I want to address the reliance on third party appraisals and the requirement for their use. I first want to address the Professional Standards that apply to all Certified Public Accountants Certified Valuators and Analysts. Within the business valuation standards of both of these professional business valuation organizations is paragraph 20 that discusses “Using the Work of Specialists in the Engagement to Estimate Value”
American Institute of Certified Public Accountants (ABV) and National Association of Certified Valuators and Analysts (CVA)
The professional standards, in paragraph 20, from both organizations state:
“In performing an engagement to estimate value, the valuation analyst may rely on the work of a third party specialist (for example, a real estate or equipment appraiser). The valuation analyst should note in the assumptions and limiting conditions the level of responsibility, if any, being assumed by the valuation analyst for the work of the third party specialist. At the option of the valuation analyst, the written report of the third party specialist may be included in the valuation analyst’s report.”
When this became effective in 2008, there was a lot of discussion about what this meant. The business valuation leadership that was providing continuing education indicated that individual business valuation practitioners should determine the qualifications of the third party appraiser and make a determination if they were qualified to perform the real or personal property appraisal. This is not included in the professional standards but that is what was being advocated.
So, I believe that this is a good practice for the business valuation professionals to follow. The problem is that the business valuation experts are not addressing any reliance that they are giving to the real or personal property appraisers. By utilizing the third party appraisals and not including their reliance on the appraisals, is a violation of their professional standards.
American Society of Appraisers Principles of Appraisal Practice and Code of Ethics
Section 6.9 states:
“In some cases, the nature of the appraisal assignment calls for special professional knowledge and abilities in addition to those possessed by the appraiser. In such an instance, it is both necessary and proper for the appraiser to employ other appraisers and/or members of other professions to obtain data and derive conclusions relative to specific parts of the work. The principal appraiser builds his final conclusions, in part, on these contributions, taking responsibility for the final result but subject to the validity of the underlying or constituent contributions.”
Self-Prepared Real and Personal Property Appraisals
The issue is when a business valuation expert takes it upon themselves to determine the value of the real and or personal property. The question becomes, what training have they had or certifications obtained in the specialty area. What I have seen in the past is not supported by any of the procedures as dictated by USPAP.
I recently saw a business valuation report that took the historical cost and recalculated the depreciation based on revised economic lives and indicated that the result was Fair Market Value. This is not what USPAP indicates as the methodology for determining Fair Market Value.
Conclusion
There are generally accepted valuation practices for various types of appraisals. The appraisals should follow the generally accepted valuation practices so that other appraisers have the ability to replicate the results. Unfortunately, in the business valuation world, a lot of business valuation experts use their judgment and arrive at a value, without using generally accepted valuation practices, arriving at an incorrect value.
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