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Gary Trugman

Business Valuation

When opportunity calls you on the phone, should you always answer?

May 19, 2008
by Gary Trugman, CPA/ABV

This is adapted from Understanding Business Valuation: A Practical Guide to Valuing Small to Medium-Sized Businesses, by Gary R. Trugman, CPA/ABV, MCBA, ASA, MVS; published by the AICPA and available at www.cpa2biz.com. The new third edition will be available soon.

Your phone rings. A caller tells you they need the services of a good valuation analyst. What should you do? Should you find out more about the assignment, automatically accept it or recommend a good valuation analyst? Believe it or not, these are serious considerations that many CPAs must think about today. The beginning of the assignment, or should I say the pre-beginning of the assignment, is the most important part of the valuation process for several reasons. Here’s why:

Back to Basics

First and foremost, you need to understand the nature of the potential assignment properly in order to determine if you are competent to fulfill the client’s real need. Take a step back and ask yourself if you are competent to do the job.

We all like to think that we are competent to do every assignment that comes in the door, but, truthfully, we are not. You cannot possibly be competent to take on every assignment that comes your way. If the proper level of competence can be obtained, you can accept the assignment. All the appraisal organizations (and especially the AICPA) have competency standards for their members.

Furthermore, the USPAP (Uniform Standards of Professional Appraisal Practice) requires the valuation analyst to disclose to the client any deficiencies in his or her level of competence — and the proposed remedy for any experience gaps. Imagine telling your client, “Although I am incompetent, I really want to do this job for you.” If they hire you, they deserve what they get.

However, full disclosure to the client is essential. At that point, it is up to the client to decide if they are comfortable with you handling the assignment.

After your prospective client has decided to go forward with you as the valuation analyst, and assuming that you do a good job, there should be no reason in the future for your client to suggest that you didn't tell him or her something crucial to the engagement.

Can you imagine your client sitting in a courtroom on the witness stand, stating, “the valuation analyst never told me that this was the first appraisal he had ever done”? Do not feel intimidated because of your inexperience. We all have to start somewhere. Unfortunately, we are in a more litigious society than we were when I got started, and as a result, we have to be especially careful not to find ourselves a party to a litigation. I prefer to be the expert in a litigation rather than the defendant.

If the client is not comfortable with you or your experience level at the start, do not try to oversell yourself to get the assignment. If anything can go wrong, it probably will, and as a result, you are staring at a malpractice suit. The worst thing you can do is to try to boost your level of experience to impress a potential client. There are serious ethical considerations that go far beyond just the appraisal.

Should You Accept the Engagement?

Before you accept an assignment, your considerations include, but should not be limited to, the following:

  • The possibility of a conflict of interest or the appearance of a conflict of interest

  • The purpose and function of the engagement
  • The amount of time required to do the job
  • The scope of the assignment, including the possibility of giving expert testimony
  • The type of report to be issued

These items must be understood at the start of the assignment, especially since many of these issues will affect your ability to accept the engagement. You can tell from that many of these items are discussed in the standards. Clearly, they are important!

Conflicts of Interest

The telephone rings and you are asked to do a business valuation for a litigation that is pending. The attorney asks if you know any of the parties. You say no. The operative word is “you.” Does “you” mean you or does “you” mean someone in your firm, your staff, your partners, your cousin or your great uncle? You better check for conflicts! Conflicts are a great way to be sued. Sometimes the conflict is immediately apparent. Other times, conflicts are well hidden. The first step in avoiding a problem is to make certain that your firm employs some form of conflict of interest verification form for use in all assignments.

In addition to checking with all professional staff, it is a good idea to make certain that nonprofessional staff do not present a problem. What if one of the parties is your secretary's next-door neighbor? Or what if it is your assistant's child's godfather?

Let's stick with conflicts of interest for a little longer. Checking all staff becomes critically important, especially when you have multiple offices. Imagine your staff in New York being hired against your staff in Chicago. Or what happens when you are asked to represent an existing client?

The appearance of impropriety is almost as bad as the act itself. Litigation services are an area that the SEC (Securities and Exchange Commission) has suggested may impair an auditor's independence.

Think about the cross-examining attorney who is in front of you, almost salivating, asking you some of the following questions:

  • You receive current income from this client for accounting services, don't you?
  • This company has been your firm's client for the last 10 years?
  • Isn't it true that they paid you about $30,000 in fees last year?
  • Do you consider them a good client?
  • You wouldn't want to lose this client, would you?
  • Do you expect this jury to believe that you can sit on this witness stand and be objective with respect to this client when your opinion in this matter may hurt your client?

Even if you can be objective, you're dead in the water. No juror will believe that you are not acting as an advocate for the client. It is often difficult to prove that, as a paid expert, we are objective even when we are truly independent from the client. The burden becomes that much more difficult when you are the client's accountant.

Even in non-litigation jobs (e.g., estate tax valuation), a perceived conflict can arise. Imagine being the tax return preparer taking a deduction on a return for officer's compensation of $1 million and then adjusting it in the valuation to reflect “reasonable” compensation of $250,000. We all know that the standard for deductible compensation for income tax purposes is very different from the concept of a replacement salary on a prospective basis, but think about the reader of the report who does not know any better. If you think that you will educate the reader, think again.

The moral of the story is, just be careful.


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Gary R. Trugman, CPA/ABV, MCBA, ASA, MVS, is President of Trugman Valuation Associates, a firm specializing in business valuation and litigation support services.