Calculations and Opinions: Bringing Clarity to a Cloudy Issue
Opinions are like viewpoints; everyone has one
Opinions are often provided in connection with calculation values and a conclusion of value. SSVS No. 1 does not prohibit or explicitly endorse either. In this article, Jim Hitchner shares his views on whether the term â€śopinionâ€ťâ€•offered in a litigation or non-litigation engagementâ€”should be used as part of the engagement or offered in connection with a calculated value.
For CPAs, the use of the word opinion has special meaning from an audit perspective, and the word opinion was purposely left out of the AICPAâ€™s Statement on Standards for Valuation Services No. 1 (SSVS No. 1)1. However, the bottom line is that there is no prohibition in SSVS No. 1 on the use of an opinion of a calculated value or an opinion of a conclusion of value. However, there is no explicit endorsement either. It is silent on this issue. That means it is up to the valuation analyst to decide whether he or she can provide an opinion of calculated value in a calculation engagement. Calculations were intended to provide wide flexibility, and valuation analysts can provide calculations any way they see fit, as long as they comply with SSVS No. 1.
The American Institute of Certified Public Accountants (AICPA) and the National Association of Certified Valuators and Analystsâ„˘ (NACVAÂ®) allow for either a â€śconclusion of valueâ€ť or a â€ścalculated value.â€ť Both are considered â€śestimates of value.â€ť The American Society of Appraisers (ASA) allows three types of value: â€śunambiguous opinion of value,â€ť â€śestimate of value,â€ť and â€śapproximate indication of value.â€ť Uniform Standards of Professional Appraisal Practice (USPAP) allows for only one explicit type of value: â€śopinion of value/conclusion.â€ť See Chart 1, below, for additional information.
|Type of Engagement||AICPA||NACVA||IBA||ASA||USPAP|
|Type of Value||AICPA||NACVA||IBA||ASA||USPAP|
|Conclusion of Value||X||X||X||Â||Â|
|Unambiguous Opinion of Value||Â||Â||X||Â|
|Estimate of Value||Â||Â||Â||X||Â|
|Approximate Indication of Value||Â||Â||Â||X||Â|
|Opinion of Value/Conclusion||Â||Â||Â||Â||X|
Now, on to the tricky part: a litigation environment where you intend to offer your opinion of value. We will address non-litigation engagements later.
The Federal Rules of Evidence, Rule 702, Testimony by Expert Witnesses states the following:
A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:
- the expertâ€™s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
- the testimony is based on sufficient facts or data;
- the testimony is the product of reliable principles and methods; and
- the expert has reliably applied the principles and methods to the facts of the case.
As you can see, sufficiency and reliability are major factors here. Blackâ€™s Law Dictionary, 10th edition, 2014, defines a credible witness as â€ś[a] witness whose testimony is believable.â€ť In some litigation settings, an opinion is given with â€śreasonable certainty.â€ť So, can a calculation and calculated value be provided that is sufficient, reliable, believable, and/or with reasonable certainty? Given the language in paragraphs 21b and 77 in SSVS No. 1, you would think that the answer is â€śno.â€ť
SSVS No. 1, paragraph 21b
Calculation engagementâ€”A valuation analyst performs a calculation engagement when (1) the valuation analyst and the client agree on the valuation approaches and methods the valuation analyst will use and the extent of procedures the valuation analyst will perform in the process of calculating the value of a subject interest (these procedures will be more limited than those of a valuation engagement) and (2) the valuation analyst calculates the value in compliance with the agreement. The valuation analyst expresses the results of these procedures as a calculated value. The calculated value is expressed as a range or as a single amount. A calculation engagement does not include all of the procedures required for a valuation engagement (paragraph 46). [Emphases added]
SSVS No. 1, paragraph 77
In a calculation engagement, the valuation analyst and the client agree on the specific valuation approaches and valuation methods the valuation analyst will use and the extent of valuation procedures the valuation analyst will perform to estimate the value of the subject interest. A calculation engagement does not include all of the procedures required in a valuation engagement, as that term is defined in the SVSS. Had a valuation engagement been performed, the results might have been different. [Emphasis added]
Letâ€™s take this in two parts. One is not a big deal; the other one is.
1) Agreement with the client
This is not a big deal unless you allow it to be a big deal. Most clients are unfamiliar with all the approaches, methods, procedures, assumptions, applications, data choices, etc., that make up a valuation analysis, whether a valuation engagement or a calculation engagement. Letâ€™s be serious. The client doesnâ€™t ask for a calculation engagement; most donâ€™t even know what it is or that it even exists. What the client wants is a less expensive process to estimate a value. They simply want a cheaper valuation analysis.
What this means is that although the client has to agree to the extent of the work performed, it is the valuation analyst who really decides what is to be done. As long as you are the one telling the client what work is to be performed, you should be able to withstand criticisms that you and the client are in cahoots and that the client is telling you what to do to drive the process and obtain a desired result. Sure, that can happen. Just make sure it doesnâ€™t involve you. The proverbial buck stops with you.
