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Ethics for Valuators—Fourth Quarter 2016

NACVA Association News

Greg ReaganEthics for Valuators…What You Don’t Know Can Hurt You:
Complying with Professional Standards and Avoiding Ethics Violations
and Conflicts of Interest when Serving as an Expert Witness
By Gregory T. Reagan, CPA, CFF, ABV, CFE, CVA
NACVA’s Ethics Oversight Board

The world of business valuation expert witnessing is growing rapidly as demand increases.  Providing business valuation services as an expert witness is becoming a hotly pursued field of practice.  Yet, this world is not for the faint of heart, the arrogantly confident, nor the unprepared.
This article focuses on the importance of complying with ethical standards and addresses issues sometimes faced by valuators and practicing CPAs who also provide business valuation services in litigation settings.  As a business valuator, what you don’t know can hurt you, and when valuing a business as an expert witness in litigation matters it most certainly will if one is not very careful.
Having served many times as a business valuation expert witness in litigation settings, I have always been, and continue to be, shocked at opposing experts who allow bias and advocacy to infiltrate their opinions.  I perceive this to be a very real problem for courts of law that are attempting to adjudicate disputes based on vastly differing professional opinions of value.  We are trained to not be “hired guns,” but some of the professional opinions I have seen have all too often leaned toward unreasonable conclusions in the direction of the party who hired the valuator.
In late 2013, I was privileged to speak to a room full of my NACVA peers about avoiding conflicts of interest and ethics violations in matrimonial litigation settings.  I posed the question, “Can ethics be taught?”  It was the consensus among my respected peers that you either have it (ethics), or you don’t.  As a certified fraud examiner, I’ve learned first-hand that the fraud triangle is real and we have no control over the external pressures people face, nor their ability or propensity to rationalize wrong as being right.
I see the fraud triangle analogy befitting business valuation work as well.  Valuators face pressures—pressures to make money, gain repeat business, develop a reputation for winning in court—and there is nothing wrong with these goals, unless we lose our bearings along the way and fall prey to rationalizing wrong as being right.  To address these concerns, the NACVA, the AICPA, and the ASA (the principle standard-setting bodies for business valuation services) all have professional ethics standards, compliance requirements, and ongoing continuing education requirements, inclusive of minimal ethics training annually.  Yet, some valuators still get it wrong in performing the work. 
I was privileged to know and learn from Tom Ratcliffe, a practicing CPA, university accounting professor, and chair of the AICPA committee that redrafted standards for accounting and review services several years ago.  Tom taught numerous continuing education accounting and auditing update courses annually, and he seemed to always find a way to exhort those present to “just do it right.” 
Why is it that business valuators, many of whom are also CPAs, seem to have such a hard time “just doing it right?”
I was present several years ago when Barry Melancon, president and CEO of the AICPA, spoke to a group of CPAs and chided them for what really amounted to: greed.  He talked about how intelligent CPAs were, but how CPAs took a product for which we had a monopoly and drove the value of that product into the ground through competition.  He was talking about the financial statement audit, of course.  If one firm would perform the audit for $15,000, the firm next door would do it for $14,000.  Before long, the audits were being done for less than $10,000 as CPAs developed strategies to do the work with less time commitment.  I used to refer to this as auditing at 30,000 feet. 
I sometimes wonder if we as business valuators are doing in essence the same thing.  We lower our prices (not our hourly rates) and in doing so, we reduce our scope of work.  Some of the valuation engagements I have performed have been quite complex and demanded extensive time commitments.  I often tell people my job is to pick up every “rock” because there is a snake under one of them.  In picking up those rocks, I also have to look carefully with clarity and objectivity or I might miss the snake camouflaged in its setting.  I am aware that if I don’t identify the snake while performing my work, it will inevitably come out from under that rock and bite me at an inopportune time, hurting both me and the client I am serving.  So, I tend to err on the side of thoroughness in performing my work. 
While the threat of Daubert challenges should serve as a sufficient deterrent and help keep us all honest and in conformity with ethics rulings, it has oftentimes been ignored and thus became a snake that has bitten the inattentive.
Snakes in valuation engagements exist in various species: 

  • historical earnings and cash flow streams that do not reflect economic reality,
  • historical earnings and cash flow streams that do not represent the known or reasonably expected future,
  • unrealistically high or low projected financial results,
  • discount rate determinations that lean toward the party that hired the valuator,
  • unrealistically low or high growth expectations
  • assigning minority interest discounts to control interest holders,
  • discounting for marketability in the face of subsequently known exit events,
  • ignoring past transactions,
  • mishandling debt used for paying distributions to owners, and
  • the list could go on and on and on.

