Outsourcing trend—as many problems as potential?

BVWireIssue #86-2
November 11, 2009

Responding to the item in last week’s BVWire™ on outsourcing “entry-level”valuations, Karan Gupta clarifies what his firm (KP Synergies, Delhi, IN) delivers: “Our services offer support to BV and CPA firms in the United States who may be short-staffed but are looking for an economical alternative to hiring entry-level professionals,” he says. His analysts prepare a customized model with all the requisite data (historical financials, guideline companies, risk-free rates, etc.) in Excel/Word formats, to which the client adds any changes or revised assumptions (projections, discount rates, and multiples). “The process is similar to having an in-house analyst prepare the model and then a senior professional review it and come to a conclusion of value,” Gupta says. His firm does not work with or market to end-users; recent projects include valuing trust deed/notes in an IRS dispute and complex 409A valuations for early-stage companies.

A Silicon Valley firm still sees problems. “We have seen firsthand the trend of companies wanting valuation reports for very low fees and a move by some of our competitors to outsource part or all of the work,” writes Jim Timmins, managing director Teknos Associates (Palo Alto, CA.), in response to the same BVWire item. “We see several problems.”

  • USPAP requires that a valuation report list all individuals who contribute significantly. In reviewing many reports that include outsourced contributions, “we have never seen any of the [outsourced] staff listed,” Timmins says.
  • The IRS has identified an unaccredited preparer as a “red flag” in 409A audits. Although offshore providers have a few accredited personnel on staff, Timmins notes, “most of the staff are unaccredited.”
  • Big 4 auditors review valuation reports for tax and GAAP purposes under SAS 73, which requires answers by the professional preparers. “Having the valuation professionals available in the U.S. makes it easier to respond promptly by telephone, compared to many outsource providers who are 5 to 12 time zones away.”

“Finally, we agree with John Borrowman that valuation is a business of judgment, and judgment cannot be outsourced,” Timmins says. “Although many in Silicon Valley focus only on price, we have found that by carefully explaining the legal requirements and the downstream risks to company executives, VC investors, legal, accounting, and other service providers, we create a better understanding of the importance of doing valuation work right the first time, and this has reduced the emphasis on price alone.” 

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