Quality of valuations for financial reporting is up—and so is competition, litigation

BVWireIssue #87-1
December 2, 2009

The quality of valuation reports from specialists has improved dramatically over the last few years, according to a panel of “Big 4” auditors at the ASA Fair Value Summit, held November 13th in the San Francisco offices of KMPG. The days of “rogue/cowboy” valuations are over, says Josh Cashman (Arcstone Partners), who provided a special report on the event to BVWire, highlighting the following points:

  • Fair value regulation? The panelists foresee continued self-regulation for the BV industry, driven primarily by the Big 4 firms, without any formal standards in the near future.
  • Increased litigation. Expect a wave of fair value litigation in the next two to five years, focusing on 141R—in particular the fair value measurements made today on the basis of contingent consideration (earn-outs, etc.) that play out differently in the future. Although the first round of lawsuits may not target valuation specialists, look for the “losers” to turn around and try to recoup damages from valuation providers.
  • International challenges. Without a single, SEC-like agency to regulate business valuation on an international scale, valuation analysts should continue to track the subtle but meaningful ways in which auditors from various countries handle reviews. (A good source? The BVWire routinely reports on international activities—as in our last issue.)

Finally, the auditors’ panel cautioned attendees to prepare for sensitivity analyses. To avoid litigation, companies will demand a range of values and some sort of confidence interval. “In other words—the secret is out, and BV professionals aren’t expected to arrive at a single number; rather, our work should provide a reasonable range of values, supported by a confidence interval,” Cashman says. “Auditors are now asking: What is the tightness of the range, and what is the sensitivity?” While companies cannot express a range of values in their balance sheet, a possible solution could be to include the confidence intervals in the footnotes, to satisfy investor disclosure needs.

Don’t miss FV Summit in New York.  If you missed the one-day ASA overview, be sure to sign up for BVR's 3rd Annual Summit on Fair Value for Financial Reporting in New York City on February 1-2, 2010. For the first time, registrants can attend both days in person—or view any or all sessions via live webcast, right from their desktops. To get the complete agenda and a podcast from Chair Neil Beaton describing the Summit, click here.

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