Advocate vs Expert: Is There Room as a CVA to be Both?—Fourth Quarter 2020
Advocate vs Expert—Is There Room as a CVA to be Both?
By Karen M. Lascelle, CPA, CVA, CFE
Chair, NACVA Ethics Oversight Board
Let’s cut to the chase. Yes, there is room to be both an advocate and an expert as a Certified Valuation Analyst (CVA). And dare I say, you may build a better, more robust practice for it! However, it can be a fine, blurry line that you do not want to cross inadvertently.
You cannot be all things to all people. That includes being an advocate and an expert at the same time on the same engagement. It is important to clearly define your role in an engagement and the services for which a client is engaging you. As experts, we are tasked with providing opinions that are fair and objective and we need to stick to evidence that is within our area of expertise. The trier of fact should be able to rely on our unbiased opinion based upon our extensive training, experience and expertise. If you do litigation work and have been practicing for a while, you have likely come across the “expert” who is clearly advocating for their client. Let me provide an example.
I was the expert for Party A, the out-spouse, in a divorce. Party B had also retained an expert for valuation services. The valuation was for a closely held construction company. In mediation, as we were discussing the valuation of the company, the expert for Party B proclaimed that there could not be any discretionary expenses in the company as his “client would argue” that every expense paid was absolutely necessary for running the company. This brings up a few questions, in my mind. First, are you really working as an expert if you are relying solely on the client’s word of whether an expense is discretionary? Second, the very nature of discretionary normalization adjustments is to “normalize” expenses “that would not exist in a reasonably well-run, publicly traded company.” Third, are you advocating for your client or are you being an independent, unbiased expert who can rationally think through what the point of discretionary expenses are and why they may need to be adjusted in a valuation? Be careful with always and never. By proclaiming there could not be any discretionary expenses in the company as his “client would argue” that every expense paid was absolutely necessary for running the company, the question is how could that expert make such a statement. Might this indicate bias? Two opposing experts certainly will not come to the same conclusion of value in almost any circumstance. However, there are procedures and professional standards that need to be followed. We will discuss a few of these in a moment.
Before we look at some standards, let’s discuss when we can be an advocate. There are many opportunities in valuation work to advocate for our clients. I will often consult with clients on merger and acquisition deals, helping them to understand the worth of their company, helping them negotiate potential purchases or sales of a company, and even working with a client to understand what the current value of the company is and how they can build value. I will often tell a client that their business is worth as much as they are willing to sell it for and as much as the buyer is willing to pay for it. Does this necessarily equate to fair market value? No. There is investment value and strategic value and any number of reasons a client may be looking for more or less than the fair market value of the company. It is okay to advocate on behalf of the client in this manner. These are all consulting engagements that help me to build a more engaging, successful practice while providing much needed services to clients who are not in need of formal valuation or litigation services.
We can also work with attorneys and their clients in a consulting role, where we are able to advocate for the client, much like we would in a regular consulting engagement. In this role, we are not being hired as the expert. The lines get blurry when it becomes clear that a case is not going to be settled and will be proceeding to court. If the attorney then wants to engage the consultant to be an expert, it may be difficult to establish independence from that point forward.
We always want to be in compliance with our Professional Standards as issued by the National Association of Certified Valuators and Analysts. Whether you are an advocate or an expert, you want to be sure you are following ethical standards. Our first standard of integrity and objectivity tells us we need to “maintain professional integrity” and that we cannot “knowingly misrepresent facts or subrogate judgment to others.”
“II. General and Ethical Standards
A member shall perform professional services in compliance with the following principles:
Integrity and Objectivity
A member shall remain objective, maintain professional integrity, shall not knowingly misrepresent facts, or subrogate judgment to others. The member must not act in a manner that is misleading or fraudulent.”
I would argue that an expert in a litigation setting arguing a client’s point of view, may not be following this standard. However, I do not bring this up to cast judgement or determination; I bring it to you for thoughtful consideration in how you may choose to run your practice.
Our fourth ethical standard discusses understandings and communications with clients. This tells us that we need to establish, with the client, the specific services we are to perform. This is vitally important in any engagement, but especially if you are going to be in an advocate role. Clearly defining what you will be doing and the role in which you are doing it will help ensure the proper understanding between you and your client.
Karen M. Lascelle, CPA, CVA, CFE, Senior Manager for Plodzik & Sanderson, P.A. and NACVA’s Ethics Oversight Board Chair, has been working in public accounting for over 20 years. Having worked extensively with businesses and individuals in commercial services and tax compliance, Ms. Lascelle is a business valuation expert specializing in the valuation of closely held businesses for a variety of purposes, including: succession planning, gift and estate taxation, buy-sell agreements, mergers and acquisitions, marital dissolutions, shareholder disputes, subchapter S elections, purchase price allocations, and bank relationships with SBA loan funding. She works closely with small businesses on tax compliance, financial statement, and business consulting matters.