Are the Big 4 ‘out to get’ the FV valuation specialist?

BVWireIssue #89-1
February 3, 2010

That was the first of several “hardball” questions lobbed by moderator Bo Brustkern (Arcstone Partners) at an auditors/analysts panel during BVR’s 3rd Annual Summit on Fair Value for Financial Reporting in New York City this week. Small to midsize valuation firms are making substantial efforts to serve not only their company clients but also the ultimate end-users (public consumers) of financial statements, by making the fair value measurements as robust as possible—what Brustkern calls “bulletproof.”  Frequently, however, the auditor’s response feels “asymmetric,” he said. The reviewer might send back a list of 50 questions, giving the impression that the report didn’t even get read—or worse, that the valuation analysis was “silly.”  Either way, the ensuing discussions “chew up a lot of the client’s time,” Brustkern said.

“Be careful using the term ‘bulletproof,’” answered Tony Aaron (Ernst & Young). “Bullet-resistant should be more your goal.”  Aaron—who gamely took on Brustkern’s auditor questions (in his own capacity, not for E&Y or the Big 4 firms)—also downplayed any “conspiracy theory.” Auditors often use templates, checklists, and other tools to perform their attestation function, he said—i.e., to determine whether financial statements are GAAP-compliant. It’s their job to be skeptical—more so if they haven’t worked with the valuation specialist or don’t see a basic level of sophistication. The bottom-line: “When you look at a report and it says all the right things and has all the right analyses and conveys the analyst understands fair value in the particular context,” that will go a long way to reducing an auditor’s skepticism, Aaron said. “If your work is consistent with the attestation function there should be no fight.”

Toolkit on Contributory Assets. Brustkern, Aaron, and panelist P.J. Patel  (Valuation Research Corp.) agreed that the level of guidance from peer groups (such as Fair Value Forum) and industry organizations has pushed the valuation profession to greater sophistication. “We are constantly looking at best practices and reviewing our internal procedures,” Patel said. Three working groups at The Appraisal Foundation are developing best practices in contributory assets (Aaron is a member), customer relationships (Patel), and control premiums. An example of their excellent, interactive work: The Identification of Contributory Assets and the Calculation of Economic Rents. Look for complete write-up of their session in the next (March 2010) Business Valuation Update™.

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