An Unimpeachable Treatise

Apropos Restrictions of Data, Time, and Financial Resources

When uncertainty rises to a level—where facts appear to be indistinguishable from fiction—business valuation, forensic accounting, and litigation support must prioritize the virtues of unimpeachable neutrality, integrity, and objectivity. These three virtues provide a means of best assisting the trier of fact in distinguishing that which is misleading from that which is centered upon the facts, data, and evidence regarding material matters, questions, or issues of fact or law. In a world where people consume and embrace fake news and alternative facts and deem those “truths”, the once highly valued authority of experts, facts, and proof are frequently deemed just a matter of opinion. That which is relevant, fact-based, and reliable is deemed an opinion or irrelevant and unreliable. The lines become blurred. The trend to undermine truth and ignore standards must change and be addressed. This eighth article of the Unimpeachable Neutrality series proffers an unimpeachable exposition apropos to litigatory estimates of value, juxtaposed to restrictions of data, time, and financial resources.

When uncertainty rises to a high level—where facts appear to be indistinguishable from fiction—business valuation, forensic accounting, and litigation support experts must prioritize the virtues of unimpeachable neutrality, integrity, and objectivity. These three virtues provide a means of best assisting the trier of fact distinguish between that which is misleading from that which is centered upon the facts, data, and evidence and critical to resolve material matters, questions, or issues of fact or law. In a world where people consume and embrace fake news and alternative facts and deem those “truths”, the once highly valued authority of experts, facts, and proof are frequently deemed just a matter of opinion. That which is relevant and reliable is deemed an opinion or irrelevant and unreliable. The lines become blurred. The trend to undermine truth and ignore standards must change and be addressed.

While I have had a range of standard setting and oversight roles before, during, and throughout this pandemic, including the Global Association of Certified Valuators and Analysts (GACVA) Advisory Council, Business Valuation Resource Panel of The Appraisal Foundation (TAF), and the National Association of Certified Valuators and Analysts (NACVA) Standards Board, my parental role has been the most important. It has taught me that sometimes the most effective way to prevent bad outcomes is to supplement rules with logical treatises of reason that empower the decision-making process of those for which you are trying to influence.

This eighth article of the Unimpeachable Neutrality series proffers an unimpeachable exposition apropos to litigatory estimates of value, juxtaposed to restrictions of data, time, and financial resources.

Oversight Out of Mind

Promulgating rules or supplemental guidance during calamity, pandemic, or period of uncertainty is like trying to help a son or daughter find their class on a college campus over the phone during a rainstorm, as  one can easily give unhelpful or even bad advice despite having the best intentions. It is critical not to lose sight of the fact that litigants, judges, expert witnesses, and attorneys all suffer from the same pre-existing condition of being human, which may be characterized by infrequent periods of systemic or systematic bias, misjudgment, and the occasional muted mic. The spread of these often-asymptomatic human tendencies is not always mitigated by evidentiary codes, procedural rules, or authoritative professional standards, and sometimes require supplemental guidance that we incorporate into our collective conscience of professional judgement.

Given that over the last 12 months the average valuation professional has been inundated with a plethora of uncontrollable limitations or restrictions of data, time, or financial resources, now is as good of a time as ever to revisit the longstanding issue of whether a calculation of value can, could, would, or should be appropriate in a litigatory setting. First and foremost, there are two valuation services a NACVA CVA and/or MAFF may perform to determine or estimate the value of a business, business ownership interest, security, or intangible asset: (1) a valuation engagement and (2) a calculation engagement. Like a limited appraisal, a calculation entails limitations in analyses, procedures, or scope and may be used when determining the value of a business, business ownership interest, security, or intangible asset. While some standard setting bodies are finally acknowledging a calculation (or something looking and smelling like a calculation) as being appropriate sometimes and inappropriate in other instances, still others cannot figure out what even to call it or whether to give it a name at all. There have long been two general stances when it comes to calculations done in litigation: the first stance being that a calculation should never be done in litigation and a second stance which can be summed up as to not take a stance as to when a calculation would or could be used in a litigatory setting.

Having performed over 2,000 cases since 2011, in a very rural part of America, where business failure, unpaid child support, shady dealings, and disingenuous dissolutions are not the exception but the norm, I have long come to terms with the fact that it may be necessary and/or appropriate for a NACVA CVA and/or MAFF to perform and disclose the results of a calculation engagement via written and/or oral testimony expressed as an opinion of calculated value. Or otherwise in instances where a(n) estimate or determination of value is needed or required but performing a full valuation or appraisal is unavoidably problematic due to uncontrollable limitations or restrictions of data, time, or financial resources that effectively prohibit the performance of some but not all procedures necessary to produce a conclusion of value.

