Auditors need to see more quantification of company-specific risk

One of the major audit review issues is company-specific risk (CSR), revealed a panel of Big Four leaders at the recent ASA Fair Value Conference in New York City last week. “We need to see more quantification,” said Manish Choudhary (Deloitte). Although there are no direct empirical data for quantifying CSR, several data sources can serve as proxies when estimating CSR. There are also several models or frameworks to use, such as Trugman, Black-Green, Warren Miller, Jeff Jones, Butler-Pinkerton, and the Finison-Dailey model.

We point out that an advisory is in the works from The Appraisal Foundation (TAF) from a working group that is developing voluntary guidance. The forthcoming guidance will be in the form of a Valuation in Financial Reporting (VFR) Advisory, and it will provide specific procedures for assessing discount rates and prospective financial information (PFI), as well as identifying and quantifying the elements of a CSR premium.

In addition to Choudhary, the panel consisted of Bharath Lakshmanan (Ernst & Young), Martin Mazin (KPMG), and Andrew Pappania (PwC). The panel moderator was Myron Marcinkowski (Kroll).

Full coverage of the conference will be in the June issue of Business Valuation Update.

Court opts not to split the difference in disparate valuations

Often, courts take the middle ground when faced with two disparate valuations, but, in an Ohio divorce case, the court did not do that. The expert for the husband valued his business, a relatively new, niche firm, at $290,000, while the wife’s expert valued it at $840,000. The court sided with the husband’s expert and expressly rejected the valuation of the expert for the wife.

Inputs and assumptions: As with any case where there are valuations that are very far apart, the differences are due to inputs and assumptions the analyst makes (assuming there is no improper bias). In this case, the wife’s expert included in the valuation large amounts of cash the husband withdrew from the business right before the divorce proceedings. Also, it appears that the husband’s expert took a much larger discount for lack of marketability (DLOM) than the wife’s expert, driving the valuations further apart. The court did not split the difference and accepted the lower valuation from the husband’s expert.

On appeal, the wife could not present any argument or information that the lower court had not already considered, so the appellate court affirmed the decision. The lower court noted that the large amounts of cash withdrawals were done during the marriage, so it was income and not part of the marital estate. With reference to the DLOM, the lower court noted that this was a new business that “offers a niche service indicating a lack of secondary market.” The lower court considered everything, so it was “entitled” to choose one expert’s valuation over the other, i.e., there was no abuse of discretion.

The case is Granada v. Rojas, 2024-Ohio-1272; 2024 Ohio App. LEXIS 1199; 2024 WL 1451236, and a case analysis and full court opinion are on the BVLaw platform.

Lingering high interest rates may trigger more goodwill impairments

Faced with elevated interest rates that show no signs of dropping, more companies will be forced to recognize goodwill impairments, according to a recent Wall Street Journal article. Higher interest rates mean increased cost of capital, which lowers business value.

Big shock: Pretax goodwill impairments totaled an estimated $82.9 billion across 353 U.S. public companies in 2023, above the historical average of 290 companies dating back to 2006, based on a review of filings through Monday, according to Kroll. That figure is down 39% from $136.2 billion across 400 companies in 2022. Last year, companies managed the shock of inflation by raising prices to offset higher costs. “The price increase was a big shock to the system, but we’re still seeing the aftereffects of the higher interest rates now,” said Carla Nunes, a managing director at Kroll, who was quoted in the article. “If we continue in this higher-for-longer path, we could still see a significant level of impairment this year.”

The biggest known impairment so far this year, according to the article, was from Walgreens. The company said in March that it recognized a $12.4 billion charge related to the reduced value of its VillageMD business, with $5.8 billion attributable to the pharmacy operator, which owns a 53% stake in the primary-care unit. The $12.4 billion charge exceeded that of the biggest goodwill write-down in 2023, with Lumen Technologies recording $10.69 billion.

Most professional liability claims triggered from transactions

According to Duncan Will (CAMICO), the average professional liability claim against business valuation experts is $101,000, compared with $141,000 for forensic accounting. CAMICO specializes in professional liability insurance for CPA firms, so it has many years of experience defending CPAs from claims, including those related to business valuation. He gave a presentation at the last AICPA & CIMA Forensic and Valuation Services (FVS) Conference, which was in Las Vegas.

