In the realm of fair value for financial reporting, extraordinary progress has been made in the efforts to enhance the public trust in valuations. This was clearly evident in the presentations made during the recent RICS Business Valuation Symposium in New York City on June 3. Interestingly, many of the speakers and attendees were personally responsible for a large part of the progress over the years. One important element of this success has been collaboration, and the event highlighted the teamwork that has gone on in the past and that will be key to moving forward on this matter.

Welcoming the attendees was Neil Shah, regional managing director for the Americas for RICS (a London-based valuation professional organization), who was joined by Mary Jane Andrews, president and CEO of the CBV Institute (formerly the CICBV, a Canadian group), and Johnnie White, newly named CEO and executive vice president of the American Society of Appraisers (ASA). These groups are working together to move the profession forward in the area of fair value for financial reporting. Speakers gave an overview of where the profession has been in this area of practice, what’s going on now, and what’s in store down the road. Here are some of the main points:

• The rise of financial reporting in the late 1990s, early 2000s triggered a diversity of practice and “black boxes”;

• Regulators became very concerned and questioned what they perceive as the fractured nature of the profession and its lack of unified qualifications, standards, and enforcement in this area of valuation;

• The Appraisal Foundation began issuing a series of financial reporting valuation advisories as best practices on such issues as customer relationships, control premia, and contingent consideration;

• In 2016, a landmark coalition was formed between the ASA, AICPA, and RICS in a major effort to launch the Certified in Entity and Intangibles Valuation (CEIV) credential and its Mandatory Performance Framework (MPF), which focuses on the level of documentation required to support a valuation expert’s work;

• The enforcement aspect of the CEIV is still in the works; the Big Four have trained their staff in the CEIV but have stopped short of getting their people credentialed until the quality monitoring process is ironed out;

• The IVSC has started to develop standards for financial instruments, which is of particular interest to global regulators;

• The PCAOB has come out with consolidated rules that focus on audits and the use of specialists; about half of the audit deficiencies the PCAOB has found relate to fair value measurements; and

• A “regulatory sea change” is coming with ISQM1 (2020) from the IAASB, which will closely examine internal controls in the auditing process—and will trickle down to valuation experts globally.

Doing better? After all of the time and effort spent in this area, the question is: Are we in a better position in terms of public trust and transparency? The consensus from the conference speakers and audience members is “yes”. For example, the nature of PCAOB inspections with regard to fair value measurements bears this out. Also, it appears, on information and belief, that the regulators are pleased with the progress that has been made, although they have made no definitive public statements to this effect.

Some interesting questions from the audience: Are clients aware of all that is going on behind the scenes? Will they have to pay more for engagements? Clients are largely unaware of what’s happening behind the curtain, say the speakers. The question of higher fees was not directly addressed, but it would be hard to imagine that layering in more process and regulatory requirements would not mean higher costs to customers.

There will be more coverage of the RICS conference in the August issue of Business Valuation Update.

Kress appeal still a possibility

As the valuation community ponders the reach of the recent Kress decision, many eyes are trained on the government’s next move.

To date, the government has not appealed the federal district court’s ruling in favor of the taxpayers. But, as we recently learned, it still has time to file an appeal and may still do so. Although the Eastern District of Wisconsin decided the case on March 26, the court did not issue its judgment until April 30. Typically, if the government is a party to the case, notice of appeal must be filed within 60 days from entry of the judgment (not the court’s decision, as our earlier reporting suggested). For now, the district court’s ruling is precedent in the district it was issued.

In the unlikely event that a valuation analyst out there has not heard of the Kress case, the case is important because, in valuing the minority shares of a family-owned S corporation, experts for both the taxpayers and the government applied a C corp tax rate to the company’s earnings. In addition, the government’s expert applied an S corp premium to account for the tax advantages related to S corp status. The taxpayers’ expert did not make a specific S corp adjustment. The court, with a minor modification, adopted the latter’s value determinations.

Valuators welcome the collective recognition, by the experts and the court, that the tax consequences for pass-through entities must be accounted for in some measure. Accordingly, valuators may use the Kress case to push back against the Internal Revenue Service’s longtime rejection of S corp tax affecting.

A digest of Kress v. United States, 2019 U.S. Dist. LEXIS 49850, 2019 WL 1352944, and the district court’s opinion are available at BVLaw.

Divorce conference speakers discuss ethics traps and how to avoid them

At the recent AAML/BVR divorce conference in Las Vegas, one of the sessions that drove home the advantages of an interdisciplinary discussion was on ethics. It featured Marie Ebersbacher (CBIZ MHM LLC), an appraiser and financial forensics expert, and Lawrence Moskowitz (Perry, Johnson, Anderson, Miller & Moskowitz LLP), a family law attorney, discussing dicey ethical issues that often arise while working on a divorce or any other engagement.

In “Ethics Violations: How to Avoid the Letter No One Wants to Receive,” the speakers analyzed various hypotheticals from their vantage points as expert and attorney and explained how, as professionals with different roles to play in litigation, they could ensure they followed their profession’s rules of ethics and also worked together effectively and efficiently.

Different roles: Moskowitz explained that an attorney is retained to apply legal theory to a case and advocate on the client’s behalf. Under the applicable Rules of Professional Conduct (RPC), the lawyer must be competent and diligent. Diligence means being committed to the interests of the client and being a zealous advocate for the client. In contrast, the expert, under Federal Rule of Evidence 702, is there to assist the trier of fact. Ebersbacher explained that doing so means educating the court and the jury by providing an analysis based on observable data and facts.

