For those CPAs performing business valuations, January brought a new standard into their sphere, a long-awaited pronouncement that has garnered both praise and some mixed reviews.Despite the critique, most business valuation appraisers said that the American Institute of CPAs’ Statement on Standards for Valuation Services No. 1 was a long time coming, though it hasn’t drastically affected their day-to-day practices.
The intent of the 76-page SSVS No. 1, or Valuation of a Business, Business Ownership Interest, Security or Intangible Asset, is to provide guidelines to CPAs for developing estimates of value and reporting on the results, according to the institute. It applies to institute members who perform engagements that estimate the value of a business, business interest, security or intangible asset for numerous purposes, including sales transactions, financing, taxation, financial reporting, mergers and acquisitions, management and financial planning, and litigation.
It was issued in June 2007 after three rounds of commentary, and went into effect for those engagements accepted on, or after, Jan. 1, 2008.
“We’re very pleased with the result and very proud of the process we went through to do it,” said Edward Dupke, CPA, ABV, senior consultant in the Valuation and Forensics Division of Clifton Gunderson LLP and chair of the Business Valuation Standards Task Force — the group charged with writing the standard.
That process formally took six years — but according to Michael Mard, CPA, ABV and managing director at The Financial Valuation Group in Tampa, Fla. — the buzz started back in the late 1980s.
“People say six years, but that’s from the date of the official submission to the actual completion,” Mard explained, adding that Florida passed a business valuation practice aid in 1994 that was adopted as a regulation until the AICPA’s mandate. “There was discussion six to eight years before that. The AICPA was put on official notice by the state of Florida that we need a rule and regulation controlling valuation practice by CPAs, so to me, the new Florida rule and regulation, that was the starting point.”
At that point, Mard said, those who were on the AICPA committees at the time — including himself and Dupke — established the Accredited in Business Valuation designation and were pushing for more education and standards to control the industry. “The old-school thinking is that you’re licensed and that ought to be enough,” Mard explained. “That held true for many, many years as a CPA. But as the world has gotten more complex, as technology continued to push that complexity forward and specialization became a reality, it was clear that some practitioners were abusing the license and overseers had no way of judging how improper the abuse was.”
Dupke noted that his committee sought feedback from 11 different constituencies within the AICPA: “We wanted to write a world-class set of standards that would represent generally accepted valuation practice for CPAs. There are other standards out there and there are some other very good standards out there, but they are not written from the standpoint of CPA practice.”
MORE STANDARDS, MORE WORK?
“Day to day, I don’t think it really has impacted the way I go about my work,” said Gary Dosdall, CPA, ABV and director of the Business Valuation Department at Froehling Anderson in St. Louis Park, Minn., a firm that performs upwards of 30 engagements a year. “We’ve been doing valuation work for a while and we do a fair amount of litigation support, so we’ve always had to meet some standards and we’re always being challenged. I think the standards are good, and I believe our firm was already meeting those. What I think it does do is hold the whole CPA profession to the same standard now, whether you have an ABV, some other valuation designation or none at all. It raises the public’s perception of the quality of our work.”
Frank Wisehart, CPA, CVA, ABV and president of Wisehart and Wisehart in Dublin, Ohio, agreed with Dosdall about the little overall effect on his work, save for minor adjustments to forms and methodology, and added that the new standard has strengthened the valuation field.
“It has enhanced our position as a niche firm because it has pushed regular CPAs and other people who want to dabble in this particular industry out of place,” said Wisehart. “It has, I think, done a lot of good.”
According to Dupke, the effect on part-time valuation analysts was not an accident. “We felt it was very important from the CPA’s perspective that if you’re already doing a good job that this really wouldn’t be changing anything. There are minor changes in terminology, but this is consistent with the [American Society of Appraisers], with the [National Association of Certified Valuation Analysts] standards, with the [Uniform Standards of Professional Appraisal Practice] standards and with the [Institute of Business] standards. We also looked very carefully at the ones written by the Canadian Institute of Chartered Business Valuators. These are compatible with all the North American standards.”
Dupke pointed to the ASA’s use of the word “certification,” and said that for the CPA that term has a different significance, related to providing an opinion on a financial statement audit.
“So what we did is we have a similar type thing in the SSVS, but it is called the valuation analysts’ representation and essentially the same process, just that we stayed away from the word ‘certification,’ because of the special meaning that that has to CPAs who are auditors.”
Definition of the types of reports that valuation experts can conduct was also tweaked in the standard — an effort Dosdall appreciated: “They did a good job defining the types of reports we can issue; the estimate-of-value report, which is an opinion report, or the calculation-of-value report, which is a lower level of service where you are not expressing an opinion. I think that’s good, because not all clients ... need the full-blown Cadillac version — and they still allow for oral reports.”
A NECESSARY TOOL
For Brian Bornino, CPA, ABV and director of valuation services at GBQ Consulting LLC in Columbus, Ohio, the new standard was needed — even if his firm hasn’t felt the effect.
“For larger, well-established valuation practices that had multiple professionals with multiple professional designations who already prepare valuations in compliance with valuation standards, there shouldn’t be much of an impact,” said Bornino, whose firm works on approximately 250 valuation projects a year. “For the small sole practitioner or for the CPA firm who dabbles in valuation, it could be a major issue because they were basically standard-less. This is a good thing for the valuation industry because it raises the bar for many who compete in the lower end.”
In response to the new standard, Joan D’Uva, CPA, ABV and an officer in the litigation and valuation group at Amper, Politziner & Mattia in Bridgewater, N.J., offered CPE training to her staff, as well as editing reports and engagement letters to make sure the changes were taken into account.
Aside from the difference in some language as compared to the other standards, D’Uva said that the AICPA is making the distinction on an estimate of value between a valuation and what the institute is now calling a calculation. “There are two estimates for value,” she explained. “One is a valuation and one is a calculation. One is a conclusion of value and one is a calculated value. It might not be a bad thing from a liability standpoint; this way if you are saying up front it’s a calculated value, it alerts the reader that the methodology was limited and the appraiser has not exercised judgment as to alternative methods. I think it has provided some confusion in knowing where to really draw the line between a valuation and a calculation.”
“It was a long time coming,” she said. “I think everyone knew it would boil down to issuing standards on valuations. You can’t really issue a credential without setting forth certain standards. For those of us who are CPAs and ABVs, we really had to sit down and compare the standards and analyze them and decide what we would need to do differently, if anything.”
CRITICS WEIGH IN
Not surprisingly, most of the critique comes from other associations that have already issued business valuation standards.
According to Bruce B. Bingham, a fellow of the ASA and chair of its International Education Committee, SSVS No. 1 was developed by the AICPA for its members and is applicable only to CPAs performing business valuation engagements under fair value, whereas ASA business valuation members practice according to the Uniform Standards of Professional Appraisal Practice that were established in 1986 and a series of ASA standards that expand upon the USPAP pronouncements.
“While the AICPA and USPAP standards are not inconsistent, the AICPA’s standard adds to the ‘alphabet soup’ of various issuers,” Bingham said via e-mail. “ASA’s goal for the entire business valuation profession is the development of a single set of international BV standards that can be used by all business valuation practitioners and their clients, as well as legislators and regulators.”
Parnell Black, chief executive of NACVA in Salt Lake City, is on board with developing a more comprehensive standard and is supporting the efforts of the North American Business Valuation Council. Of the AICPA standard, Black said that there were a few aspects his organization didn’t like. Aside from not agreeing with the allowance of oral reports — “We think that is going to get a lot of people in trouble,” he said — Black’s other major criticism is that the standard is too long and should have been divided into two documents. “[It’s] a standard and a practice aid of sorts because it’s very extensive and goes into great detail on procedures,” he said. “It goes overboard in that regard.”
Black acknowledged that the AICPA did contact his association for feedback and that they were included in the drafting process. “We would provide extensive and very thorough feedback on what we thought needed to be incorporated in the standards or deleted or done to improve the document,” he said. “There are things that were pointed out that we feel weren’t heard, but we do know that some of what was suggested was heard and incorporated.”
Black, however, said that the additional standard has added to confusion: “It certainly has made the water more murky. I will say that the consensus of opinion I have heard at large has been that this was not necessary for the AICPA to do. NACVA has been trying for many years to bring the community together to create one standard that would apply to everyone and I think that’s what the people wanted to see the AICPA do, because they had the clout.”
Since the AICPA Council granted the Forensic and Valuation Services Executive Committee standard-setting authority last fall, any future standards in business valuation will be issued by that body, instead of through the Consulting Services Executive Committee, according to Dupke.
“I think there are a number of areas where additional guidance will be provided,” he said. “So I see some additional ones coming down the pike.”
Though Mard said that there is no discussion of SSVS No. 2, a movement has begun in regards to fair value with the Financial Accounting Standards Board. “FASB is well on the way to requiring fair value of many line items on a balance sheet,” explained Mard, who sits on the board’s Valuation Resource Group. “What’s happening now, and we’re in transition so it’s not complete yet, but FASB is requiring that fair value be determined on each line item of the assets and on each line item on the liabilities, so now you subtract the two and you get a much closer market value of the equity. There’s processes it has to go through, but virtually everyone involved with that is a CPA and they are members of the AICPA. Now how are they going to do that without also complying with SSVS? ... There’s an evolution coming that’s very complicated.”
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