Live update from the TAF Business Valuation Roundtable

"What is the problem we're trying to solve," Jay Fishman asked to kick off today's TAF Business Valuation Roundtable, in Washington DC.  "In contrast to the accounting profession, some people perceive that there is inadequate infrastructure for the business valuation profession," he said.

Fishman, co-creator of the Roundtable with Tony Aaron, sees that the users of appraisal reports have been clamoring for standardization of practice, code of conduct, disciplinary mechanisms, and uniform best practices--and that "we may have lost some public trust in the process."  The purpose of this meeting, Fishman said, is to start that process for a profession "that's barely more than forty years old."

"We've got the PCAOB and FASB and SEC represented here," said Aaron, "not as an inquisition, but because we need their input."

Here are the topics and discussions:

  1. Qualifications.  Aaron directed the discussion to BIll Holder, the Dean of the School of Accounting at USC.  "Many schools now recognize the need to broaden education to better understand accounting valuations, at least for those involved in the financial reporting process," he said.  "The ability to offer valuation specialists to teach is not common however, at least not in accounting," he admitted.   He described a redesign of USC's curriculum to include more financial valuation components in the core instruction.  Wendy Pirie from the CFA Institute commented that "I can't think of a single profession that doesn't require an undergraduate degree, though the question of  whether you need to specify the discipline."  Paul Barnes from Duff & Phelps agrees that the common sense approach would seem to mandate an undergraduate degree, with a quantitative focus of some sort.  "At the least," said Greg Forsythe, "you might hold the expectation that some one have a degree by the time they consider certification within the profession."  Don Charles (E&Y) understands however that there are people who find engagements, supervise engagements, and do the work.   "These individuals may all have different education and concentration and work experience expectations," he said.
  2. Importance of valuation.  Holder continued to say that "every asset south of cash has a valuation implication," so most accounting curricula spend time with entry level professionals talking about valuation of goodwill or in process R&D.  "But now we see that it's pervasive, and this requires changes in training approach."  One of the issues, is that "it would be almost impossible to prepare some one through an undergraduate degree for the variety of business valuation experiences and demands," said Paul Barnes.  So, while a degree might be a minimum requirement, professional experience will be more important.   "Any one of us has probably hired people from any of the quantitative undergraduate disciplines, including the liberal arts," added Jim Hitcher (FVG).  "We generally require that new people get at CFA or an MBA however, as part of their work experience, if they don't have finance or economics or accounting in their backgrounds."  Jerry Mehm agrees with Hitchner that you're unlikely to allow some one with the minimum professional experience (five years, for instance, for an ASA) to sign off without supervision on a completed business valuation report, "particularly if the report is for financial reporting purposes."  Barb Vanich of the PCAOB said she was "glad to hear there was pushback" between the professions on training and standards.
  3. Mehm says that "we don't have to worry that art history majors are being turned away.  Generally they're not interviewing at Ernst & Young.  The problem is that we don't have strong undergraduate education in valuation."  Forsythe notes, however, that the more quantitative students often make good hires, but don't advance as far in "what is now a principles-based profession."  In addition "in places other than the US, requiring a university degree may hold people out of the profession."  He cites the fact that when he got his chartered accountant license in the UK there was no undergraduate degree requirement.
  4. Professional credentials.  "Should members of our profession work toward certification," asked Aaron.  Hitchner started:  "I think the profession spends a lot of negative energy, perhaps more than the users, in designation wars.  But they all require an exam, a certain number of hours of education, and different levels of professional experience."  So Hitchner agrees that designations are good, but that professional experience is what matters.  "Most users see what firm you're from, and assume you have the necessary credentials and experience to perform the job," said Barnes.   "Designation is creating more confusion than clarity for the users.   Paul Beswick (SEC) says "I'm not sure we know the difference between the designations, and I'm not sure most consumers do either.  But he distinguishes between preparation of valuations for management or for external services."  The model he sees is that controllers do not need to have a CPA, for instance. Carla Glass agrees:  I still spend a lot of time educating users on what a business valuation  certification means."
  5. Intangible assets.  Forsythe comments that "we're talking about business valuation certifications, but there's also the world of valuing intangible assets.   At the beginning all the people doing intangibles were coming out of BV.   Now you're getting so many people coming into intangible asset valuations from other areas, and none of them have the previous experience of valuing entire businesses."
  6. Public outcry.  Most of the public outcry on fair value has come from the world of financial instruments," says Barnes.  "That's where you'd say that the profession has let down the consumer.  Perhaps we need to keep that in mind when considering the right answer.   John Glynn feels that in this case perhaps the issue is more internal to the professionals.  "There may not be lots of restatements, but the issue is more that there's bubbling concern among the people involved in the completion of financial reporting.  The people with one set of letters after their names are coming up with different answers than the people with a different set of letters after their names," he argued, and that's where the public trust can potentially be betrayed.
  7. Continuing education. "It's there and it's getting more sophisticated," said Hitchner.  "I don't think this is a problem, and one of the advantages of being part of a certifying organization is that they all require CPE."
  8. Should there be a certification expressly for valuation for financial reporting?  Mark Zyla asked this question. One approach is that groups like TAF are getting standards setting documents out that create best practices.   John Glynn agreed that this question needs to be answered.  However, on the other hand, "you can lose track that you're valuing a business if you specialize too much," said Carla Glass.  "You can learn something from every time of valuation exercise, so we need to be very careful about too much specialization in both our training and in our certifications."  Many people note that the discipline of measuring intangibles or financial instruments are leading the tendency for total specialists.