Yes, It Is Ethical To “Judge”—Third Quarter 2021

Yes, It Is Ethical To “Judge”
Cheryl B. Hyder, MT, CPA, CFF, ABV, CVA, CFE
NACVA Ethics Oversight Board Member

The most recent articles published in NACVA’s Association News related to ethics were fascinating. The author who literally wrote the book on valuing small businesses said leveraging available resources and “doing the work” generally ensures an expanded array of services in compliance with professional standards.[1] The immediate past chair of NACVA’s Ethics Oversight Board believes it is possible to transition roles from consulting to testifying expert within the same engagement.[2] I re-visited a NACVA QuickRead article in which the author asserted compliance with professional standards is not as important as results attained.[3] He also recycled advice once shared with him: “standards are only important to those who make or violate said standards”. The importance of professional judgment resonated throughout these (and other) articles. Given the coalescence of socio-economic trends and new or proposed changes to professional standards, the timing of this article is opportune.[4]

Spoiler Alert: We need to ensure mindful and intellectually honest professional judgment is applied to support analyses or conclusions reached in absence of direct relevant and reliable information. Our combined skills, training, education, and experience are byproducts of hard work and may be evidenced by advanced accreditations. These attributes should engender trust among all parties with reliance on our work, including business associates, colleagues, and the courts. 

“Trust your training.”Professionals generally rely on experience to navigate circumstances when there is no clear path forward. This is the conceptual basis for “professional judgment”, a term buried in relative obscurity within decades-old Statements on Financial Accounting Concepts (as amended) and audit literature until recently. 

NACVA provides a convenient comparison chart of business valuation and appraisal standards of major credentialing organizations; it demonstrates the depth of the similarities and absence of conflicting expectations.[5] They align with the AICPA’s Code of Professional Conduct (CPC) as well, and for CPAs, may provide redundancy. Earning either a CPA license or an accreditation demonstrates (a minimum level of) advanced knowledge, and at a minimum, establishes technical credibility. These tangibles are subject to oversight, generally intended to protect the public, including clients and other stakeholders who rely on their work.[6] 

The AICPA introduced a decision-making model for professionals to consult and follow in certain situations, where existing ethical guidance was insufficient to address a specific situation during 2014.[7] Shortly thereafter, AICPA released updated guidance related to provision of certain services, via Statement on Standards for Accounting & Review Services 23 (SSARS 23). Of significance here is for SSARS purposes, the meaning of professional judgment was “adjusted for better alignment” with the “clarified” definition applied to financial audits:
 

Professional Judgment: The application of relevant training, knowledge, and experience within the context provided by SSARSs, accounting, and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the preparation, compilation, or review engagement.[8]

Thanks to SSARS 23, practitioners have added incentive to not substitute “judgment” for “effort”: a new requirement to document how conclusions based on professional judgment were attained. This includes decisions that appear inconsistent with available information and may otherwise be considered “unsupported.[9] Services that now fall under SSARS with its expanded definition might require a little more attention to detail.

The Point: Is it Obvious or “Non-Obvious”?
What could possibly be the purpose of revisiting these two changes in professional literature? Is it possible a standard-setter took note that analyses could be skewed by inappropriate use of “professional judgment”?

I doubt I am the first testifying expert to receive an (opposing) expert report sprinkled with non-specifics intended to justify assumptions, opinions, or findings beneficial to one party or adverse to the other. Disclosure may not be required for litigation but practically speaking, may have unintended consequences to the parties, including deposition-related costs, additional hearings, possibly increasing case-related tensions, and so on.  

The regulatory landscape specific to FVS professionals is limited yet straight-forward, particularly through the lens of understanding “professional judgment”:

• Statement on Standards in Consulting Services No. 1  

CS Section 100 of AICPA Professional Standards, the formal name for SSCS No. 1, was a first effort to sort out different types of “management consulting” services as a practice area separate from attestation and other work. SSCS specifically requires adherence to CPC’s general standards.

• Statement on Standards in Valuation Services No. 1

FVS standard-setting remained dormant for about 15 years, until the six-year project to address the increased number of CPAs performing valuations of privately-owned businesses was completed.[10] The only reference to professional judgment within SSVS was a requirement for valuation analysts to “use professional judgment”, an “essential component of estimating value”.[11] There is no mention of the inherent obligation to conform to CPC standards; the drafters likely assumed conformance a prerequisite to providing any services.

• Statement on Standards in Forensic Services No. 1

Statement on Standards in Forensic Services No. 1, issued in 2018, applies to any AICPA member providing services pursuant to an engagement for litigation or investigation. The pronouncement appears to highlight the importance of applying critical thinking through exercise of professional judgment throughout the engagement. Forensics are an iterative process; SSFS clarifies reliance on established guidance to support a conclusion or opinion where the result does not make sense is a practice to be discouraged.

• International Glossary of Business Valuation Terms (“Glossary”)

Potential changes to the glossary following extensive collaboration with other valuation-based organizations. The process exposed terminology-related conflicts that raised practical concerns over the benefit of unified implementation, and whether it could be achieved without creating needless confusion among stakeholders. The current glossary (6/1/17) does not address “professional judgement”; the proposed, updated glossary (1/5/21) would include some definitions otherwise not found in current valuation or forensic literature:[12]

“Professional Judgment: Refers to the process of making informed and reasonable decisions that are based on the cumulative experiences of the Valuation Professional. This is a skill that requires competence in valuations and results in decisions that reflect best practices of the valuation profession. Users of this glossary should note that there may be local requirements in their jurisdiction dealing with independence, objectivity, and other matters, which are also required in order to apply professional judgement.”

“Professional Skepticism: An attitude that includes a questioning mind and critical assessment of valuation evidence. The Valuation Professional uses the knowledge, skill, and ability called for by the valuation profession to diligently perform, in good faith and with integrity, the gathering and objective evaluation of evidence. Professional skepticism requires that the Valuation Professional has an attitude that emphasizes Evidential Skepticism and Self-Skepticism.”

On the whole, the proposed glossary updates met sufficient controversy that its fate has not yet been decided, more than six months later. 

Final Thoughts
As a profession, we need to ensure intellectual honesty supports our professional judgment much as experiential feedback and supplemental research. There is a time and a place to apply “professional judgment” and it is certainly not my intention to suggest otherwise. The trust and credibility accorded to members of our profession through individual achievement and recognition within the profession will fade quickly if not supported by current actions, analyses, and results.