Announcing new Abbott Liquidity Factor

While analysts generally agree that a discount for lack of liquidity (DLOL) is an important component of asset-pricing, they haven’t had an empirically based tool for indicating its range and variability—until now.  Beginning with the November 2007 issue, the Business Valuation Update™ will feature the “Abbott Liquidity Factor.”  This new measure is derived from a liquidity database developed by Dr. Ashok Abbott (Business Valuation, LLC), which tracks directly observable data for common stocks of publicly traded securities from the primary national exchanges (NYSE, AMEX, and NASDAQ).  The Liquidity Factor is calculated on a lagged basis beginning when the month’s end outstanding shares and trading volume data become available for the component stocks.  

The Abbott Liquidity Factor is the first indicator to help quantify this material, but rapidly changing discount, reflecting block size, asset size, trading speed and costs.  Analysts may expect larger DLOL during periods of higher volatility, for example, but the Liquidity Factor shows the impact can be much larger—and more volatile—than many would predict from the historic S&P 500 Index.  The ranges in the BVU identify the level of small-stock liquidity and resulting discounts specific to block size and the valuation period.  For a more complete discussion, click here for the BVU article, including the back page portion displaying the current Abbott Factor.  Also: If you’re attending the ASA BV Conference in San Diego next week, be sure to catch Dr. Abbott’s session on Discounts and Premiums, or stop by the BVR booth for more information. ASA-goers will also have a copy of the November BVU in their tote bags.

Conference update:  We hear from ASA planners that the San Diego fires have not affected and do not threaten the airport or the conference venues.  All conference activities will go forward as scheduled.  We do send our best wishes for all in the California communities affected by the wild fires, and our hopes for speedy containment.  For current information on impacted areas, visit www.sandiego.org (click on “San Diego Wildfire Updates”).

PCAOB report shows where auditors still need help

“We have heard some concern that auditors are not consistently effective at assessing risk and then responding appropriately,” said Chief Auditor Thomas Ray of the Public Company Accounting Oversight Board (PCAOB) to its Standing Advisory Group last week.

Additionally, our inspectors have observed some cases in which auditors did not respond appropriately to fraud risk factors, [as well as] some cases in which auditors appear to have approached their consideration of fraud as an isolated, mechanical process rather than an integral part of the audit.

In addition to a risk-assessment project, the Board’s 2008 standards-setting priorities will include “keeping our eyes” on fair value developments, Ray said.  “We have been evaluating the existing …standards on auditing estimates, auditing fair values, and using the work of specialists” to determine if the Board needs to amend its standards and/or issue further guidance.  While SFAS 157 will make some aspects obsolete, most of the PCAOB standards will still apply to the new accounting rules.  Eventually, the Board will update its standards, Ray predicted, “some time in the next twelve months.”  For his complete statement, click here. 

More PCAOB news:  Last week, the Board issued its inspection of PricewaterhouseCoopers LLP, noting several deficiencies in the firm’s audits of accounts receivable, goodwill impairment, and mortgage servicing rights.  All PCAOB reports are available here.  The Board also published for public comment staff guidance on auditing internal control over financial reporting in smaller companies.  This week, the Board identified the top 11 inspection issues—including business combinations, asset impairment, and use of specialists—in its report on U.S. firms that perform fewer than 100 audits; for more information, click here.

First-ever employee assessment for BV

Too often—especially during the current labor crunch—valuation practices may be tempted to make new hires without sufficient objective input as to their “fit.”  Off-the-shelf assessments aren’t tailored specifically to the needs of the BV profession, and after more than a dozen years of watching employers struggle with these decisions, Borrowman Baker has developed the first-ever pre-employment benchmarking system for BV candidates. 

How it works: Potential hires complete an online evaluation in about fifteen minutes.  Their scores are compared to a Job Match Pattern, further correlated to their functional levels.  A “Placement Report” compares each candidate to successful individuals in Thinking Style, Occupational Interests, and Behavioral Traits.  In addition to analyzing the “fit” of potential hires to the position, the reports also suggest helpful interview questions.  BV firms can use the assessments on current employees, to improve productivity and identify coaching needs.  The new pre-employment testing is *free* for a limited time (until December 15, 2008).  To find out more, go to BorrowmanBaker and click on the link at the top of the page; or visit John Borrowman at his booth at the ASA BV conference in San Diego, or at the AICPA National BV Conference in New Orleans in December.      

FASB to expose Liabilities and Equities for comment

In its meeting last week, the Financial Accounting Standards Board (FASB) decided to expose the Preliminary Views (PV) on its current Liabilities and Equities project for a six-month period.  Among other aspects, the Board will solicit feedback about its characterization of a dividend payable.  While the Board has committed to the public exposure, it has not yet issued its Preliminary Views, a FASB spokesperson told the BVWire™.  “We expect the PV to be…posted to the website in November, after which the comment period will start.”  For the latest project update, click here.

A good time to take a course in intangibles

In their latest educational offering, “Valuation of Intangible Assets for Financial Reporting Purposes,” the American Society of Appraisers (ASA) takes participants through three full days of instruction, from the most recent changes in accounting requirements, to a full understanding of SFAS 157, to application of current valuation methods.  In addition to top-flight technical insights, instructors from nationally known valuation practices—including Duff & Phelps and Grant Thornton LLP—will also analyze issues related to intellectual property litigation. This November, the course will be taught in two locations (Manhattan Beach, CA and Brooklyn, NY) and seats are going fast.  Click here for a course overview and registration.

Competing VC data differ by $1 billion for Q3 2007

Venture capitalists invested $7.1 billion in 887 deals in the third quarter of this year, according to the latest MoneyTree™ Report, published this past weekend by PricewaterhouseCoopers and National Venture Capital Association, with data from Thomson Financial. The total was down slightly from Q2 2007, which saw $7.2 billion invested in 1,000 deals.

But a contemporaneous report by VentureOne (Dow Jones, Ernst & Young LLP) claims that 635 companies raised $8.07 billion in Q3 2007, for an 8% increase over the same period last year.  “This marked the ninth consecutive quarter of gradual year-over-year growth in dollars invested,” says a Forbes.com report, “and is the highest quarterly investment total since the first quarter of 2001.”

How to explain the discrepancies?  Yesterday, the Wall Street Journal reported the VentureOne data (Dow Jones is its publisher).  The Associate Press reported the MoneyTree/Thomson Financial data, which was picked up by papers across the country, as in this summary by Business Week.  PEWeek Wire, also published by Thomson, promised a breakdown of the data—but so far (as of BVWire press time) hasn’t reported its findings. We’ll keep investigating the variance; in the meantime, feel free to email your insights to the editor.

Largest ESOP confab offers large networking

The ESOP Association’s Las Vegas Conference & Trade Show on November 8-9, 2007, continues to be the largest technical conference geared toward ESOPs.  The gathering attracted over 1,200 attendees in 2006, and this year is sure to bring as many (or more) mid- to upper-level executives of ESOP companies, ESOP professionals, and CEO’s from smaller ESOP companies.  Top ESOP experts will lead two days of intense review of current ESOP issues, including appraising ESOP shares, ESOPs as acquisition tools, S corporation rules, and fiduciary responsibility for valuation.  If you plan to attend, you can also get Willamette Management Associates’ latest (2nd edition) Guide to ESOP Valuation at a significant conference discount—just mention BVWire at the WMA booth.  If you can’t get to Vegas, you can still pick up the ESOP guide at BVResources.