BVWire Issue #179-4 | August 23, 2017


Startling SEC order over alleged wrongdoing re: fair value

Last Tuesday, attorney Peter J. Anderson (Eversheds Sutherland) was at the SEC and remarked to an official that he was convinced the agency would never bring a case where the staff went after the actual valuation of an asset or financial instrument. He felt that the agency would continue to focus on policies, procedures, and internal controls. When Anderson made his remark, the enforcement lawyer just smiled—he knew that later that afternoon the SEC would release an order doing just the opposite.

Not pretty: KPMG agreed to pay more than $6.2 million to settle SEC charges that it failed to properly audit the financial statements of an oil and gas company. Specifically, the failures involved management’s fair valuations of unproven oil and gas reserves and related fixed assets.

Allegations included misuse of industry expert reports on reserves and tangible assets, a double counting of fixed assets, inadequate testing of assumptions, the auditor’s lack of industry experience, an inadequate disclosure of the work of the valuation specialists, which contributed to the improper valuations, according to the order.

Red flag: Fair value expert Mark Zyla (Acuitas) noted that the company paid $4.5 million for oil and gas assets and then booked them at $480 million. Under ASC 805, that’s a bargain purchase, which standard setters expect to be rare. “If it looks like you have a bargain purchase, check your work,” says Zyla. “In the order, the SEC says this should have triggered extra scrutiny.”

Attorney Yvonne Williams-Wass (Eversheds Sutherland) led the presentation and, along with Anderson and Zyla, gave additional insights on this case and related regulatory matters during a webinar, Fair Value and Valuation: Understanding the SEC, PCAOB and Key Case Law. Anderson urged everyone in the audience to read the order to get a sense of where the SEC will be focusing as to the use of and work by valuation specialists, whether internal or external by auditors. The SEC order can be found on BVR’s website in the Free Resources area in the Articles and Webinars section.

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New Jersey court’s inadequate goodwill ruling triggers rebuke and remand

A New Jersey appellate court recently rebuked the trial court for its defective valuation rulings surrounding the goodwill component attached to the owner spouse’s equity interest in a law firm.” For valuation specialists active in this jurisdiction, familiarity with the appellate ruling is a must.

Large law firm interest: The husband, who specialized in complex tax matters, became an equity partner in 1984. He did not generate work but distinguished himself by working hard and accumulating billable hours. The firm calculated the value of the partners’ interests by way of a termination credit account (TCA). Once a partner turned 65, the board had discretion to decide whether the partner could continue to participate in the allocation of the firm’s excess income system or was moved to senior status, which meant to a salaried position.

The wife’s expert decided there was a separate goodwill interest in the husband’s firm ownership, about $1.18 million. The husband’s expert disagreed. Instead, he concluded the husband’s TCA alone represented the “true” value of the husband’s interest.

The trial court said it was “incredible” there was no goodwill in the firm and adopted the value conclusions the wife’s expert had submitted in his initial report but had later corrected because of admitted errors. The appellate court called down the trial court for failing to analyze the facts and support its conclusions as well as for obvious inconsistencies in the trial court’s findings. Further, the trial court seemed to misunderstand the conclusion the husband’s expert reached regarding goodwill. It wasn’t that the firm had no goodwill but that there was no additional goodwill component to the husband’s interest, the appellate court explained.

It reversed and remanded. Goodwill was a “complex question,” and this case in particular required a “nuanced methodology,” the reviewing court said. To “aid” the lower court on remand, the appellate court provided a review of New Jersey goodwill jurisprudence and alerted the lower court to crucial differences between the instant case and the controlling case law. It also ordered the case reassigned to a new trial judge. Stay tuned.

A digest of Slutsky v. Slutsky, 2017 N.J. LEXIS 120 (Aug. 8, 2017), and the court’s opinion will be available soon at

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New study included with comments on Section 2704

The deadline has passed for public comments on IRS Notice 2017-38, which targets for reform the controversial proposed Section 2704 regs designed to curb estate valuation discounts for minority interests. The S Corporation Association joined several other trade groups in submitting its final comments and included its study highlighting the threat these rules pose to family businesses and their employees. The study, authored by former Clinton economist Dr. Robert Shapiro, makes it clear that the proposed Section 2704 rules violate all three of the criteria established in the president’s executive order: (1) they are financially burdensome; (2) they are unduly complex; and (3) they exceed Treasury’s authority.