Business valuators must comply with valuation standards, and choices exist depending on the certifying body you have chosen:

  • Professional Standardsof the National Association of Certified Valuators and Analysts (“NACVA”),
  • Statement on Standards for Valuation Services(“SSVS #1”) issued by the American Institute of Certified Public Accountants (“AICPA”),
  • Business Valuation Standards andPrinciples of Appraisal Practice and Code of Ethics of the American Society of Appraisers (ASA), and
  • Uniform Standards of Professional Appraisal Practice(“USPAP”) promulgated by the Appraisal Foundation.

Each of these contain helpful guidance regarding ethics and avoiding bias, advocacy, and conflicts of interest.
CPA business valuators live and operate in a world of more comprehensive regulation.  There is a professional standard, rule, guideline, or procedure, for virtually everything a CPA does in serving clients.  CPAs are expected to be masters of:

  • AICPA Statements on Standards for Accounting and Review Services(“SSARS”),
  • AICPAAttestation Standards,
  • AICPAStatements on Auditing Standards,
  • Financial Accounting Standards issued by the Financial Accounting Standards Board, and
  • Federal and state income tax laws and regulations.

While CPAs attend continuing professional education classes to learn about varying professional standards, I can think of only one instance in my 35-year CPA career where I attended a course on The AICPA Code of Professional Conduct (“Code of Conduct”).  Yet, the latter is the governing regulation for avoiding conflicts of interest, bias, and advocacy when performing both “attest and non-attest services.”  Non-attest services include tax return preparation and business valuation, among many others.  The attest service that has tripped up many unwitting CPAs is the financial statement compilation service.  Special caution is warranted when compiling financial statements and being asked to also perform a valuation service, especially in a litigation setting.  As an expert witness, failing to identify and respond correctly to one’s bias, advocacy, or conflict of interest when performing both attest and no-attest services can result in a deathblow to the expert and the client being served.  The AICPA Code of Conduct ( should be consulted by all CPAs performing business valuation services, regardless of the valuation certificate possessed.  The scope of this article is not sufficient to delve further into this important area.
To their credit, the NACVA and the ASA have “preached” ethics conformity for many years, but in litigation settings, I still see all too often expert witnesses (whether CVAs, ABVs, or ASAs) who cross lines that should not be crossed.  The heart of the AICPA Code of Conduct and the NACVA and ASA professional standards is objectivity, independence, and freedom from bias and advocacy in making professional judgment decisions and in formulating opinions of value.  The NACVA’s professional standards can be reviewed at
The NACVA provides excellent business valuation training through its training center programs on how to perform business valuation engagements properly and arrive at sound opinions of value.  The instructors, course content, and materials are “top-shelf.”  I encourage everyone interested in growing as a business valuator to partake of this resource.  Ethics training is also provided, but as I stated at the start of this article, I don’t think we as a profession can teach ethics.  I could be wrong, of course, so articles like this float to the surface from time to time, and most of us have to get our two-hours of ethics CPE each year.  At the end of the day, we and we alone must look ourselves in the mirror and reflect on the many judgment decisions we make each day in doing our work.  As members of this profession, let us all take the high road and “just do it right.”
Gregory T. Reagan, CPA, CFF, ABV, CFE, CVA is the Managing Member of Reagan FVL, LLC, a valuation and forensic accounting firm with offices in Charlotte, North Carolina and Birmingham, Alabama (, and serves on the Ethics Oversight Board of the NACVA.