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Yvonne Hinson

Keith Sellers
How to improve business valuation education

Universities need BV practitioners’ help to better prepare budding CPAs for the real world.

January 6, 2014
By Yvonne Hinson, CPA, Ph.D., and Keith Sellers CPA/ABV, Ph.D.

Business and asset valuation has become increasingly important in the CPA world in recent years due to the multitude of FASB accounting pronouncements requiring fair value measurements. Once a niche field, valuation now is pervasive throughout accounting, financial reporting, and auditing.

The CPA of today must understand much more about valuation methodologies—and the underlying finance and economics concepts—than was needed 30 years ago. These changes prompt some important questions related to higher education. Are universities providing accounting students with the knowledge and skills necessary to participate in this increasingly important field? Are graduates familiar with the various valuation methodologies, including their strengths, weaknesses, and susceptibilities to bias? Are they being taught the different methods used for valuing various intangible assets and common financial instruments under GAAP? The answer in most accounting programs is no.

A practitioner’s perspective

Mark Edwards, a valuation partner at Grant Thornton LLP, says that the increasing scrutiny on valuation models and fair value measurements in assurance makes a basic understanding of the terminology and methodology in these areas critical to the long term success of the accounting profession. With accounting programs now including fair value in their curriculums, the firm has begun hiring students directly into its valuation practice.

“There are very few universities in the United States that we feel comfortable going directly to as national platforms for these hires,” says Edwards, who also is an adjunct professor at Wake Forest University. “As an adjunct professor in valuation I am fully aware that accounting programs are already overloaded with content. However, integrating valuation into these programs at a level where new auditors can understand the terminology and basics will allow them to excel in their careers and speak more easily with their peers and their clients.”

Specialists aren’t the only ones who must possess at least some level of valuation proficiency. Auditors in public accounting are increasingly expected to evaluate and attest to the reasonableness of various fair value measures. Yet problems related to fair value measurements have become a major source of audit deficiencies. Business valuation CPA firm Acuitas Inc. recently analyzed PCAOB reports and found that “Fair value measurements (FVM) and impairment audit deficiencies are particularly significant because these two particular issues account for over half of all recent audit deficiencies. Auditing the estimates and assumptions underlying FVM and impairments requires heightened professional skepticism as these judgmental areas are susceptible to management bias, particularly in difficult economic times.”

The Acuitas report notes that pricing issues, including failure to understand the methods, models, and assumptions used by pricing services or valuation specialists, were the primary cause of fair value audit deficiencies. Evaluating critical assumptions impounded in a fair value estimate requires a level of understanding not presently taught to most accounting students. If the audit team does not have the knowledge to critically evaluate the work, the probability of a failure to “connect the dots” rises for this increasingly critical aspect of the audit.

So even if new graduates do not prepare fair value measurements directly, they will need an understanding of them—whether they are the auditor or part of the accounting team at the reporting entity. The base level of knowledge includes, but is not limited to, the following:

  • Purchase price allocation;
  • Valuation of common financial instruments;
  • Valuation of intangible assets, including discounted cash flow modeling; and
  • Impairment of goodwill calculations.

While this level of knowledge should be offered to all accounting students, many programs are overlooking opportunities to prepare their graduates for more specialized positions related to valuation. And there’s good reason to train such specialists, given growth trajectories in the profession.

A growing practice area

According to the 2012 Big Four Firm Performance Analysis report, growth in advisory services is far outstripping both audit and tax areas:

“By service line, Audit accounts for 45% of total revenues and grew 2.9% from 2011 to 2012. Tax services are 23% of total revenues and also rose 5.6% from 2011 to 2012. Advisory services have been the fastest growing service line for several years increasing share from 22% of total revenues in 2004 to 33% in 2012. Advisory revenues grew a strong 12.2% from 2011 to 2012. …”

The AICPA 2013 Trends in the Supply of Accounting Graduates and the Demand for Public Accounting Recruits report shows similar shifts, with accounting, audit, and tax declining in percentage of new hires between 2002 and 2012 while the percentage of hires for other jobs including advisory work has risen from 5% in 2002 to 18% in 2012.

Given the rapid growth in advisory services, schools should be working hard to give graduates the skills and knowledge necessary to enter related practice areas.

According to IRS Statistics of Income data, there are 4.1 million subchapter C corporations, and they reported combined revenues of $5.7 trillion and net income of $358 billion. If there is a valuation “event” (sale, gift of stock, etc.) for these companies on average every 10 years, more than 400,000 appraisals would be needed annually. Demographic trends also should boost business for BV professionals. The Middle Market Investment Banking Association predicts that more than 671,000 middle market businesses worth an estimated $2.47 trillion will be sold by retiring Baby Boomers between 2011 and 2029. CPAs are uniquely qualified to deal with the valuation issues surrounding these closely held businesses due to their expertise in related income, gift, and estate tax issues.

Given such trends, why is there a lack of detailed valuation education in most universities? The problem is a result of a curriculum that’s already too full, coupled with a lack of knowledge of these methodologies by many existing faculty members. Accounting programs are constantly being told that they need to integrate more into their courses while not removing anything currently being taught. Many faculty members who previously worked in public accounting did so when business valuation techniques were not as widespread. Thus, relatively few accounting faculty have substantial practical experience in valuation.

How to help

Business valuation professionals can help address the problem by providing their expertise to universities. Such assistance usually takes one of three forms. First, practitioners can work with professors to develop material for a BV curriculum. Secondly, CPAs can appear as guest lecturers in accounting classes. Finally, BV experts can teach valuation courses as adjunct instructors.

One such example is Mark Wehrle, a recently retired Deloitte audit partner who teaches “Auditing Fair Value” at the University of Denver as an adjunct professor. “As my auditing career was wrapping up, I saw the disconnect between the extent of valuation knowledge needed by auditors and accountants, and what was being offered on campus,” he says. “It has been very rewarding to move into the classroom to teach these important skills.”

Team teaching or mentoring under an experienced professional helps full-time faculty learn more about BV techniques. As for materials, faculty and adjuncts can take advantage of the vast resources available through the AICPA Forensic and Valuation Services section website. And many firms grant faculty access to internal training materials as long as the documents are used for educational purposes.

In summary, CPAs have a responsibility to engage with universities to ensure that a base level of valuation knowledge is being taught to new accountants. Interns and new employees are increasingly being put into more advanced situations earlier in their careers. A grounded knowledge in valuation basics can make the transition from student to new employee a much more comfortable and enriching experience. To help fill this gap, practicing (or recently retired) CPAs with valuation experience should be welcomed into university accounting programs—both current faculty and future graduates will be better off for it.

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Yvonne Hinson, CPA, Ph.D., is an associate professor at Wake Forest University in Winston-Salem, N.C. Keith Sellers, CPA/ABV, Ph.D., is an associate professor at the University of Denver.