The Pink Elephant in the Courtroom

Un-Impeaching Opinions of Calculated Values

Valuation or calculation? That is the question asked, answered, and argued by judges, experts, lawyers, and industry thought leaders apropos to whether a calculation of value can be used in litigation. The answer echoed throughout courtrooms across America thus far is a resounding “it depends.” This article offers a synopsis of the debate over calculation engagements being used in litigation. The full version appears in The Value Examiner, September/October 2018 issue.

[su_pullquote align=”right”]Resources:

Calculation Engagement vs. Valuation Engagement

Financial Litigation Consulting Professionals Workshop

The Expert’s Role in Financial Litigation—Real-World Guidance for Managing the Engagement

What Makes a Proper Calculation Report and What Development Standards Apply?

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Valuation or calculation? That is the question asked, answered, and argued by judges, experts, lawyers, and industry thought leaders apropos to whether a calculation of value can be used in litigation. The answer echoed throughout courtrooms across America thus far is a resounding “it depends.”

This less than comforting answer only fuels the debate already steeped in calculated opinions and opinionated conclusions for and against using calculation reports in litigation, causing some to consider eliminating calculation engagements altogether. The problem with the current commentary addressing calculation engagements used in litigation is that it is limited in scope as it fails to consider the pink elephant in the courtroom relative to issues of manipulation, unreliability, and public confidence which are disconnected from whether a calculation of value is used for litigation or not. This article offers a synopsis of the debate over calculation engagements being used in litigation. The full version appears in The Value Examiner, September/October 2018 issue.

The Essence of Estimating Value

Estimating value is at the essence of what a valuation professional is and does. Under NACVA and AICPA standards, there are two types of professional service in which a valuation professional may estimate value: (1) valuation engagements and (2) calculation engagements. Contrary to popular belief, both valuation and calculation engagements require the analyst to apply professional judgement, obtain enough relevant data, exercise due professional care, remain objective, and maintain professional integrity while doing so in a professionally competent manner. Despite the many similarities, there is one significant difference between a valuation and a calculation—a calculation is limited to specific approaches and methods while a valuation is not.

Calculation Limitations

NACVA Standards state that a “Calculation engagement occurs when the client and member agree to specific valuation approaches, methods, and the extent of selected procedures and results in a calculated value.”

Compared to a valuation, a calculation is an engagement to estimate value where the analyst’s professional judgement is limited as to the methods and approaches applied to estimate the value of a subject interest. In other words, the analyst will only consider the agreed upon approaches in their quest to determine or estimate the value of a subject interest.

Professional Judgment

The decision apropos to whether a calculation is appropriate or necessary is critical, as the Standards themselves admittedly delegate the determination of an engagement’s form and scope to the analyst who must then use (but not delegate) their professional judgement to determine whether a calculation or valuation is appropriate under the circumstances. The problem fueling the argument against using a calculation engagement in litigation stems from the fact that the analyst is restricted or limited by agreement to “specific valuation approaches, methods, and the extent of selected procedures”.

Trier of Decision Making

In cases where an analyst uses a calculation of value for litigation, the courts look to the valuation standards for guidance, only to find that the standards neither endorse or prohibit using a calculated value in litigation, leaving this decision up to the valuation expert’s professional judgement based on the facts and circumstances. Due to the risk that a calculation could be used to disingenuously inflate or deflate the resulting value estimates, the decision predicating the use of an estimate of calculated value in lieu of a value estimate concluded under a valuation becomes a critical point of reference.

Mechanism of Compliance

The distinction between a valuation and a calculation is a necessary bifurcation that acts as a mechanism for compliance which separates that which is a full valuation from that which is not. While there are a very limited number of acceptable reasons that justify offering an opinion of a calculated value in lieu of a valuation in litigation, both the court and the industry benefit from having two separate and distinct categories of value estimation services to satisfy the need of the courts and the market in general. With the rise of self-employment expanding across a more diverse number of income brackets, it becomes clear that a calculation may be judicially prudent in instances where an estimate of value is legally necessary but not feasibly affordable.

The Pink Elephant in the Courtroom

The pink elephant in the courtroom is that the decision to use a calculation can significantly impact the resulting estimate of value. This is because the inclusion or exclusion of an approach or method may be material, as the estimated value of a business under an Asset Approach may be higher or lower than a value estimate derived from the Income or Market Approaches. Likewise, the use of different methods under the same approach may also yield different value estimates. Scrutiny should be given to the included and excluded procedures of any calculation offered as an opinion or otherwise in litigation.

My Calculated, Opinionated Conclusion

Calculations of value can be used in litigation, but only as a tool of necessity and not as the preference, whereby their use should be limited to enhancing judicial effectiveness for the purpose of settlement facilitation or instances where an estimate of value is required, but a full valuation is unavoidably problematic due to limitations or restrictions of data, time, and/or financial resources.

Simply put, an estimate of a value, limited under the definition of a calculation, can be applied properly to the facts and evidence if disclosed as an opinion or otherwise when the facts and evidence are subject to unavoidable limitations that necessitate an expert’s decision to perform and disclose an estimate of value derived under a calculation in lieu of a valuation.

This article is published here with permissions and can be viewed in its entirety in The Value Examiner, September/October 2018 issue.

C. Zachary Meyers, CPA, CVA, was elected to the NACVA Standards Board in 2016, appointed Vice-Chair in 2017, and Chair to the NACVA Standards Board in 2018. He has been retained in over 1,600 engagements as a testifying expert, consulting expert, or joint/court appointed expert since 2011. Mr. Meyers has provided expert testimony and been qualified in Federal District Courts, State/Circuit Courts, and Family Law Courts as an expert in Business Valuation, Forensic Accounting, Pension Valuation, and Taxation.

Mr. Meyers can be contacted at: (304) 690-2619 or by e-mail to: czmeyers@icloud.com.