In the realm of fair value for financial reporting, extraordinary progress has been made in the efforts to enhance the public trust in valuations. This was clearly evident in the presentations made during the recent RICS Business Valuation Symposium in New York City on June 3. Interestingly, many of the speakers and attendees were personally responsible for a large part of the progress over the years. One important element of this success has been collaboration, and the event highlighted the teamwork that has gone on in the past and that will be key to moving forward on this matter.
Welcoming the attendees was Neil Shah, regional managing director for the Americas for RICS (a London-based valuation professional organization), who was joined by Mary Jane Andrews, president and CEO of the CBV Institute (formerly the CICBV, a Canadian group), and Johnnie White, newly named CEO and executive vice president of the American Society of Appraisers (ASA). These groups are working together to move the profession forward in the area of fair value for financial reporting. Speakers gave an overview of where the profession has been in this area of practice, what’s going on now, and what’s in store down the road. Here are some of the main points:
- The rise of financial reporting in the late 1990s, early 2000s triggered a diversity of practice and “black boxes”;
- Regulators became very concerned and questioned what they perceive as the fractured nature of the profession and its lack of unified qualifications, standards, and enforcement in this area of valuation;
- The Appraisal Foundation began issuing a series of financial reporting valuation advisories as best practices on such issues as customer relationships, control premia, and contingent consideration;
- In 2016, a landmark coalition was formed between the ASA, AICPA, and RICS in a major effort to launch the Certified in Entity and Intangibles Valuation (CEIV) credential and its Mandatory Performance Framework (MPF), which focuses on the level of documentation required to support a valuation expert’s work;
- The enforcement aspect of the CEIV is still in the works; the Big Four have trained their staff in the CEIV but have stopped short of getting their people credentialed until the quality monitoring process is ironed out;
- The IVSC has started to develop standards for financial instruments, which is of particular interest to global regulators;
- The PCAOB has come out with consolidated rules that focus on audits and the use of specialists; about half of the audit deficiencies the PCAOB has found relate to fair value measurements; and
- A “regulatory sea change” is coming with ISQM1 (2020) from the IAASB, which will closely examine internal controls in the auditing process—and will trickle down to valuation experts globally.
Doing better? After all of the time and effort spent in this area, the question is: Are we in a better position in terms of public trust and transparency? The consensus from the conference speakers and audience members is “yes”. For example, the nature of PCAOB inspections with regard to fair value measurements bears this out. Also, it appears, on information and belief, that the regulators are pleased with the progress that has been made, although they have made no definitive public statements to this effect.
Some interesting questions from the audience: Are clients aware of all that is going on behind the scenes? Will they have to pay more for engagements? Clients are largely unaware of what’s happening behind the curtain, say the speakers. The question of higher fees was not directly addressed, but it would be hard to imagine that layering in more process and regulatory requirements would not mean higher costs to customers.
There will be more coverage of the RICS conference in the August issue of Business Valuation Update.
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