ASB reports a ‘changing face for USPAP’

The Appraisal Standards Board just issued its 2007 Summary Report, announcing (among other highlights) “a changing face for USPAP in 2008.”   The most “visible” changes will be to the seven-hour National USPAP Update Course, which will shift focus from discussing changes in the uniform appraisal standards to applying their principles.  “This will include addressing those areas of USPAP that are most commonly misunderstood or questioned, as well as presenting ‘real world’ scenarios that challenge the students to interpret and apply USPAP to situations they will likely encounter.”

The literal face of USPAP will also change.  The 2008-2009 edition will comprise a single-bound compilation of the uniform standards as well as Advisory Opinions, FAQs, and related guidance from the ASB.

Most importantly, this next edition of USPAP, effective January 1, 2008 through December 31, 2009, will incorporate all modifications the ASB approved in June, including the 1) deletion of the Supplemental Standards Rule and 2) revisions to the report certification requirements related to the appraiser’s reliance on third party reports (by those who do not sign the certification).  The complete 2007 Summary of Actions is available at the Board’s website.  A final note: Applications for vacancies on the ASB as well as two additional Appraisal Foundation boards (see BVWire™ # 57-3 ) are due August 17, 2007.

Was it a mistake for BV to ‘shun’ USPAP?

The BVWire forum on business valuation sites and societies continues with this commentary by Roger Durkin, JD, MSA, ASA (Durkin Valuation Consultants, Boston): “Of course I agree” (with comments urging BV societies to stop their “tribal warfare” and collaborate on one set of harmonious standards.)   “The tribal war is truly a clash of egos, and touches on the nerve of the valuation profession;” in particular, the impression that appraisers seek and receive credentials as a “form or anointing.”  

Further, “business appraisers only had IRS [Rev. Ruling] 59-60 until USPAP” came along.  “But BV practitioners shunned USPAP,” Durkin maintains, in favor of developing their own society-specific standards.  Then late last summer, the IRS issued Notice 2006-96, endorsing USPAP, while at the same time, FASB and the IVSC became more interested and influential in the standards-setting arena.  “Had BV adopted USPAP in the beginning (1989), we would have outstanding standards, and professional practice in accord with national standards.  But keep making more and more detailed society-specific ‘standards,’” Durkin says, “and you will cause the courts to look for a source of standards stability someplace else.”

As always, email your comments, ideas, and insights to the editor.

ERISA may not shield ESOP appraisers from state liability 

Just what every ESOP appraiser dreads: In 2002, the Department of Labor concluded that based on its investigation, trustees of an Ohio insurance company’s ESOP may have violated several ERISA provisions.  In particular, the DOL questioned the method used for valuing the company’s stock (one and a half times total income, plus or minus the positive or negative book value of the company, divided by the existing shares).

After the plan paid $500,000 to correct the violations, the trustees (and the plan’s insurers) sued the valuation firm and its managing director in Ohio federal district court, alleging state law claims of professional negligence and breach of contract as well as breach of ERISA fiduciary duty.  The court granted summary judgment on the ERISA claims in favor of the appraisers, but dismissed the state law claims without prejudice, permitting their re-filing in state court.  The valuation firm appealed to the Sixth Circuit, which just issued its decision in Kloots v.American Express Tax and Business Services, Inc. (May 15, 2007).  An abstract of that decision will appear in the next (Sept. 2007) issue of Business Valuation Update™, with the full-text court opinion available to subscribers of BVLaw™.

ESOP due diligence free download:  In the meantime, given the increasing complexity of ESOP valuations (and increasing oversight), we’ve just added an invaluable checklist to our free downloads.  “Employer Stock Valuation and Financial Adviser Due Diligence Procedures,” excerpted with permission from Willamette Management Associate's Guide to ESOP Valuation and Financial Advisory Services, 2nd Ed., by Robert Reilly & Robert Schweihs (2007), is now available here.

BVMarketData hits the 10K mark

As of July 31, 2007, the Pratt’s Stats® and BIZCOMPS® databases each reached the 10,000 transaction mark.  Both private transaction databases at BVMarketData.com contain financial information and selling prices on 100% closed business sales; Pratt’s Stats covers detailed financial information on sold businesses in over 700 industries and BIZCOMPS reports on sold businesses in nearly 450 industries.  While Pratt’s Stats is typically used for main street, middle market, and M&A business valuations, BIZCOMPS is most commonly used for valuing main street businesses.

More improvements to come:  With 20,000 transactions between the two databases, analysts now have access to more empirical market data from which to derive accurate and defensible conclusions of value.  We are also in the midst of improving the usability of Pratt’s Stats, including:

• Links to source information for transactions involving a public buyer.
• Added ability to search by either public buyers, private buyers or both.
• Additional financial ratios and more content included in the Excel exports. 

These are just of the few planned enhancements; stay tuned for more news in September.

PCAOB cites ‘Big 4’ auditor for failing to test intangibles

More evidence of the mounting pressures on auditors, issuers, and valuation professionals in the context of intangible assets: Per its Sarbanes-Oxley (2002) mandate, the Public Company Accounting Oversight Board just issued its 2006 inspection of KPMG LLP, including a selected review of “the Firm’s” audits of at least seven issuers of financial statements.  Included among its July 26, 2007 findings:

Issuer C  The issuer used the work of a valuation specialist to determine the fair value of certain assets acquired in a significant business combination. The fair value of these assets as determined by the specialist was approximately 18 percent less than their historical book value. The Firm did not perform procedures to test whether certain data the issuer provided to the valuation specialist were complete, accurate, and relevant.  Similarly, the issuer used the valuation specialist to assist in its annual impairment test related to goodwill, and the Firm failed to test whether certain data the issuer provided to the valuation specialist were complete, accurate, and relevant.

The report also includes KPMG’s response (“We have addressed the engagement-specific findings identified in the Report in a manner consistent with PCAOB auditing standards and KPMG policies and procedures and, as previously communicated to the PCAOB staff…”) Note: A “substantial portion” of the Board's criticisms of any auditor and its subsequent dialogue with the firm occurs out of public view, unless the firm fails to make satisfactory within twelve months of the report.  For the complete report, response by KPMG, and archive of all PCAOB inspection reports, click here.

IASB issues July 2007 update

The most recent Update (July 2007) from the International Accounting Standards Board summarizes discussions during its recent London meeting, July 17-20.  Among other topics, the Board took up:

• the joint conceptual framework with the Financial Accounting Standards Board
• post-employment benefits
• financial instruments puttable at fair value and obligations arising on liquidation
• annual improvements process
• IAS 27 (Consolidated and Separate Financial Statements)

The complete and most current Update is posted with other 2007 issues at the IASB.

How to value any private business in 30 seconds (or less)

Just ask the owner what the business is worth, and “multiply by .70,” says Rob Slee, who made a provocative four-hour presentation at the recent IBA 2007 Symposium in Denver (see BVWire #57-4).  “If the owner is in ‘Lala-land,’ multiply by .5.”

The point being: “Appraisers are not the authorities on value; we are the interpreters of authority,” which can include the business owner as well as the market, the IRS and the courts, the investors, banks, insurance companies, and on and on.  “Each authority is ‘right’ in its respective world,” Slee says, and each value “world” has its own rules, risks, and rates of return.  Slee doesn’t like the term “premise of value,” as it’s not particularly useful to private business owners or investors.  Instead, he recommends understanding value in terms of its relativity, and reminds analysts that because the possibilities for valuing a business are infinite, they should always ground their appraisals in the appropriate valuation “world.”