The Importance of Adhering to Ethical Standards

An ethical duty to ourselves, the profession, and our clients

Business appraisers owe each other, the profession, and clients a duty to behave ethically and set aside our own biases and self-interest.

As business appraisers, we have a high ethical duty to our clients, ourselves and our profession.  We must rigorously police our standards, or else an authority will  step-in to  regulate or police  us.  This very scenario has already happened to the real estate appraisal industry, with disastrous consequences. 

When the housing meltdown began about four years ago, some of the blame was attributed to real estate appraisers who performed services contrary to professional standards.  I believe that the vast majority of real estate appraisers are honest, hardworking professionals, but the entire industry was tainted by a few bad apples.  In an effort to “fix” the appraisal part of the housing problem, Congress created Appraisal Management Companies (AMCs).  The AMCs are now the intermediaries between the client and the appraiser.  Appraisers are assigned to the lenders by the AMCs.  The lapse of ethical behavior by a few appraisers affected the residential real estate appraisal profession as a whole.  These are a few of the consequences:

• Profitable business relationships between appraisers and their clients, which took years to develop, evaporated overnight.
• Experienced appraisers are on par with newly credentialed appraisers on many AMCs’ lists. 
• The turn-around time for an appraisal report went from days to weeks. 
• Work dried up altogether for a lot of veteran appraisers.
• The real estate appraisal profession is now more regulated than ever before. 

I spoke with a Certified Residential Appraiser in my market.  He told me that before the housing collapse and the initiation of the AMCs, he was doing 20 to 30 appraisals a month.  He now does one or two every month or so, if he is lucky.  In an effort to pay his bills, he is now seeking to become a Certified General Appraiser.  Another real estate appraiser asked me how things were going with business appraisals.  I know he was considering business appraisals as a viable alternative to supplement his shrinking income. 

The housing meltdown was not the first time the federal government imposed regulations on real estate appraisers.  In response to the failure of a large number of savings and loan institutions in the 1980s, Congress conducted numerous hearings to determine the cause of the disaster.  During the course of their inquiry, Congress was surprised to learn that appraisers, the individuals determining the value of the underlying collateral of loans, were generally unregulated.  While professional licensing issues generally fell into the domain of state governments, Congress was concerned about protecting the future integrity of deposit insurance funds.  When passing legislation in 1989 to address the financial institution crisis (known as the Financial Institutions Reform, Recovery and Enforcement Act or FIRREA), Congress included a provision known as Title XI mandating the regulation of real estate appraisers by the states.¹ Congress came up with Title XI and the AMCs to protect government funds and to attempt to regulate professional and ethical behavior.

We business appraisers have ethical standards and if we voluntarily abide by them, no other authority will need to impose regulations.  In Section III C of the Institute of Business Appraisers’ updated standards we read, “Any service provided by a member of the IBA should be done so in an ethical and competent manner that does not negatively impact the valuation profession in general or the IBA in particular.” 

To better understand what it means to act in a professional and ethical manner, I looked at a number of sources.  According to Merriam-Webster, ethics is the discipline dealing with what is good and bad and with moral duty and obligation.²  Acting ethically is doing the right thing, even when nobody is watching.  Throughout history, we have been given valuable guidance when it comes to ethical behavior.  Consider the following quotes:   

• “Integrity without knowledge is weak and useless, and knowledge without integrity is dangerous and dreadful.” ~ Samuel Johnson
• “A single lie destroys a whole reputation of integrity.” ~ Baltasar Gracian  
• “It is curious that physical courage should be so common in the world, and moral courage so rare.” ~ Mark Twain

Socrates believed a person will naturally do what is good if he or she understood what is right.  The reason people act evil or bad is due to ignorance.  If someone is really aware of the consequences of his actions, he will not commit or consider committing the immoral act.  Socrates went on to say that knowledge correlates with virtue and virtue leads to happiness.³

World religions have strong ethical underpinnings.  In the Judeo-Christian teachings, we have a code of moral conduct written more than 3,000 years ago.  In the Book of Exodus, Chapter 23 of the Bible,⁴ we read the following: 

• “Thou shalt not raise a false report: put not thine hand with the wicked to be an unrighteous witness.”
• “Thou shalt take no gift: for the gift blindeth the wise, and perverteth the words of the righteous.”
• From the Quran, we read the following Islamic teaching:
  “And give full measure when you measure out, and weigh with a true balance; this is fair and better in the end.”⁵

These passages stress the importance of being an advocate for our own opinion, objective, an unbiased witness and not taking gifts or other items that may sway our opinion.  They go hand-in-hand with IBA’s updated standards.  In Standard II A, we read, “A member shall remain objective, maintain professional integrity, shall not knowingly misrepresent facts, or subrogate judgment to others.  The member must not act in a manner that is misleading or fraudulent.”  Standard II goes on to say in Section I, “A member shall serve the client interest by seeking to accomplish the objectives established with the client, while maintaining integrity and objectivity.”  Standard II J emphasizes the importance of transparency.  This standard states, “A member shall not express a Conclusion of Value or a Calculated Value unless the member and the member’s firm state either of the following: “I (We) have no financial interest or contemplated financial interest in the subject of this report.”; or “I (We) have a (specify) financial interest or contemplated financial interest in the subject of this report.”  IBA’s standards apply to all professional services performed by members.

In conclusion, I truly believe we can avoid the consequences that have plagued the real estate appraisal profession.  Imagine for a moment walking into a courtroom where the judge knows expert witnesses who hold professional designations—whether from IBA, NACVA, ASA, or AICPA—will abide by their professional standards and act in an objective and ethical manner.   In my case, my commitment and adherence to IBA’s standards will make this happen.   

Joseph Phelon, MBA, CBA, manages the Utah office of Hyde Valuations, Inc., a business and commercial real estate appraisal firm.  Joseph is a member of IBA’s Accreditation Board.  He is also a member of the National Business Valuation Group and the American Rental Association.  Joseph can be reached at jphelon@hydevaluations.com or (801) 368-4459.

Published with permission from the 4QTR 2011 edition of Business Appraisal Practice