2) Â More limited procedures that do not include all the procedures required in a valuation engagement, and had a valuation engagement been performed, the results might have been different
This is a big deal, particularly in a litigation setting. How does this sound? â€śMy opinion of the calculated value of XYZ Company is $4,000,000.â€ť Sounds fine on the surface, right? Letâ€™s parse this some. What you are really saying is, â€śMy opinion (which is sufficient, reliable, believable, and with reasonable certainty) of the calculated value (with is not sufficient, reliable, believable, or with reasonable certainty) of XYZ Company is $4,000,000.â€ť This sounds odd, as it should. So, while an opinion of a calculated value is not prohibited by SSVS No. 1, from a practical perspective, why would you want to put yourself in this untenable position?
One possible exception to this is if you prepare a calculated value where you did enough work to have obtained reasonable certainty. However, again, why would you want to do this? If you did enough work to obtain reasonable certainty, you are probably very close to having a valuation engagement. In that regard, call it a valuation engagement with a conclusion of value versus a calculated value.
Another possible exception we have heard about is when both sides in a dispute agree to perform calculations and it is expected that the judge will be comfortable with more limited analyses. Two words come to mind here: â€śBe careful.â€ť One side may do a very limited engagement whereas the other side does a lot more work. Although this sounds odd, one side did very limited procedures and the other side did less limited procedures. All things being equal, and assuming the calculated values are different, which calculated value do you think will be more persuasive? Okay, on to non-litigation engagements.
This is tricky as well. Why? Because the definition of an â€śopinionâ€ť is not necessarily the same in a non-litigation setting versus a litigation setting. Again, an opinion of value in a dispute is usually sufficient, reliable, believable, and/or with reasonable certainty. However, see the following common definitions of the word â€śopinionâ€ť:
â€śA view or judgment formed about something, not necessarily based on fact or knowledge.â€ť
â€śA belief, judgment, or way of thinking about something: what someone thinks about a particular thing.â€ť
â€śAdvice from someone with special knowledge: advice from an expertâ€ť
â€śA formal statement by a judge, court, etc., explaining the reasons a decision was made according to laws or rules.â€ť
- A belief or judgment that rests on grounds insufficient to produce complete certainty.
- A personal view, attitude, or appraisal.
- The formal expression of a professional judgment: to ask for a second medical opinion.
a. Law. The formal statement by a judge or court of the reasoning and the principles of law used in reaching a decision of a case.
b. A judgment or estimate of a person or thing with respect to character, merit, etc.
c. Favorable estimate; esteem
Look at some of the definitions under each of the above three sources.
- â€śA view or judgment formed about something, not necessarily based on fact or knowledge.â€ť
- â€śA belief, judgment, or way of thinking about something: what someone thinks about a particular thing.â€ť
- â€śA personal view, attitude, or appraisal.â€ť
Where is the sufficiency, reliability, believability, and/or reasonable certainty here? There isnâ€™t any. So, is it possible that we have a different definition of the word opinion in litigation versus non-litigation engagements? It sure appears to be possible.
One last thought here. In a non-litigation setting, do I really want to use the definitions of opinion quoted above. Many, if not most of us, will continue to offer opinions of value in both litigation and non-litigation engagements under the mantle of sufficiency, reliability, believability, and/or with reasonable certainty. It just seems more balanced and, well, right. However, it appears the door may be open for alternate views. Also, the wording in paragraph 77 of SSVS No. 1 is very well done and is the suggested language that valuation analysts should use. Nothing more really needs to be said or added, including the word â€śopinion.â€ť However, again, there is no prohibition to adding the word â€śopinion,â€ť as long as you are using the correct definition in the proper context.
For additional information and Carla Glassâ€™s article, you can purchase VPSâ€™s Financial Valuation and Litigation Expert journal, FVLE Issue 47, February/March 2014 (available at www.valuationproducts.com).
Jim Hitchner, CPA, ABV, CFF, ASA, is managing director of Financial Valuation Advisors, Inc., a Ventnor, New Jersey, valuation advisory and litigation support firm, and editor of Financial Valuation and Litigation Expert, a bi-monthly publication with tools from leading experts on valuation, forensic/fraud, and litigation services.
Editorâ€™s Note: We would like to thank Ed Dupke and Jim Alerding for their thoughtful review of this article. The views presented here are Hitchner, Dupke, and Alerdingâ€™s personal views and do not represent the official view of the American Institute of Certified Public Accountants (AICPA).
This article is reprinted from Financial Valuation and Litigation Expert, Issue 50, August/September 2014, published by Jim Hitchnerâ€™s Valuation Products and Services. For more information, please go to www.valuationproducts.com
1 Unfortunately, the word â€śopinionâ€ť is included SSVS No. 1 paragraphs 65.a., 65.g., and Appendix A, No. 6. This was unintentional and should not be in the standards.
2 We want to thank Carla Glass, CFA, FASA, owner, Hill Schwartz Spilker Keller, former chair of the ASA Business Valuation Committee and former chair, the Appraisal Foundation (USPAP) Standards Board. Carla surfaced the concept of alternate definitions of the word â€śopinionâ€ť in her article â€śThe Question of Calculations and USPAP â€“ Another Round,â€ť published in the Financial Valuation and Litigation Expert journal, FVLE Issue 47, February/March 2014. Carla was the first to alert us about what we believe to be an important view on calculations, particularly for members of the American Society of Appraisers who are required to follow USPAP. However, her views on non-litigation opinions of value are also relevant to CPAs who have to follow SSVS No. 1. Note: Carl Glassâ€™s views are her own and are not the official view of the American Society of Appraisers, the Appraisal Foundation, or the American Institute of Certified Public Accountants.