Scary numbers: Specifically, the study finds that the proposed rules would increase estate taxes for large family businesses by $633.3 billion (present discounted dollars) over the next 46 years. To pay the extra taxes, businesses would forego capital investments, which would lead to a reduction in GDP growth by $2,476 billion (in 2016 dollars) from 2016 to 2062. This slower growth also would reduce job growth over the next decade.

Now we must wait for the Treasury and IRS to submit a final report by Sept. 18, 2017, to recommend their proposed reforms for the regulations identified in the notice (eight in all). This could range from modification to full repeal.

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U.S. economy expanded in 2Q17

The U.S. economy—as indicated by GDP—grew at an annual rate of 2.6% in the second quarter of 2017, which is faster than the 1.2% revised rate reported for the first quarter of 2017, according to BVR's Economic Outlook Update (2Q17 issue). The growth from the current quarter is due to an increase in consumer spending, which comprises about 70% of the economy. Imports, however, which are subtracted in the calculation of GDP, increased. The quarter ended with the economy in the third longest economic expansion in U.S. history.

Other highlights:

  • The Leading Economic Index climbed 0.6%, reaching a record high at 127.8 points;
  • All major stock indexes posted gains;
  • Consumer spending grew at a rate of 2.8%; and
  • The Federal Reserve raised its benchmark interest rate by a quarter point, to 1.25%.

The 2Q 2017 Wells Fargo/Gallup Small Business Index, which was reported in May, trended downward, losing 5.0 points, to 95.0. The decline is not statistically significant, with small business still up greatly from its index score of 64.0 from the same period in 2016.

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Revealing look at fairness opinions

During a recent webinar, BVR presented a preview of its new Fairness Opinion Research Service (FORS). This service—scheduled to launch this October—gives you full access to hundreds of actual fairness opinions from around the world. What’s more, you can filter a search by any data point or field.

Shining a light: The webinar audience received a handout of a sample document from the new service, an actual “valuation analysis” for a firm proposing to do a reverse stock split. The document contains disclaimers stating that the valuation experts relied on management’s forecasts and projections and assumed they were accurate, taking no responsibility for independent verification. In other words, they accepted management’s projections without question.

This brings up the question of how can a valuation analysis be done without scrutinizing management’s projections and how can a fairness opinion be rendered if no one questions the projections. One answer is that fairness opinions are not genuine valuations and do not fall under standards such as USPAP. They are designed to take certain specific assumptions agreed on with management to come up with an acceptable range of a deal price. They are also designed to provide evidence that boards have sought professional financial and legal advice about a proposed transaction. However, there are critics of the process.

Another document we saw from FORS is an engagement letter from an investment bank for a fairness opinion that includes a contingency fee that’s paid if the transaction is successful. This represents a potential conflict of interest and, to some, a clear conflict. During the BVR webinar, speakers said boards should compensate the financial advisor with a noncontingent opinion fee.

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Business owners duck advice, says expert

If you’re looking to expand your business valuation practice into consulting engagements, be aware of one potential hurdle. Business owners are not open to getting advice—they’re just not wired that way, explains John Warrillow in a Sageworks webinar. You need to figure out your prospect’s deepest personal motivations in order to understand how to win him or her over.

Simple trick: Take a look at his or her business card. The title he or she uses can give you a clue as to his or her primary motivations and the way he or she sees himself or herself. A “mountain climber” will use the title of founder, CEO, or chairman, even if there’s only a handful of people in his or her firm. The “freedom fighter” will use the title of owner or president, while a “master craftsman” may use his or her profession or trade as a title.

A recap of the webinar, Why Business Owners Don’t Buy Coaching From Their Accountant (And What to Do About It), can be found in an article in AccountingToday.

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Comment deadline looms on PCAOB proposals

Comments are due Aug. 30, 2017, on two standard-setting proposals from the Public Company Accounting Oversight Board (PCAOB): one on auditing accounting estimates including fair value measurements and the other on the auditor’s use of the work of specialists. Of course, specialists include valuation experts. One of the matters the new rules seek to reinforce is that of “professional skepticism” over information you get from management or other third parties.

