Maintaining Your Independence

Being business appraisers often places us in the precarious position of deciding whether to be an advocate for our client's position, or an objective professional whose job it may be to not necessarily please the client. Many of us who get involved in litigation assignments get pushed into a position that we cannot allow ourselves to get into; the position of an advocate for the client. Most complaints that are filed against a business appraiser arise out of litigation engagements. Our ethics do not permit us to be advocates for anything other than our own opinion.

The best example of an advocate is your client's attorney. That attorney's job is to do whatever is necessary (legally, of course) to present the client's case in such a light that the client wins the lawsuit and ends up with as large a settlement as possible. The advocate will omit items that do not help the client's cause and take the position that if opposing counsel does not raise an issue, it will be left unsaid.

When testimony is expected to be given, we must remain objective, even though instinct dictates that we should fight for the client's benefit. In this type of situation, an independent appraiser will actually be a greater benefit to the client for at least two reasons:

• Although the client may not be happy, the truth may save your client from the emotional and financial costs of a protracted litigation. An extreme position may convince the client that there is a false "pot of gold" at the end of the litigation that may never be realized.
• The appraiser who serves as an expert witness will lack credibility in the eyes of a judge or jury if the position taken by him or her is that of an advocate.

During litigation, there is rarely a client who does not feel the emotional impact of the issue that caused the lawsuit to be filed originally, as well as the impact of the ongoing proceedings. It does not matter if the case involves a divorce, a stockholder breakup (which in many respects is similar to a divorce), damage litigation, or a breach of contract litigation. The client is angry because he or she feels that a wrongful act has been committed, either forcing the client to file a lawsuit or having a lawsuit filed against him or her.

To illustrate the painful effect of an advocate position, let's look at a business valuation issue in a divorce. Harry and Sally are going through a divorce. Harry owns a business which he had appraised by an independent appraiser for $1 million. Sally's attorney recommends Joe Appraiser who values Harry's business at $5 million. During the valuation, Joe ignores the fact that Harry's largest customer, who accounts for 63 percent of his business, recently died of a heart attack. Joe also determines Harry's reasonable compensation to be $25,000 per year, despite industry statistics and Harry's work habits, which justify a salary of approximately $150,000.

Joe meets with the attorney and Sally and convinces Sally that his salary position "could be" (rather than "is") justified and says nothing about the main customer's death. The end result is that Harry and Sally cannot reach a settlement because of the great disparity in the values of Harry's business and they go to trial.

The trial does not take place for 1 1/2 years due to the backlog in the court system. During that period, Harry and Sally are bitter over their perception that they were each being cheated out of a fair settlement by the other party.

At the time of trial, both attorneys prepare, meet with their respective expert witnesses and proceed with their case. The legal and expert fees incurred by Harry and Sally are in excess of $100,000. The judge accepts the value of Harry's business as being $1 million based on the testimony of the independent appraiser.

What did Joe's position of advocacy do to Sally? First, she waited for almost two years to be finished with the divorce and go on with her life. During that period, her life was in turmoil; she was dependent on Harry's temporary support and did not know where she would be living after the divorce if the marital house was ordered to be sold. In addition, she became more and more agitated at the thought of Harry trying to "stick it to her" and became a very bitter person. Let's also not lose sight of the fact that her legal and expert fees amounted to about $70,000. Worst of all, she ended up with the same amount of marital property (less legal and expert fees) as she would have two years ago.

In this situation, although good-intentioned, Joe hurt the client with his advocacy. Granted, this situation sounds extreme, but it happens more often than can be imagined.

Let's also look at what advocacy does for the appraiser. After this matter gets to court, the judge finds the appraiser's position to be that of a "hired gun" and determines that he lacks credibility. The independent appraisal expert remains objective and assists the other side with a victory. Joe, or any other expert for that matter, should not believe that attorneys and judges do not talk about experts.

My experience has been such that word gets around fast about the reputation of an expert. As an expert, we must demonstrate a particular level of knowledge about the subject matter for which testimony will be given, but our reputation depends on us being both knowledgeable and objective. We all know about personal goodwill. It is very easy to lose if you are not careful!

Gary R. Trugman CPA/ABV, MCBA, ASA, MVS is President of Trugman Valuation Associates, Inc. He is the Chair of Business Valuation Education and International Ethics for ASA. He can be reached at gary@trugmanvaluation.com.