General and Ethical Standards—Third Quarter 2019
Have You Seen NACVA’s General and Ethical Standards?
NACVA Ethics Oversight Board Member
Michael Gregory Consulting, LLC
As a new member of the NACVA Ethics Oversight Board (EOB), I was interested in learning how the board handles ethics complaints. In reviewing our first ethics complaint, I had several questions like: What have we done previously in similar situations as a board? What facts do we initially know? What are other questions we might ask before deciding to initiate an investigation on a case? Who is going to do what as a next step?
While reviewing ethics complaints as part of the EOB, I have found areas you might want to be aware of and consider relative to your practice. It is not like you think about general and ethical standards every day, but part of being a successful practitioner is upholding and maintaining a good reputation. Nobody wants to purposefully tarnish their reputation. Maintaining the highest ethical standards will greatly reduce the chance of someone witnessing or even perceiving an ethical violation that could possibly be reported to your credentialing organization.
NACVA’s General and Ethical Standards
In a NACVA Association News article titled, How Well do You Know Your Ethical Standards, written by Chris Hatcher, CPA, CFF, CGMA, CVA, CFE, Chris provides a concise commentary that provides helpful resources for everyone associated with NACVA. In this article, he addresses eleven categories found in the NACVA Professional Standards that will help bring ethics to the forefront and ensure that everyone in your organization is on the same page. It would be wise to periodically review these categories in the workplace.
NACVA’s Professional Standards will provide principles-based Standards that have been developed specifically to provide guidance to its members and all other professionals performing valuation services.
There are several resources available that will help you identify potential risks for ethical violations within your organization.
In an article, Ethical Lapses in Business Valuations: Be Aware of These Areas, Scott Saltzman, CPA, CVA, ASA, MAFF, shares that we are all human and make mistakes, but the goal is to minimize our errors. He offers several insights on how to avoid making developmental and reporting mistakes by complying with business valuation standards. Practitioners can do so by considering the Uniform Standards of Professional Appraisal Practice (USPAP), NACVA, AICPA, and ASA standards. The author points out that “the underlying goal of all the various BV organizations for their members is to provide a meaningful, unbiased product to their clients.” He goes on to provide commentary on what he sees as common trouble areas. These include:
Conflict of Interest
He offers commentary with an example where a CPA was sued for an ethical violation—more commonly known as professional malpractice.
You must be competent in the area. If you are not competent, is the fee worth the learning curve? How many assignments are you likely to receive in this area?
Cap Rate and Earnings/Cash Flow
Are you using the correct capitalization rate with the earnings or cash flow? Ask this question with respect to both the Income and Market Approaches. Were you determining MVIC or equity?
Providing a Value without Due Diligence
Clients may ask for a valuation number “yesterday”. The author points out that “by providing the client an answer—or even a range of value—before conducting sufficient due diligence in accordance with the standards, the analyst may violate the standards. If the client then uses that information in loan documents, legal filings, etc., it may come back to the analyst as an ethical violation and professional negligence.”
BV Standard Reference
An individual may have several designations. For example, the author of this article is a CPA, CVA, and ASA. As a business valuer “you must disclose that you followed standards associated with each designation and not just one organization’s standards.
For several years, there has been a lot of discussion by users of valuation services regarding the fragmentation of the industry, transparency and consistent application of methodologies, and the different valuation standards of the various credentialing and standard setting organizations. NACVA has developed a Business Valuation/Appraisal Standards Comparison Chart which provides a comparison of business valuation standards promulgated by NACVA, AICPA, ASA, and USPAP. This document can be used as a starting point toward unification of industry wide and accepted standards by the respective organizations.
Assumptions and Ethical Decisions
Associated with a business report are assumptions and limiting conditions. These are formal statements that are required whether the report is a detailed, summary, or calculation report. However, a host of other assumptions beyond the section of the report that addresses assumptions and limiting conditions are routinely made as part of the process. Some are not significant, and others are major. According to Business Valuation: An Integrated Theory (Second Edition) by Z. Christopher Mercer and Travis W. Harms, “care must be given to document all assumptions and provide the sources of these assumptions”. Do you? Do your employees? Are they checked?
As an example, Chris Mercer maintains a blog called A Tale of Two Appraisers—Or Two Companies. There he provides a basis on providing assumptions that for every use of the single period income capitalization method, where a single assumption about expected earnings is made as a representative of “expected” earnings, there is an implied forecast of earnings and an implied use of the discounted cash flow method.
Hopefully, the sources identified above, and the associated commentary may stimulate you to review the NACVA General and Ethical Standards and provide some ideas going forward for discussions with your colleagues. Reviewing these materials will expand your thinking and help you consider practices that should greatly reduce your chance of falling into trouble.
May this be a reminder of the importance in abiding by the general and ethical standards of any society or association that you represent through the credentials that you hold. By doing just this, NACVA members have greatly helped its Association become one of the most respected and credible organizations within the business valuation community. By upholding these standards, practitioners will be able to maintain the highest level of integrity in their dealings with clients and potential users of their reports.