The Value of Ethical Behavior—Third Quarter 2022

The Value of Ethical Behavior

John E. Barrett, Jr., CPA, ABV, CVA, CBA
NACVA Ethics Oversight Board

Over the past 24 months or so, members of the NACVA Ethics Oversight Board have written some very informative and helpful articles on ethics in business valuation for the Association News. I would like to expand on some of that information. My focus is on how developing our ethical behavior can benefit all of us both in the development of our business valuation skills and the development of our business valuation and litigation practices.

Ethics, also called moral philosophy, is defined by Britannica as “The discipline concerned with what is morally good or bad and morally right and wrong.” The word ethical is defined by dictionary.com, in part, as “Being in accordance with the rules or standards for right conduct or practice, especially the standards of a profession.” Ethical behavior is defined by dictonary.com as “Conforming to accepted standards of conduct.” The NACVA Professional Standards regarding General and Ethical Standards are provided in Section II, which includes 11 subsections. As certified valuators and analysts, we need to become very familiar with this section of the Standards. Section II-A deals with integrity and objectivity. This section states “A member shall remain objective, maintain professional integrity, shall not knowingly misrepresent facts, or subrogate judgement to others. The member must not act in a manner that is misleading or fraudulent.”

This information is very helpful. The problem is that these words mean very different things to different appraisers. This is somewhat analogous to a divorce case where both parties tell you they just want to be treated fairly. The problem is with the interpretation of being treated fairly. If the husband owns the business, his interpretation of fair might be the wife gets nothing for the business interest. The wife’s interpretation of fair might be that the husband is left with nothing (or worse). In similar fashion, the problem with adhering to integrity and objectivity is that different professionals have very different views on what these words actually mean.

So how do we develop and follow ethical behavior in our appraisal work that is really appropriate? Start by striving to avoid bias, both intentional and hidden biases, in our work product. Work towards developing a credible, supportable work product without concern for the valuation outcome. Treat each and every assignment as if you were working for both parties in a litigation case. Ask yourself, Would I recommend a family member buy or sell a business at that value? Developing ethical behavior is an ongoing process that we all need to continually improve upon.

Eight Reasons to be Ethical

1. Avoid litigation
2. Avoid increased regulation
3. Positive public perception
4. Trust of referral sources and clients
5. Customer loyalty
6. Employee recruitment, engagement, and retention
7. Personal pride
8. It is required by our profession

In litigation cases, the attorney advocates for the client. The business valuation expert must only advocate for his or her opinion of value. Our job, especially in divorce cases, is to value the business, period. Do not get emotionally involved in cases. Do not decide to right perceived wrongs by altering the valuation outcome. Do not become Don Quixote tilting at windmills. Remember, there is no premium or discount applied based on alleged bad behavior. They have lawyers and judges for those matters.

So where is the value in ethical behavior? Well, first of all, if you work diligently on each and every assignment to obtain a valuation outcome to the best of your ability, you will develop as a business appraiser. I can tell you from years of experience that the high-low guy never really develops as a skilled business appraiser. These folk simply take the easy way out on every job. Challenging yourself and reviewing each critical assumption on each assignment will help you fully develop your valuation skills. Secondly, lawyers and clients respond well to quality work. They might not like the valuation outcome, but if you can explain and support your work, it will get accepted. The market responds well to good work and your reputation will be enhanced. The high-low guys come and go. The market generally tends to discard them over a period of time. This can take a number of years, but I have seen these types of appraisers just come and go.

Do’s and Don’ts in Litigation Cases

• Do be an advocate for your opinion of value
• Do be objective, independent, and fair minded
• Do credible work
• Treat every valuation as if a joint retention
• Work closely with the client and the lawyer, and help them understand the valuation outcome
• Do not become THAT APPRAISER—in the long run, this will kill your reputation and future referrals
• Do not misrepresent historical financial information
• Do not misrepresent or alter source data

Suggestions to Improve Our Valuation Performance

• Be very objective and follow the standards
• Ask yourself, is this the value I would develop if a family member was buying or selling this business
• Is the work credible
  Credibility Attributes (from Determination of Valueby Francisco Rosillo)
  1. Replication
  2. Relevance
  3. Reliability
  4. Reasonable Tests
  5. Generally Accepted Methods and Procedures
  6. Transparency
  7. Adequate Disclosures
  8. Nonadvocacy
  9. Completeness
• Continuing education
• Report writing course
• Develop strategies, work processes, and analytical checks to ensure data/content quality and produce higher quality reports

The NACVA Ethics Oversight Board is currently in the process of developing ethical behavior courses for presentation at future national conferences. These sessions will cover general ethical issues in litigation cases and include real world examples of do’s and don’ts in litigation. Once developed, these sessions should be of great interest and benefit to the NACVA membership.

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John E. Barrett, Jr., CPA, ABV, CVA, CBA, operates Barrett Valuation Services, Inc., a business valuation firm focusing on business valuation work for litigation, estate and gift tax matters, and transactional matters. He is a current member of the Ethics Oversight Board, The Value Examiner Editorial Board, and a mentor in the NACVA mentoring process.