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Doing the Right Thing: How to Properly Comply With Professional Standards in Business Valuation Matters

Published Date:
Apr 15, 2014

One of the most prevalent issues a CPA will confront when performing valuation services is whether he or she has properly understood and applied our professional standards throughout the process. A CPA who performs any valuation is subject to the AICPA’s Statement on Standards for Valuation Services 1 (SSVS), which was released in 2007, but there may be some who are unaware that these guidelines exist.

I recently saw an example of how professionals can fall short in their compliance with the rules. While reviewing valuation-related documents, I found that a letter addressed to an attorney about a valuation matter was being referred to as an “informal valuation.” Under SSVS 1, the only allowable valuations are a “valuation engagement” or a “calculation engagement,” which result in a conclusion of value or a calculated value. There are no informal valuations allowed. Once you provide a figure to a client and say that figure represents your opinion, determination, approximation, indication, conclusion or range of value (I have seen them all), you have, in fact, provided a valuation report. The only question that remains is whether you’ve provided such a report that’s in compliance with our professional standards.

Understanding the SSVS

The SSVS has two key components: development provisions and reporting provisions. Just like they sound, the development provisions provide rules about the types of engagements you can perform, financial and nonfinancial information to consider, the appropriate valuation approaches and methods, events that may happen after the valuation date, how to arrive at your valuation conclusion, and the file documentation that is required. There are three types of reports that you can provide to a client (detailed, summary or calculation), and each of them requires different levels of information and disclosures in different formats. The guidelines provide a detailed description of what must be included for each type of report, such as report layout, key sections and key disclosures.

Some services and scenarios are excluded from the SSVS. These include economic damage calculations; simple mechanical (i.e., numerical) calculations that require no professional judgment or valuation approaches or methods, and are very narrow in their interpretation and application; internal-use assignments for those CPAs not in public accounting; possible overriding governmental, judicial or accounting authorities; use of values provided by the client or a third party (e.g., use of a real estate appraisal); and traditional audit, review and compilation engagements.

As the SSVS says, “Performing a valuation engagement with professional competence involves special knowledge and skill.” Obtaining the AICPA’s Accredited in Business Valuation (ABV) credential is certainly one means of demonstrating that, as a CPA, you have passed the exam that is offered by your own governing body. Having passed the American Society of Appraisers’ series of exams to obtain an ASA credential or even the Certified Valuation Analyst exams, also indicates an effort to demonstrate specialized valuation knowledge.

Whether or not you possess any of these designations, as a CPA, if you’re providing valuation services, you must follow the SSVS.  If you don’t, your risks include your professional reputation, possible ethics charges or potential liability for any damages incurred by the recipient of a noncompliant valuation report.

Using the engagement letter to bolster compliance

A good way to avoid potential risks is to have a detailed engagement letter (EL). The SSVS states that the valuation analyst should “…establish an understanding with the client, preferably in writing, regarding the engagement to be performed.” Even further, the SSVS goes on to say that “… the valuation analyst should modify the understanding if he or she encounters circumstances during the engagement that make it appropriate to modify that understanding.” If the client later objects to such a modification, the EL should provide the valuator with the right to withdraw from the engagement or provide for the possibility that such events may impact the ability to provide a conclusion of value without a statement of limiting conditions.

The EL should cover key features such as the name of the client, the date of the valuation, the standard of value, the purpose of the valuation, the type of entity to be valued, the percentage ownership being valued, the timing of the delivery of the valuation report, any limiting conditions in determining your value, indemnifications, any services not covered by the report, withdrawal provisions, a list of key items that you will need to review, and your professional fees and their terms, etc. Aside from addressing the need to comply with the SSVS, the EL provides both parties with an understanding of exactly what is being done, and lessens the chance for any later misunderstanding.

Biz valuations and conflicts of interest

A last area of concern for business valuators is ethics, in general. Like the AICPA Code of Professional Conduct, the SSVS reiterates that objectivity is a state of mind. “The principle of objectivity imposes the obligation to be impartial, intellectually honest, disinterested and free from conflicts of interest.” I often see CPAs providing valuation services for a client who is also receiving accounting, tax or consulting services from other staff, managers, partners or directors of their firm. In such instances, I ask, Are you disinterested in the financial performance of your fellow staff, managers, partners or directors? If you answer yes, are you truly being intellectually honest. If you answer no, then under our Professional Standards, you have a conflict and should not provide the service.

If you do decide to proceed with offering the valuation services in this situation, you must make the necessary disclosures in your report and obtain the necessary consent from your client, as required in both Interpretation 102-2, Conflicts of Interest, and under Rule 102, “Integrity and Objectivity.”

At the recent annual AICPA National Business Valuation Conference, an IRS representative said that the agency was increasing the number of valuation reports where potential conflicts exist being selected for review. To quote the movie “Dirty Harry,” “You’ve gotta ask yourself a question: ‘Do I feel lucky?’  Well do ya’?” Or maybe you should be asking your client that same question, especially if your role increases the chance of an audit and significant professional fees for them.

Under United States Golf Association rules, if you accidentally move your ball and no one sees it happen, you must still call a one-shot penalty on yourself. If you are potentially harming a client, and they don’t know about it, have you, nonetheless, informed them of this risk? If not, are you still being disinterested and intellectually honest? As a game, golf is revered for its integrity. Business valuation standards and the AICPA Code of Professional Conduct require no less.

Brian K. Pearson, CPA/PFS, ABV, CFF, ASA, is the President and Managing Member of Valuation Advisors, LLC, a Buffalo, New York, firm that focuses exclusively on business valuation services. He is also a past chair of the NYSSCPA’s Business Valuation Committee, is a member of the ABV Exam Task Force, and a current member of the Society’s Professional Ethics Committee.

This article is for informational purposes only. For further guidance on professional issues, please see the AICPA Code of Professional Conduct.


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