More attention needs to be paid to prospective financial information (PFI), according to David Dufendach (Alvarez & Marsal), speaking at the ASA 12th Annual Fair Value Conference in Los Angeles. In the past, appraisers have often included language in their valuation reports stating that management projections have been accepted as provided without review—something auditors have expressed concern about. Appraisers should not simply accept the projections the client provides, plug them into a DCF, and then merely apply a discount rate, he says.

Dufendach is the technical author of the financial instruments framework underlying the new Certified in Valuation of Financial Instruments (CVFI) credential from the AICPA. The “application” document for the framework includes a blue-shaded sidebar—the only one in the entire document—that states:

Important: Valuation professionals who obtain management’s PFI for use in their valuation procedures must review the PFI with the appropriate level of professional skepticism (see DF-FI sections 2.16-2.18).

The reference is to a section in the disclosure framework document that talks about having “an attitude that includes a questioning mind and critical assessment of valuation evidence.” The valuation analyst “should not presume management is biased” but shouldn’t simply accept management’s information because of that presumption. Although not completely spelled out in the document, factors and procedures to consider when preparing an assessment of a company’s PFI include, but are not limited to: a comparison of prior forecasts to actual results, a comparison of PFI to industry expectations, checking PFI against other internally prepared financial information for consistency, a comparison of entity PFI to historical trends, an understanding of who prepares the PFI and how often is it prepared, and the performance of mathematical and logic checks.

The CVFI disclosure framework has been issued in the form of an exposure draft, and comments are due Sept. 26, 2017.