The Triple Crown of Valuation Reports
How CPAs can communicate their responsibilities and manage risk more effectively in their reports and engagement letters.
November 12, 2007
by James Hitchner, CPA/ABV
A detailed valuation report should be a winner in three major areas: communicating the value of conclusions to intended user(s), conforming to standards and ensuring protective language for the valuation analyst or firm. That’s the “Triple Crown” of valuation reports. However, one leg of this Triple Crown is often overlooked — protective language and risk management.
While proper communication of a value conclusion and compliance with standards are important, CPA financial experts often do a poor job of including protective language in their reports and in their engagement letters. There is sample language that financial experts can put into these documents to help them manage risk in an engagement and more fully disclose what they are or are not responsible for.
Editor Note: James Hitchner will be speaking at the AICPA National Business Valuation Conference, New Orleans, LA, December 2-4.
Examples of Sample Language
Below are examples of sample language that financial experts can consider for use in their reports and engagement letters in valuation services.1 This language can also be easily modified for litigation services, including lost profits damage measurement engagements. The names and data are fictitious.
At your request The Accurate Valuation Group, Inc. (“AVG”) was retained to prepare a valuation analysis and appraisal (valuation engagement and conclusion of value) and detailed/comprehensive appraisal report to assist you and your client, Mr. Gustave Gracie, [the Court or other] in the determination of the fair market value of 25,000 common shares of Gracie Markets, Inc. (“Gracie” or the “Company”), which represents a five percent common stock interest in Gracie. This five percent minority interest does not possess any elements of control (minority interest), has no readily accessible market and is thus non-marketable. The value conclusion is considered as a cash or cash equivalent value. The valuation date is January 1, 2008. This valuation and report is to be used only as of this date and is not valid as of any other date.
Valuation and Analysis
We have performed a valuation engagement and present our detailed report, as those terms are defined in the “Statement of Standards for Valuation Services (“SSVS”) No. 1” of the AICPA. This valuation was performed solely to assist in the determination of the value solely for gift tax [other] purposes and the resulting estimate of value should not be used for any other purpose or by any other party for any purpose without our express written consent. The estimate of value that results from a valuation engagement is expressed as a conclusion of value.
Our analysis and report are in conformance with the [if appropriate] 2008 [other date] Uniform Standards of Professional Appraisal Practice (“USPAP”) promulgated by the Appraisal Foundation, the ethics and standards of (ASA, IBA or NACVA)2 and with IRS [if appropriate] business valuation development and reporting guidelines.
Any summary of, or reference to, the opinion, any verbal presentation with respect thereto, or other references to AVG in connection with this engagement, will be, in each instance, subject to AVG’s prior review and written approval, except as may be required by a governmental agency or court. The opinion will not be included in, summarized or referred to in any manner in any materials distributed to the public without AVG’s express prior written consent.
There were no restrictions or limitations in the scope of our work or data available for analysis.
The approaches and methodologies used in our work did not comprise an examination in accordance with generally accepted accounting principles, the objective of which is an expression of an opinion regarding the fair presentation of financial statements or other financial information, whether historical or prospective, presented in accordance with generally accepted accounting principles or auditing standards. We express no opinion and accept no responsibility for the accuracy and completeness of the financial information (audited, reviewed, compiled, internal, prospective or tax returns) or other data provided to us by others and we have not verified such information unless specifically stated in this report. We assume that the financial and other information provided to us is accurate and complete, and we have relied upon this information in performing our valuation.
Based on our analysis as described in this valuation report, and the facts and circumstances as of the valuation date, the estimate of value of 25,000 shares of common stock of Gracie Markets, Inc. as of January 1, 2008, on a minority, non-marketable basis is $1,646,000, or $58.56 per share. This conclusion is subject to the “Statement of Assumptions and Limiting Conditions” found in Section X of this report and to the “Valuation Analyst’s Representation/Certification” found in Section X of this report. We have no obligation to update this report or our conclusion of value for information that comes to our attention after the date of this report.
Distribution of this letter and report and associated results, which are to be distributed only in their entirety, is intended and restricted to you, your client, and your client’s accountants and attorneys, solely to assist you and your client in the determination of the fair market value of the subject interests for gift tax [other] purposes and is valid only as of January 1, 2008. This letter and accompanying report are not to be used with, circulated, quoted or otherwise referred to in whole or in part for any other purpose, or to any other party for any purpose, without our express written consent.
We hereby grant consent for this letter and report and associated results to be provided to the Internal Revenue Service [other].
This is only a sample of what CPAs can do to communicate their responsibilities and manage risk in their reports and engagement letters.
2 ASA (American Society of Appraisers); IBA (Institute of Business Appraisers); NACVA (National Association of Certified Valuation Analysts).
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James R. Hitchner, CPA/ABV, ASA Managing Director, The Financial Valuation Group, President, Financial Consulting Group, President, Valuation Products and Services, Editor in Chief, Financial Valuation and Litigation Expert journal. Mr. Hitchner will be presenting “Reports, Reports and More Reports.” He will be handing out sample report language from Valuation Products and Services’ AICPA Business Valuation Standards Compliance Toolkit (sample reports and engagement letters, compliance checklists and flowchart, etc.) www.valuationproducts.com that will assist CPAs in conforming to the new AICPA “Statement on Standards for Valuation Services (SSVS) No. 1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset,” which is effective January 1, 2008.