The worst case scenario those that disavow calculations in litigation is a very validly bad situation, as it comes down to the increased likelihood in a litigation setting for a respondent, petitioner, plaintiff, or defendant, via their expert to proffer a value estimate in court that has been disingenuously calculated by performing only the valuation procedures that result in the most financially advantageous value to the litigant while ignoring other perhaps more relevant or reliable procedures, methods, or approaches that would or could result in a different less advantageous value for the litigant. The most simplistic example would be a calculation performed in litigation where the expert and client agree to ignore the income approach and market approach but instead opt to use the asset approach simply because the asset approach yields the lowest value which undervalues a marital asset and results in a smaller payment amount the business owner spouse must pay the non-business owning spouse.

Data, Time, or Financial Resources

A balance must be struck that provides helpful guidance which does not explicitly prohibit the thought of an unavoidable problem while falling short of being a misinterpreted authorization to take part in reckless behavior. Guidance that is overly broad or too specific with regards to a calculation in a litigation setting can be the equivalent to telling a child about the birds and the bees on the morning of junior or senior prom, and then asking them if they like foreign or domestic beer on their way out the door to pick up their date.

Taking a stance on this issue is like quoting yourself within the body of any professional writing, as one should use caution, refrain when necessary, and above all, choose your words wisely. It is with the hindsight of a man having seen the best and worst year of his professional career falling within the same 12-month period that I stand firm in saying, or reiterating, that with rare exception should a calculation be blindly seen as an acceptable alternative to a valuation unless the decision to perform a calculation is predicated by unavoidable limitations of time, data, or financial resources making a valuation unreasonably burdensome or impossible.

The inverse of this seemingly antiquated fact goes without saying, as calculations of value can be used in litigation, but only as a tool of necessity not 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, or financial resources.[1] This notion would take a few years to catch on but the NACVA Standards Board and Executive Advisory Board both approved a Standard Interpretation on January 14, 2021, which asked “are there situations in a litigation setting where a calculation of value may be used in lieu of a conclusion of value?” The answer was “yes”.

A calculation of value may be preferred in lieu of a conclusion of value in a litigation setting for the purpose of settlement facilitation. A conclusion of value may be unavoidably problematic due to uncontrollable limitations or restrictions of data, time, or financial resources that effectively prohibit the performance of some, but not all, necessary valuation procedures. The Court may allow testimony on a calculation of value, which would go to the weight of the evidence not the admission of evidence. Further, the parties may stipulate to the calculation of value and/or the admission as evidence. The Interpretation clarified that, “In some cases, a calculation of value is preferred due to scope, time, and monetary limitations or based on the type of litigation setting. Additionally, both experts may agree to perform calculation engagements to address those limitations. However, it is important to note that a member may not utilize a calculation engagement for the sole purpose of excluding relevant information or methods that may manipulate the ultimate value.”[2]

The key here is that this interpretation defines the general situations where a calculation may be appropriate or necessary. A calculation has merit in those situations where a conclusion of value may be unavoidably problematic due to uncontrollable limitations or restrictions of data, time, or financial resources that effectively prohibit the performance of some, but not all, necessary valuation procedures. If a valuation expert or opposing expert has the necessary data and time to perform a valuation, but instead performs a calculation in a litigation setting, the question then becomes whether the financial resources of the client are in fact limited or at issue. More importantly, it is the judge, who often is knee-deep in the history and assessment of alimony, child support, and other financial assessments, who will be in the best position to assess whether the limitation of financial resources argument holds water. It is important to note that, as discussed further below, the decision to perform a calculation should not—in most cases—be a unilateral decision, as the other litigants, and more importantly the Court, should be given the opportunity to weigh in on whether a calculation is warranted based upon the multilateral assessment of data, time, and financial resources. This makes any preconditioned or subsequent agreement with a client moot as a matter of fact. More specifically, a calculation of value can be used in litigation, but only as a necessity, not 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, or financial resources.  

The Timely Death of the Self or Client Imposed Scope Limitation

For the legion of expert mothers and fathers out there, homeschooling by day, bottle feeding by night, and somehow wrapping up that expert report a day before your client must disclose it, this next point will come as no surprise. Before you get nervous, there is no need to move the play pen out of the view of the web cam, though you may want to put the kids to bed for this next point. As the other thing that happened while we were all out on pandemic was the timely death of the self or client-imposed scope limitation in a litigatory setting. Anyone with a toddler knows that one must never set parameters allowing or conceding a behavior (calculations in a litigation setting) without also limiting the scope (pun intended) of said behavior by accompanying a “thou shall not” with a meaningful “when and why thou shalt not.” This is far more effective and helpful than the “because I said so” approach that some thought leaders tend to use. Moreover, the NACVA Standards Board and Executive Advisory Board, being the responsible adults in the room, would go on to also approve the following Standard Interpretation on August 13, 2020 which asked if “there are situations in a litigation setting where a calculation engagement (calculation report) may not be appropriate in lieu of a valuation?” The empirical answer was “yes.” “The decision to perform and disclose the results of a calculation engagement via written and/or oral testimony may not be appropriate in certain contested dispute/litigation settings. Some courts may attribute less weight to a calculation of value as compared to a conclusion of value for the same business since the nature of a calculation engagement is more limited in the scope of the of procedures to be performed and therefore the value determined may be different had a valuation engagement been performed (NACVA Professional Standards Section V, C.3.g.). Any real or perceived benefits to a member’s client should not be the sole reason for a member choosing to perform a calculation engagement.” The Interpretation clarified that. “A unilateral decision to disclose the results of a calculation engagement in a contested dispute/litigation setting may not be appropriate absent legitimate restrictions preventing both the member and opposing expert from performing a conclusion of value. A member must avoid bias in the development of a calculated value, and the application of a self-imposed scope limitation, even by agreement, may be perceived by the court as bias(ed) if the self-imposed scope limitation is seen as preventing a member from objectively considering an approach or relevant data.”[3]

