Don’t Let Your Valuation Report Get Thrown Out

Litigants sometimes attempt to minimize litigation costs by engaging accountants to perform limited procedures as part of an initial investigation or to assist in settlement negotiations. Such services are permitted under American Institute of CPAs standards. Limited scope engagements by nature do not contemplate all procedures and information required to render an opinion of value.

When unsettled matters escalate into litigation, limited procedure reports may find their way into court. Accountants may have difficulty defending these engagement findings, and courts often look with skepticism at such reports. The consequences can be dire.

Valuation Standards

The AICPA issued Statement of Standards for Valuation Services 1 in 2007, addressing the types of valuation services. It identifies two types of valuation engagements:

Valuation Engagement – "A valuation analyst performs a valuation engagement when (1) the engagement calls for the valuation analyst to estimate the value of a subject interest; and (2) the valuation analyst estimates the value and is free to apply the valuation approaches and methods he or she deems appropriate in the circumstances. The valuation analyst expresses the results of the valuation as a conclusion of value …"

Calculation Engagement – This is conducted when "a valuation analyst performs a calculation engagement when (1) the valuation analyst and the client agree on the valuation approaches and methods the valuation analyst will use and the extent of procedures the valuation analyst will perform in the process of calculating the value of a subject interest—these procedures will be more limited than those of a valuation engagement; and (2) the valuation analyst calculated the value in compliance with the agreement. The valuation analyst expresses the results of these procedures as a calculated value … A calculation engagement does not include all of the procedures required for a valuation engagement."

A valuation engagement results in an opinion of value. The following table summarizes the differences between these engagements.

	Valuation Engagement	Calculation Engagement
Best Used	When presented to a trier of fact.	For planning purposes, preiminary investigation and settlement.
Differences	Opinion based upon unrestricted accountan's choice of approaches and methods. Accepted in court.	Does not include all the procedures required for a valuation engagement. May not rise to the level of an opinion of value. The client influences the choice of approaches and methods. May not be accepted in court.
Types of Report Issued	Valuation	Calculation

Dismissal of Defendant's Expert Testimony

In Surgem, LLC v. Seitz, 2013 NJ Super. Unpub. Lexus 2491, the appellate court agreed with the trial judge and found the defendant's expert's opinion unreliable and his calculation of value report insufficient in establishing the fair value of Surgem. The trial court stated "Seitz's appraisal expert … did not appraise the fair value of Surgem or of Seitz's interest; rather, he testified that he had been engaged to prepare only a 'calculation of value,' an agreement between appraiser and client as to the manner in which the appraiser's work is to be done …" The expert testified that inaccessibility to sufficient information and restricted procedures agreed upon with the defendant limited his report. He stated more work should have been done to develop an opinion. The court found his procedures insufficient for its purposes and accepted the opinion of the plaintiff's expert.

Accountants should prevent calculation reports used in planning, investigating and preliminary settlement negotiations from winding up in New Jersey courtrooms. Detailed conclusion of value reports should be used for disputes going to deposition, court and other formal venues.

Accountants should inform users of limited-scope engagement reports of procedure restrictions and any known information constraints. The report should disclose that additional procedures and new information may change findings. A calculation report should state its specific use (e.g., settlement negotiations) and that additional information and procedures may be required for the findings to rise to the level of an opinion suitable for a trier of fact.

Robert B. Charlton, CPA, ABV, CFF, CVA, is a partner at Nisivoccia LLP. He is a member of the New Jersey Society of CPAs Business Valuation Forensic Litigation Services and Federal Taxation interest groups. Contact him at rcharlton@nisivoccia.com.