Calculation engagement value holds up in Alabama divorce litigation
Many valuators are adamantly opposed to doing calculation engagements, as we recently reported. Among other concerns, they fear that nonvaluators, including judges, may not recognize the critical differences between a valuation engagement and a calculation. The critics argue that a valuation engagement, if done right, adheres to standards of independence and reliability. In contrast, a calculation engagement is not only easier to do, it is more profitable. But a recent Alabama divorce case shows that judges may well be attuned to the differences between the two types of valuation and that a calculation engagement can provide meaningful guidance to the court under the right circumstances.
The parties in this divorce proceeding contested the valuation of the husband’s dental lab. The husband served as his own valuation expert. The wife retained a CPA who was a certified valuation and financial forensics analyst. The expert worked pursuant to a calculation engagement. The husband and his counsel attacked the expert at various stages of the trial, arguing, among other things, that he had conducted the “wrong” type of valuation. He had submitted a valuation pursuant to the more lenient requirements of a calculation engagement as opposed to the more “thorough and accurate” valuation engagement. Counsel spent a great deal of time developing evidence as to the difference between the two types of valuation.
The attacks were unsuccessful. The trial court found the expert used “methods recognized and accepted by [the] accounting industry for accountants conducting ‘calculation engagements.’” Also, simply because a “more arduous or accurate method (valuation engagement) exists does not preclude the Court’s consideration of [the expert’s] findings.” The court pointed out that the husband did not present evidence that directly contradicted the expert’s findings for the relevant years. “And the Husband did not employ his own expert or pay the increased fee to [the expert] to conduct the more rigorous ‘valuation engagement.’”
The appeals court affirmed. It said the trial court duly had noted that the expert’s value determination conformed to a calculation engagement rather than a valuation engagement. This factor went to the weight of the testimony but did not disqualify the estimate from consideration by the trial court. The appeals court also found the SSVS approved of the capitalization-of-earnings method, which the expert had used. The husband left the trial court with no credible valuation evidence other than the calculated estimate by the wife’s expert, the reviewing court said.
A digest of Rohling v. Rohling, 2018 Ala. Civ. App. LEXIS 94 (June 1, 2018), as well as the court’s opinion, is available at BVLaw.
Extra: A recent webinar, Calculation Engagements: Risks, Rewards and New Guidance, was conducted by Jim Alerding (Alerding Consulting, LLC), one of the authors of the new guidance from the AICPA. To access a recording, click here.
Several discussion threads on the BVR LinkedIn page take up the decision by the AICPA to open up the ABV credential to non-CPAs. One commenter says that in his 20 years of practice he has found that clients are not very astute about BV credentials and has rarely been asked what credential he has. For those clients who are clued in, they would be able to distinguish a CPA/ABV from an ABV, he feels. Other commenters have had different experiences with clients and their perception of credentials. Some of the points made by commenters:
Adding non-CPAs to the ABV increases supply while demand stays the same, putting downward pressure on price;
The BV profession is too fragmented and needs one professional organization to be the voice of the profession;
It’s “naïve” to think that trade groups such as the AICPA don’t have a business model that may require them to take steps in the interest of survival that some existing members will disagree with; and
CPAs may not be the best ones to provide BV services, says one commenter who reminded the group that CPAs as “trusted advisors” were behind big accounting frauds, bank collapses, and myriad other disasters (leading one responder to ask, “Why not blame CPAs for climate change and the collapse of Western civilization?”).
Extra: The Virginia State Society of CPAs has sent a letter to the AICPA suggesting an open dialogue on the issue for the next council meeting; other state societies have sent letters. The NYSSCPA’s August CPA Journal includes the article, “Is the ABV Credential For Sale?”
Chris Mellen (Valuation Research Corp.) reports a marked increase in demand for valuations of shares of privately held companies before an M&A transaction in connection with a charitable gift. He’s written an article on wealthmanagement.com that discusses a strategy for donating stock pending a sale.
Accounting firms of all sizes plan to increase their use of social media, according to the 2018 Marketing and Business Development Strategies at Accounting Firms study. Sole practitioners (47%) and firms with 11-50 persons (59%) ranked social media as the top marketing tool they will be increasing. The study (available for purchase) is by Capstone Marketing and Bay Street Group and is published by CPA Trendlines.
