG&A, and balance sheet movements for consistency
- linking earnings quality to cash conversion and working capital behavior
Next question: what are the most common red flags in a target's financial statements that could indicate earnings are overstated or not sustainable?
Common red flags include rising receivables without a matching increase in cash, inventory growth faster than sales, and margins improving without a clear operational reason. I would also look for unusual related-party transactions, changes in accounting policies, and large manual journal entries. If management is consistently excluding many items from adjusted EBITDA, that can also be a warning sign.
That is directionally strong and commercially relevant. You are thinking like a diligence analyst.
What I liked:
- you linked receivables and inventory to real cash and sales behavior
- you flagged manual journals and related-party items, which are classic review areas
- you recognized that too many adjustments can undermine credibility
What to improve:
- say why each red flag matters in a transaction context
- distinguish between a timing issue and a structural earnings issue
- mention accruals, deferred revenue, and capex underinvestment if relevant
Final technical question: how would you explain the difference between EBITDA, adjusted EBITDA, and QoE to a client who is not technical?
EBITDA is earnings before interest, tax, depreciation, and amortization based on reported accounts. Adjusted EBITDA starts from EBITDA and removes items management or the advisor considers non-recurring or non-operational. QoE goes a step further and tests whether those adjustments are appropriate, whether earnings are normalized, and what level of earnings is likely to continue after the transaction.
Excellent. That is the right hierarchy.
Assessment report:
- Technical accuracy: strong
- Structure: strong
- Commercial judgment: good
- Areas to sharpen: be more explicit on cash conversion, revenue cutoff, and balance sheet anomalies
Interview-ready summary:
Your answers show a solid understanding of due diligence basics and QoE concepts. To reach top-tier Big Four level, you should speak more precisely about how statement movements support or contradict management's story. In particular, connect EBITDA quality to cash flow, working capital, and potential normalization adjustments.
If you want, I can now run a second round focused on a mini case with specific financial statement red flags.