The Risks and Responsibilities of Valuation Reviews and Litigation Valuations
As a valuation specialist, I am frequently retained to review valuation reports prepared by other experts. The reasons for these engagements are varied. For example, accounting firms that do not offer valuation services may engage us to review a valuation report in connection with an audit. In other cases, I am retained to review an opposing expert’s valuation in litigation matters, including shareholder disputes and marital dissolutions.
In these engagements, I typically issue a Valuation Review Report. It is important to clarify what a valuation review is. I do not arrive at a conclusion of value. Rather, my role is to evaluate whether the valuation analyst:
- Followed applicable professional standards
- Used reasonable assumptions, methods, and data
- Selected appropriate valuation approaches and methods
- Reached a conclusion that is credible and supportable
The quality of the valuation reports I review varies widely, ranging from well done and professional to very flawed. Unfortunately, over the past year, I have encountered several valuation reports that, in my professional opinion, should never have been undertaken by the CPA who prepared them.
CPAs must be acutely aware of the ramifications of accepting valuation engagements, particularly when litigation is a possibility. CPAs are often the first clients or attorneys contact when a financial issue arises. In some cases, the significance of the engagement is downplayed, and the work is framed as routine or low-risk. That is a dangerous misconception.
If there is any possibility, however remote, that an engagement could lead to litigation, the CPA must treat it as a litigation engagement from the outset. If the CPA has never testified, has never been admitted as an expert witness, or lacks formal valuation training and credentials, serious consideration should be given to declining the engagement or engaging a qualified valuation specialist.
Recently, I was retained to review a valuation prepared for a litigation matter and participated in the deposition of the CPA who authored the report. During the deposition, it became clear that the CPA was unfamiliar with basic valuation concepts. He could not identify the recognized methods used to value a business, did not understand the applicable standards of value, and did not even know what the Statements on Standards for Valuation Services were. This lack of knowledge alone could support disqualification of the CPA as an expert witness.
More concerning, however, are the potential ethical violations implicated by such conduct. Under the AICPA Code of Professional Conduct, CPAs are required to perform services only within their professional competence and to obtain adequate training before accepting an engagement. Engaging in a valuation, especially in litigation, without the requisite education, experience, or understanding of professional standards may expose the CPA not only to exclusion by the court, but also to professional discipline and liability.
There is reason valuation professionals are referred to as experts. Expertise is not conferred by a license alone; it is earned through specialized education, experience, adherence to professional standards, and the ability to defend one’s work under oath. In litigation settings, courts, attorneys, and opposing experts will quickly expose the absence of that expertise.