In an informative exchange, the speakers made clear how this difference may play out in real life. What happens, for example, if the expert does an analysis for an attorney representing the owner spouse and arrives at a capitalization rate of 25%, while the attorney, aiming for a low valuation (which benefits the owner-client), prods the expert to use a higher cap rate? If you are the expert, don’t take instructions on this matter from the attorney, Ebersbacher cautions. She notes that anytime an expert’s position on an issue is easily rebuttable by the opposing party, that expert’s testimony risks being dismissed in court as biased.

Moskowitz, giving the attorney’s perspective, notes that, as an advocate for the client, the attorney will not offer an expert opinion that may hurt the client’s case. But Moskowitz also points out that, under the applicable rules, an attorney has a duty of candor toward the court and an obligation to be truthful in statements to others.

Takeaways: The attorney advocates for the client, but the expert must only advocate for his or her opinion. Experts and lawyers need to know, and follow, the rules of ethics that apply to their professions in the state in which they practice. Remember, different jurisdictions have different rules.

An extended discussion of this ethics session and additional coverage of the divorce conference will appear in the July edition of Business Valuation Update.

BVWire is just back from the annual conference of the National Association of Certified Valuators and Analysts in Salt Lake City, which attracted a good crowd both in-person and online via live streaming. Some of the sessions on our radar included one on new research regarding growth rates (part of an emerging trend of re-examining the components of the terminal value), the cost of capital “conundrum” (which had some heads spinning over rising complexities), management projections (a very hot topic), a new mechanism for reconciling the outcomes of different valuation methods, the controversy over calculation engagements, a “tell-all” session with judges on the panel, and several sessions on storytelling. We’ll have some takeaways in the next issue of BVWire.

ASA Advanced BV Conference will present Woman Appraiser of the Year Award

The American Society of Appraisers will hand out its very first annual Woman Appraiser of the Year Award at the Joint ASA 2019 Advanced Business Valuation and International Appraisers Conference in New York City on August 25-27. This award recognizes and celebrates the outstanding contribution of women appraisers to the profession. The ASA is looking for nominations of women who have contributed to ASA and/or to the appraisal profession in a positive way. To nominate a woman appraiser of the year, click here. Entry forms must be submitted by Sunday, June 30. The conference is one of the must-attend BV events of the year, so check out the agenda. If you can’t attend in person, you can register for live streaming.

IVSC gives update on Asia Pacific region

In 2016, the finance ministers of the Asia-Pacific Economic Cooperation (APEC) region invited the IVSC to lead an initiative to enhance valuation practices through the widespread use of IVS across the APEC region. IVS is the set of international valuation standards from the International Valuation Standards Council (IVSC). Former IVSC trustee, Nicholas Brooke, leads this initiative, which is targeted at both tangible and intangible assets, although the latter is the area of greatest need and one that requires the most attention. Brooke notes that significant progress has been made both in the Philippines and in Mexico where the regulators have now fully adopted IVS 2017 as the principal standard, with guidance notes provided to local valuers to assist them to address local legislation and conditions that are specific to that economy. You can read more about the APEC developments if you click here.

BV movers...

People: NACVA honored Howard Zandman, CPA, CFF, MAFF, with the Thomas R. Porter Lifetime Achievement Award; he’s a partner at Aprio and the leader of the firm’s litigation support and forensic services team … Brian Burns, CPA/ABV/CFF, ASA, MAFF, has been admitted as a partner at Dixon Hughes Goodman, where he leads the firm’s forensics and valuation practices in Virginia … Martin C. Levin, CPA, CVA, has been named president of the Pennsylvania Institute of Certified Public Accountants; he is a managing partner at RLB Certified Public Accountants in Allentown, Pa., where he leads the firm’s audit and business valuation strategies.

Firms: Houston-based firms HSSK LLC and Weaver have combined their litigation consulting, forensics, and valuation capabilities to expand the services in these areas; three partners and more than 20 other professionals from HSSK will join Weaver as part of the firm’s financial advisory services practice … New York-based Citrin Cooperman has expanded to the West Coast with the addition of Shuwarger & Co. LLP of Los Angeles, a boutique CPA firm with a staff of 10 … Milwaukee-based Wipfli LLP has announced that TopLine Strategies of Scottsdale, Ariz., joined the firm on June 1; this is Wipfli’s ninth transaction in three years and the firm’s first physical location in the Southwest … Mathieson Moyski Austin & Co. of Wheaton, Ill., has joined CPAmerica, an accounting association of independent CPA firms … Teegardin & Associates CPAs of Austin, Texas, has joined Springfield, Mo.-based BKD as of June 1; the combination adds one partner, one managing director, and approximately 12 staff, who will remain in the Austin office.

Please send your professional and firm news to us at editor@bvresources.com.

Upcoming BVR training events

• FREE WEBINAR: Finding Comps in DealStats: Examples and Best Practices, (June 18), with Adam Manson (Business Valuation Resources), Mitchell Cameron (Business Valuation Resources), and Oday Merhi (Business Valuation Resources)
  
  Attend a free one-hour webinar that will demonstrate how to use DealStats (formerly Pratt’s Stats) to identify and analyze private business sales that are comparable to your subject company.
  
  

• Valuation in a Nonlinear World (June 19), with Gary Schurman (Applied Business Economics).
  
  There are areas of valuation that are outside the box of the typical business appraiser because they utilize a much higher level of mathematics and creativity. Robust modeling and analytics are needed where the primary purpose of the valuation is investment, acquisition, liquidation, financial reporting, assessing risk, and/or pricing.