The key here is that the presence of the unilateral imposition of the self or client-imposed scope limitation, which refers to an instance where an expert takes it upon themselves without conferring with the court or other parties to the litigation to implement a self-imposed scope limitation, can be the best point of attack for a judge or opposing party or expert to apply rigorous cross examination or rebuttal efforts. If a scope limitation is out of the control of one expert, it is more likely than not out of the control of both experts and parties to litigation. In any event, taking it upon oneself to adopt a materially impactful scope limitation is unwise, as a legitimate scope limitation should in most cases be such that all parties can agree that due to the case specific circumstances said limitation is warranted, necessary, or unavoidable. In other words, a calculation performed in a litigatory setting must not be blindly seen as an acceptable alternative to a valuation unless the decision to perform a calculation is predicated by unavoidable limitations of time, data, or financial resources making a valuation unreasonably burdensome or impossible.

Trick or Treatise

Sometimes the most fleeting answers require that we as an industry, parent, or expert witness reword the question within our answer as opposed to giving an unhelpful answer to an unremarkable question. The Pink Elephant in the Courtroom[4] article I wrote in 2018, spoke to instances where a calculation of value may or may not be appropriate in a litigation setting. The advice provided then, I believe, was time-tested and contained a flexible mix of rule and principal-based guidance; as most mathematicians will concede that the best model is generally the most resilient and flexible model. The fact remains that when a valuation expert or analyst is retained, employed, and/or appointed as a neutral and/or testifying business valuation expert in an engagement where (a)n estimate or determination of value is needed to assist a trier of fact but there are limitations or restrictions of data, time, or financial resources, outside of the valuation expert or analyst’ control or influence. These factors will preclude the expert’s ability to perform and disclose the results of a valuation engagement. It is in these cases that it may be necessary and/or appropriate to perform and disclose the results of a calculation engagement.

On balance, a calculation performed in a litigatory setting must not be blindly seen as an acceptable alternative to a valuation unless the decision to perform a calculation is predicated by unavoidable limitations of time, data, or financial resources. When these limitations arise, these make a valuation unreasonably burdensome or impossible. A calculation of value can only be used in litigation, not as a preference, but only as a tool of necessity. The primary driver is enhancing the judicial effectiveness for the purpose of settlement facilitation or those instances where an estimate of value is required, rather than a full valuation, due to limitations or restrictions of data, time, or financial resources.[5]

[1] “Unimpeaching Calculations of Value—The Pink Elephant in the Courtroom” https://quickreadbuzz.com/2018/12/12/the-pink-elephant-in-courtroom/.

[2] NACVA Standards FAQ Library, https://www.nacva.com/standardsfaq Standard Interpretation Approved by EAB on January 14, 2021.

[3] NACVA Standards FAQ Library, https://www.nacva.com/standardsfaq, Standard Interpretation Approved by EAB on August 13, 2020.

[4] “Unimpeaching Calculations of Value—The Pink Elephant in the Courtroom” https://quickreadbuzz.com/2018/12/12/the-pink-elephant-in-courtroom/.

[5] “Unimpeaching Calculations of Value—The Pink Elephant in the Courtroom” http://www.nacva-cti.com/ValueExaminer/18-SO/index_40.html#page=34.

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C. Zachary Meyers, CPA, CVA, has been retained in over 2,000 engagements since 2011. He has provided expert testimony and been qualified in federal district courts, circuit courts, family law courts, and the West Virginia Human Rights Commission as an expert in business valuation, forensic accounting, pension valuation, and taxation. Mr. Meyers was elected to the National Association of Certified Valuators and Analysts (NACVA) Standards Board in 2016, appointed Vice-Chair in 2017, elected Chair in 2018 and 2019 , which promulgates professional standards for financial professionals, analysts, and experts. He was appointed to the Global Association of Certified Valuators and Analysts (GACVA) Advisory Council in 2020, which liaises with NACVA’s international chapters in Africa, Canada, Europe, India, Taiwan, and Southeast Asia. In 2021, Mr. Meyers was elected to the Business Valuation Resource Panel of The Appraisal Foundation (TAF), whose purpose is preserving and improving the public trust in valuation.

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