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Valuation experts on the hot seat at AICPA

We love mock trials! A good one is shaping up for the AICPA Forensic & Valuation Services Conference November 13-15 at Caesar’s Palace in Las Vegas. Two attorneys and three valuation experts will square off in a four-hour session where you will get a real-life feel for what goes on in the courtroom—and how to prepare for your next appearance.

Watch attorneys Laurin Quiat (Baker Hostetler LLP) and Brian Blankenship (Schwartz Flansburg) along with valuation experts Stacey Udell (HBK Valuation Group), Ron Seigneur (Seigneur Gustafson LLP), and Neil Beaton (Alvarez & Marsal Valuation Services LLC) go at it. Who will squirm? Who will prevail? Don’t miss it!

Extra discount: There’s an early-bird discount of $75 if you register before September 29. Plus, BVR has arranged with the AICPA for an extra discount of $100 for BVWire subscribers. Just use the code LVH when you register. See you there!

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Global BV News

Key changes to the RICS Red Book of valuation standards

On July 1, 2017, the latest edition of the Red Book came into effect. Issued by the Royal Institution of Chartered Surveyors (RICS), the Red Book contains rules that RICS members undertaking most types of valuation in most parts of the world must follow. The Red Book has been updated to incorporate changes to the International Valuation Standards (IVS), which also went into effect July 1, 2017.

Since the Red Book runs 272 pages, most will struggle to find the time to spot the changes that may affect the way they undertake and report their valuations. Chris Thorne, a former chair of the RICS Red Book Editorial Board and former IVSC technical director, has produced a single page guide to the most significant changes.

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BV movers . . .

People: James G. Wolf joins Houlihan Lokey Inc. as a managing director in its Tax & Financial Reporting (TFR) Valuation practice within Financial Advisory Services; he is based in New York City … Josh Brummett, shareholder in the healthcare and valuation services practice at LBMC (Nashville, Tenn.) was named a Nashville Emerging Leaders Award Top 5 finalist in the category of financial services … Grant Thornton admitted 39 new partners and principals and promoted 28 professionals to managing director; among them are Paul Peterson, forensic advisory services partner (Arlington, Va.); Bradley Chadwick, transaction services principal (Chicago); and Cory Rogers, forensic advisory services managing director (Charlotte, N.C.) … Joe Ashor has been promoted to business valuation senior manager at Rehmann; he’s in the Farmington Hills, Mich., office.

Firms: Jerry Tellinghuisen and Cynthia D. Martin have opened a new firm, Sequim CPA, to specialize in small businesses and offer accounting, tax, and other services, including business valuation, in Sequim, Wash. … Tighe, Kress & Orr PC opened two new office locations—Chicago and St. Charles, Ill.—to complement its existing location in Elgin, Ill. New York City-based Anchin, Block & Anchin LLP’s specialized group, Anchin Private Client, captured the New York State Society of CPAs’ annual Family Office Cup for the second consecutive year; its winning presentation was based on the topic of “Family Legacy” … CPA Solutions Inc. just opened a new office in Celebration, Fla.—its third location; others are in Orlando and Avalon Park … Philadelphia-based BizEquity has partnered with Discovery Data (Eatontown, N.J.) on a new online service to do real-time valuations of financial advisory firms; first one is gratis.

Please send your professional and firm news to us at

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CPE events

The Application of Professional Judgment in a Data-Driven World (August 24), with Barry Baker (CapVal-American Business Appraisers)

There are concerns that the profession is trying to turn the “art” of valuation into the “science” of valuation and becoming overly mechanistic in the process. This session will show you how to justify and support your professional judgment amid a sea of data.

Valuing Auto Dealerships: Applicable Methods, Value Drivers, and Current Economic Environment (August 31), with Timothy York (Dixon Hughes Goodman) and Adam Lawyer (Dixon Hughes Goodman)

Key considerations when valuing an automotive dealership will be discussed, including franchise, location, real estate, management, and more. Also, you’ll get an update on private equity and family office activity in the industry.

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In this issue:

SEC stunner

Goodwill trouble

Sec. 2704 study

Economic update

Fairness opinions

Advisor woes

PCAOB deadline

AICPA mock trial

Global news

BV movers . . .

CPE events

LinkedIn discussions

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