Accounting Careers in Appraisal and Business Valuation
If you have a considerable degree of creativity and insight, this just might be the job for you.
June 17, 2010
In part because of Accounting Standards Codification 805 and 122, which concern the valuation of assets in the context of business combinations, the accounting profession has taken an increasing interest in developing careers and in establishing departments that focus on business valuation and appraisal. Section 201 (g) (3) of the Sarbanes Oxley Act prohibits auditors from providing appraisal or valuation services. But the accounting and appraisal functions interact in the context of mergers and acquisitions and there is synergy between the two disciplines so that a department within a firm can attract non-audit clients and potentially develop long-term relationships. As well, a valuation department can review the work of outside appraisers through appraisal review and management (ARM) services. Hence, some CPAs might be interested in combining business valuation or appraisal with accounting.
An appraiser is someone who gives an opinion of value. Qualified appraisers have the requisite experience and recognition from one of the certifying societies. Of the three key disciplines within appraisal, business valuation, machinery and equipment and real estate appraisal, business valuation is of greatest interest to accounting firms, with real estate being second.
With respect to real estate appraisal, there are state-licensing requirements that vary from state to state, but there is no formal educational requirement for any of the business valuation and appraisal fields. No one kind of educational background fits best, although finance, accounting and economics majors are often a good fit. But it is not unusual for appraisers and business valuation experts to come from diverse fields like teaching.
The field involves a considerable degree of creativity and insight and some CPAs might find it complements their background well. Although a college degree is not technically required to pursue an appraisal career, college coursework is useful and it doesn’t hurt to have a graduate degree. Some appraisers also have the CFA certification.
Michael McGuire, a principal of the Norwalk, Conn.-based real estate appraisal firm Austin McGuire, points out that appraisal requires a combination of interpersonal and analytical skills. Real estate appraisers cannot just crunch numbers by rote, he emphasizes. Real estate appraisal requires an understanding of the marketplace and a grasp of the entrepreneurial overview of business as well as a grasp of basic valuation methods.
There are only a handful of real estate appraisal courses in colleges and while programs do exist — not necessarily as majors – they are usually offered as graduate programs and as part of Forensic programs. Rather, practical experience along with training programs from five organizations, the Appraisal Institute (AI), the American Institute of Certified Public Accountants (AICPA); the National Association of Certified Valuation Analysts (NACVA); the Institute of Business Appraisers (IBA); and the American Society of Appraisers (ASA) are means by which to attain relevant training. As well, experience is crucial.
Beyond the technical know-how, appraisal and valuation require understanding of business and interpersonal skills. Rob Schlegel, principal of Houlihan Advisors in Indianapolis and incoming president of the American Society of Appraisers describes the best applicants as being multidimensional. Business valuation is a specialized discipline that integrates accounting with finance, an understanding of human resource management and business strategy. Human resources and strategy are, after all, many businesses’ most important assets.
“While accounting is like taking an X-Ray of the firm’s financial performance, appraisal is like looking at the soul of the business. You need to look at the net present value of future benefits,” not just historical cost, Schlegel notes. Thus, appraisers need to be broad minded and look at the quality, pertinence and persistence of earnings into the future.
Thus, CPAs who are interested in broadening their backgrounds and integrating additional aspects of business thinking might consider developing a background in valuation or appraisal. Schlegel adds that there are a number of good books to read to help discern whether the field is of interest. These include Shannon Pratt’s and Alina V. Niculita’s Valuing a Business: The Analysis and Appraisal of Closely Held Companies and Gary R. Trugman’s Understanding Business Valuation.
McGuire and Schlegel emphasize the importance of both verbal and written communication skills. McGuire says that of 10 hires, two turn out to be first rate and five turn out to be failures. The psychological trait known as cognitive complexity, the ability to integrate diverse and sometimes contradictory information would seem to be an important characteristic to succeed in the valuation field. As well, basic intelligence tests might be useful for selection. However, the use of standardized degree requirements (e.g., a master’s degree as a minimum requirement) might serve almost the same purpose if applicants are selected from elite schools. It is evident that valuation and appraisal require a high degree of both mental ability and interpersonal skills in order to develop relationships with clients.
One tactic that McGuire suggests would be to ask applicants to value a complex real estate purchase (or business acquisition, as the case may be). In general, work samples or case study problems of this kind are even better than IQ tests (which in turn are better than traditional unstructured interviews) in selecting talented employees. In general, work samples and job tryouts with content similar to the actual job have validities (correlations with performance) of about 0.55, IQ tests have validities of 0.4 to 0.5, while unstructured, traditional interviews have validities of 0.2 (Herbert G. Heneman, III and Timothy E. Judge. Staffing Organizations, 6th Edition. New York: McGraw-Hill Higher Education, chapters 8 and 9) Hence, in building a good staff in this field rigorous testing would be well advised.
Sara Stephens of Little Rock, Ark.-based Richard Stephens and Associates and vice president of the Appraisal Institute says the ability to analyze, collect and discuss data with clients as well as the commitment to the field is critical. Thus, there is a need for precision and detail orientation as well as strong interpersonal and communication skills. Appraisal is not a nine-to-five job, Stephens emphasizes. Considerable travel is required as are meetings with clients on weekends and during evening hours.
Although programming and software skills are not typically the dimension that distinguishes the best applicants, Stephens, McGuire and Schlegel emphasize the importance of having very good spreadsheet skills as well as skills with software like Argus, although there is no substitute for imagination and insight.
It is difficult to train business valuation and appraisal experts from scratch because much of the field depends on practical experience. Thus, in building a department within a firm, hiring at least one or two experienced valuation experts is necessary. Writing in Appraisal Today, Ann O’Rourke argues that good appraisers like new challenges and aim to find out “the real story.” They care about their profession and don’t just crunch the numbers and utilize programs like Argus as a “black box.”
Appraisers tend to like their jobs. The diversity of problems and intellectual interest pose a lively mix that fits well with — but differs from — traditional accounting responsibilities. Because the field requires the development of experience and practical imagination, developing a career requires patience.
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Mitchell Langbert, PhD, is an Associate Professor at Brooklyn College. Widely published on the subject of human resource management, Langbert has consulted and served as an expert witness.