Some practitioners who want to break into the legal marijuana industry may be concerned that marketing to this audience could negatively influence the more mainstream industries they serve. Consider this: Create a different brand name for your new industry vertical, advises an article on marketing to cannabis clients.
The effect of shareholder lawsuits on cost of equity
A firm may see adjustments to its cost of equity capital either at the time a shareholder lawsuit is filed or when the outcome of the lawsuit is determined—or both—says a new paper by William J. Moser (Miami University). At the time of filing, if “the probability of a favorable outcome for the firm (dismissal or win) is relatively higher, the effect of the shareholder lawsuit on firm ex ante cost of equity capital is low,” the paper says. “In contrast, a high probability of a settlement or a loss for the firm results in a greater increase in firm ex ante cost of equity capital.” When the case is resolved, firm ex ante cost of equity capital adjusts only when the final resolution is different from initial probability estimates. The paper is “The Reaction of Firm Ex Ante Cost of Equity Capital to Initiation and Resolution of Shareholder Lawsuits.”
How to earn the ASA’s BV credential in just 90 days
Experienced valuation experts who hold certain designations with other appraisal organizations can earn the BV credential from the American Society of Appraisers within 90 days under the ASA’s reciprocity arrangements. This was explained during a recent free ASA webinar on how experienced valuers can attain the ASA’s BV credential. For example, a person holding the CPA/ABV designation with five years of BV experience would only have to take an ASA ethics exam (one day), pass a 15-hour USPAP course and exam (in-person or online on demand), and submit a valuation report for review. The report review can take 90 days at most but is often much less. For more details on which designations qualify for reciprocity, you can go to the ASA’s BV Accreditation Guide or listen to a recording of the free webinar (BV184-WEB - Understanding the ASA BV Application and Accreditation Process) which will soon be available on the ASA website.
New research on global risk premiums and risk-free rate
“Market Risk Premium and Risk-Free Rate Used for 59 Countries in 2018: A Survey” is the latest research from Pablo Fernandez, Vitaly Pershin, and Isabel Fernández Acín. The authors found that the change between 2015 and 2018 of the average Km (Rf + MRP) used was higher than 1% for 22 countries. Also, most of the respondents use for European countries a Rf higher than the yield of the 10-year government bonds. To download the entire survey, click here.
People: Paul Vogt has joined PCE Valuations, LLC, an affiliate of PCE Investment Bankers, as the firm’s BV practice leader in its Atlanta office; he’s formerly with Houlihan Lokey ... David Burdette and Gregory Cook of Prairie Capital Advisors Inc. are Top 40 under Forty honorees by the National Association of Certified Valuators and Analysts (NACVA) ... Shawn Hyde has been named executive director of the International Society of Business Appraisers (ISBA); he’s the founder of Canyon Valuations LLC (Twin Falls, Idaho) ... Shivam N. Jadeja was promoted to manager of valuation and forensic services at Morrison Valuation & Forensic Services (Orlando, Fla.) ... AtOmaha, Neb.-based Acclaro Valuation Advisors LLC, Wayne D. Fjeld, a managing director, has become a partner in the firm; and Robert S. Powell, Jr., has joined the firm as a valuation analyst.
Firms: Richmond, Va.-based Cherry Bekaert has acquired CTS Capital Advisors, expanding its transaction advisory and valuation services, particularly for private equity funds and lenders ... Montgomery, Ala.-based Jackson Thornton announced the acquisition of Kevin S. Kelso, CPA, PC, PA, of Kansas City, Kan., which specializes in utilities; this brings Jackson Thornton to more than 200 employees ... Gollob Morgan Peddy (Tyler, Texas) is merging in Jerry Nelson & Associates which will bolster the firm’s construction division ... Gleason & Associates (Pittsburgh) celebrates its 30th anniversary; Mark Gleason founded the firm in September 1988; other current shareholders are Ivan Hofmann, Doug King, and Bill Krieger.
Your discussion could be featured here—BVR's LinkedIn group is a place for valuation professionals to share, discuss, and learn about compelling BV topics. If you're not already a member, request to join: