By Eva Lang - Earlier this month, Sarah Johnson, a senior writer at CFO magazine wrote in the article “How Far Can Fair Value Go?” that the problem with moving from historical cost to fair value financial statements lay in the difficulty of determining value due to “lack of consistent valuation standards, questionable valuation models, and uncertainty about the veracity of valuation specialists.” Ouch.
How can this perception persist when the valuation profession has better standards today than ever before, more sophisticated models, and higher ethical standards? Are a few bad apples spoiling the barrel for the hundreds of knowledgeable ethical valuation professionals? The lesson here is to recognize going into a fair value engagement that bias against valuers may exist. So we must be vigilant in doing our very best work, at the highest ethical level, with no hint of advocacy.
- 1841 reads
Gail Perry, CPA
"Made as Instructed" and "Made as Ordered" Valuations - Have things Improved?
Eva,
I find your blog very informative, e.g. I was not aware till I read in your blog that AICPA has launched a new forensic credential.
I was particularly interested in your post on "The Veracity of Valuation Specialists" in which you ask,"Are a few bad apples spoiling the barrel for the hundreds of knowledgeable ethical valuation professionals?"
Based on the comment posted by Bennett G., who said he left the valuation profession after seeing one too many 'made as instructed' (MAI) valuations (i.e. that lack objectivity,) I would wonder if its just a few bad apples, a couple bushels or entire orchards we're talking about here. There may not always be malicious intent on the part of the apple, but at least in the case cited by Bennett G, there seems to still be some undue pressure (whether imposed, or self-imposed in a belief that will help obtain the client/business, which is an important question in itself) to issue a MAI valuation.
I recall SEC's former Deputy Chief Accountant Scott Taub noting in a Dec. 2005 speech concern about the valuation profession, but that he was 'optimistic' about improvements being made in the profession (see Fair Value discussion in this Dec. 05 speech: http://www.sec.gov/news/speech/spch120505sat.htm . ) Taub had in 2004 identified one area of concern as 'made to order" (MAO) valuations - (slide 12 in this slide deck: http://www.bvappraisers.org/contentdocs/Conference/Valuation_Issues_and_the_SEC.pdf ).
Seeing the comment from Bennett G. about the persistence of MAI valuations makes me wonder how much progress has been made since Taub called out MAO valuations in 2004.
True value?
This is an issue that must be dealt with on every engagement. I have researched the subjective nature of valuations quite a bit, and almost every article dealing with fair value issues mentions the evils of subjectivity and the character of valuation professionals. The only way to balm this sore spot is to do quality work, one report at a time, every time. Those who simply put client's names in sample reports from subscription services will ultimately be shown the door, just like the auditors who did not know the meaning independence. Furthermore, is there a profession where the subjectivity of its practitioners is completely eliminated?
The charlatan profession
I had done valuation work from 1980 until 2005. I was A CVA (no longer). I have discontinued work in this area for one simple reason. In my experience there is an extremely high incidence of valuation reports done on a made as instructed (MAI) basis.
I recently reviewed the valuation reports of a national valuation firm that was to say the least shocking in the lack of due diligence done to support the data used in the income approach. This report has the potential to result in someone being assessed in excess of $1 million in taxable income.
Frankly I am sick and tired of seeing reports showing a value that the client wants and therefore done with a total lack of objectivity and adherence to professional standards. Accordingly I have chosen not to be associated with a charlatan profession.
Bennett G., Maryland