Behind The Curtain – Understanding Bias in Valuation Reports©

Part I, Are the Scales Balanced?

By David Goodman MBA, CPA/ABV/CFF, CVA and Les Gosule, MST, CPA/PFS, CVA

Diogenes the Cynic is said to have searched around ancient Greece, carrying a lantern in full daylight—looking for an honest man.

When reading a business valuation report in a litigation context, whether it be for family law or civil litigation, it is important to “shine a lantern” on the report to assure yourself that the report is not biased.

Maintaining complete objectivity and neutrality in valuing a closely-held business is difficult—but it should be the appraiser’s goal, even so. That’s why various organizations, including the National Association of Certified Valuators and Analysts (NACVA), the American Society of Appraisers (ASA), and the American Institute of Certified Public Accountants (AICPA), have laid down rules to promote impartiality, as well as expertise, in this field—and attempted to standardize business valuation practices.

The NACVA calls on its members to “remain objective, maintain professional integrity…not knowingly misrepresent facts, or subrogate judgment to others.” A member “must not act in a manner that is misleading or fraudulent.”

ASA policy states: “When an appraiser is engaged by one of the parties in a controversy, it is unethical for the appraiser to suppress any facts, data, or opinions which are adverse to the case his client is trying to establish; or to overemphasize any…which are favorable to his client’s case; or in any other particulars to become an advocate. It is the appraiser’s obligation to present the data, analysis, and value without bias, regardless of the effect of such unbiased presentation on his client’s case.”

The AICPA requires that: “…in the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.”

Business valuation appraisers may also be expected to follow the Uniform Standards of Professional Appraisal Practice (USPAP), overseen by a board that includes U.S. government representatives. These standards say: “An Appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests.” The rules also prohibit appraisers from misrepresenting, underreporting, or performing as an advocate for the client.

The professional standards are very consistent in requiring that members perform their valuations without bias. Unfortunately, none of this guarantees the fairness of any business valuation report.

An appraiser once commented, “You start with the scales balanced. But if, every time you have to make a judgment, you make (it) in favor of your client, then, at some point, you have tipped the scales and have a biased opinion.”

The purpose of this series of eight articles is to help you read a business valuation report critically—specifically, to assess whether it may reflect the author’s conscious or unconscious biases. We will cover eight topics:

                                         i.    Balancing the scales

                                        ii.    Use of professional judgment

                                      iii.    The nature of business valuation

                                       iv.    Review of basic concepts

                                        v.    Valuation approaches

                                       vi.    The grey areas of valuation

                                     vii.    Identifying whether bias has come into play

                                   viii.    Applicability of approaches to the standard of value

In Part II of this series, we will discuss The Use of Professional Judgment in Business Valuation.

Gosule, Butkus & Jesson, LLP is a full service accounting firm with extensive experience in performing business valuations in a variety of industries including construction, service, restaurants and dental practices. For more information, please see our website at www.gbj-bestcpa.com.