A study of past claims reveals the percentage breakdown in three categories:

1. Transaction risk (the transaction failed for one or both parties): 62%;

2. Relationship risk (doing a valuation for an existing client; perceived bias): 24%; and

3. Inherent risks (the valuation is problematic, e.g., methodology, inputs, assumptions): 14%.

What to do: Will gave some advice on how to avoid or mitigate these risks. For transactions, all kinds of things can go wrong in a merger or acquisition, so the expert needs to be willing to disengage at the sign of trouble (don’t stay on and just increase your fees). “I have written more disengagements than all of you in the audience combined,” he said. “I love writing them, but I encourage practitioners to write their own, because it can be very cathartic.” Also, a cap on damages can be included in the engagement letter (consult with legal counsel for how to draft). But the cap should be two-to-three times the fee because triers of fact add a punitive element.

Reminder: Take a short survey on college recruiting

Has your firm reached out to colleges to recruit new hires? How has it worked out? Please let us know by taking our latest Two-Minute Practice Builder survey on this topic. All responses are confidential, and we’ll present the results here at the end of the month. Click here to take the survey. Thank you!

This Monday: The NYSSCPA BV conference in New York City

One of our favorite events is the annual New York State Society of CPAs Business Valuation and Litigation Services Conference, which will be in New York City on May 13 (full day). Always a strong slate of speakers, the topics this year include complex valuation issues in marital dissolution, IRS audits, IP finance, valuing music, blockchain, AI, and more. For more details and to register, click here.

V20 global valuation conference is in Brazil this year

Last year’s inaugural V20 Summit and Conference in India was a great success, and this year’s event will be in Sao Paolo, Brazil, September 30 to October 2. This year, the Brazilian Institute of Engineering Assessments and Expertise (IBAPE) hosts the event in association with the International Valuation Standard Council and the Assessors and Registered Valuers Foundation. The theme is “Valuation for Sustainability and Inclusive Growth: Bridging Finance and the Digital Divide,” and the full schedule is available, and registration is now open if you click here. More details will be forthcoming.

BV movers . . .

People: Several appointments to the standards setting boards at the International Valuation Standards Council: on the Standards Review Board, the new members are Ariel Fischman (414 Capital), Lie Kok Keong (PwC, Singapore), and Darren Sullivan, CPA, CA, CFA (Ontario Teachers’ Pension Plan); on the Business & Intangible Assets Board, the new members are: Gabriela Clivio, CFA, CAIA (Mazars, Chile), Robert Crockett (EY, Cayman Islands), Victor Siu (Greater China Appraisal Ltd.), and Edwina Tam (FTI); on the Financial Instruments Board, the new members are: Dr. Tomas Krabec (Prague University of Economics & Business), Stephani Mason (DePaul University), and Maisam Raza (Golub Capital); and, on the Tangible Assets Board, the new members are: Paloma Arnaiz (Asociación Española de Análisis de Valor), Charles Golding (RICS), and Leo Lo (CHFT Advisory & Appraisal).

Firms: New York City-based Marcum has integrated Rockville, Md.-based Simon Krowitz Meadows & Bortnick (SKMB) into its network, expanding the firm’s financial reporting, audits, tax consulting and preparation, bookkeeping, and business valuation and litigation services … New York City-based LMC has acquired Vogel & Co., an independent business management and tax advisory firm with offices in Darien, Conn., and West Palm Beach, Fla., specializing in family office services for high-net-worth clients … Atlanta-based CliftonLarsonAllen has acquired Ronald Blue & Co., a firm with 80 employees and eight partners that does tax, audit, and accounting and has offices in Atlanta; Tempe, Ariz.; Knoxville, Tenn.; and Santa Ana, Calif.

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

CPE events

A Saga About S Corporation Tax Affecting: It’s a Thriller! (A BVR Workshop). May 8, 10:00 a.m.-1:15 p.m. PT/1:00 p.m.-4:15 p.m. ET. Featuring: L. Paul Hood Jr., The University of Toledo Foundation. CPE credits: 3.5.

This presentation includes a comprehensive, up-to-date discussion of a still-unsettled issue: whether earnings of an S corporation should be “tax affected,” i.e., increased or offset to account for S corporation status.

Effectively Utilizing Review Reports in Valuation and Damage Litigation. May 14, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: P. Dermot O’Neill (Rider University College). CPE credits: 2.0.

This presentation deals with the role of review (not rebuttal) reports including a discussion of review report standards and how best to craft them based on the circumstances of the engagement.