Why Should our Reports Contain an Appraiser Certification/Representation
As part of the valuation practice within a public accounting firm, one of the Valuation Group’s responsibilities is to review valuations that have been performed by other valuation specialists for our firm’s audit clients in connection with the annual financial statement audit. As most readers of this newsletter know, this review requirement relates to auditing and accounting standards that have been published by the American Institute of Certified Public Accountants (“AICPA”) and the Public Company Accounting Oversight Board (“PCAOB”) – specifically, the AICPA’s AU Section 328, Auditing Fair Value Measurements and Disclosures and AU Section 336, Using the Work of a Specialist, and the PCAOB’s Auditing Standard No. 10, Supervision of the Audit Engagement.
As review appraisers, one of the “report content” requirements that we always look to confirm is whether the valuation report contains a signed appraiser certification or representation, and that it is signed by the individual, responsible appraiser(s). Occasionally we will find this certification/representation missing from the valuation report, and the appraiser may respond by saying one of two things; 1) “I’m not required to sign an individual appraiser certification/representation, because this report represents the conclusion of my company, not me personally” or 2) “this report is not required to be in compliance with the Uniform Standards of Professional Appraisal Practice (“USPAP”), therefore I’m not required to sign an appraiser certification/representation.”
I thought it would be helpful to briefly discuss why review appraisers in a public accounting firm look for a valuation report to contain a signed appraiser certification/representation, and to clarify when a signed appraiser certification/representation is required to be included as part of the valuation report, per professional valuation standards.
First, a quick story about an experience I had several years ago when reviewing a valuation report that had been prepared by a valuation specialist for a rather large, publicly-traded audit client of our firm – we’ll call the audit client “ABC Company”. The valuation report was an ASC 805 (SFAS 141R at the time) valuation for purchase accounting and financial reporting, and I noticed that the report did not include a signed appraiser certification/representation. When I questioned the individual appraiser about why he had not provided a signed certification/representation, he responded, "I'm not a member of the ASA so I don't have to follow USPAP." While I recognized that this might be true, I thought that I should at least ask the appraiser to confirm his independence verbally, and confirm that there were no contingent fees involved, etc. When I asked about his independence (of both ABC Company and the target company being acquired), he said, "Well, I probably should tell you that I do own some stock in ABC Company." So I'm thinking, well, maybe he owns a small number of shares, no big deal, but I probably should dig a bit further and ask how much stock he owns, how much this represents of his total investments, etc. After some further digging, the appraiser ended up telling me something to the effect that, "My stockholdings in ABC Company probably do represent the largest single stock investment that I own." So now we had a problem. We were eventually able to resolve the problem, because the acquisition was relatively immaterial for ABC Company, and ABC Company was able to provide some alternative value evidence that helped us get comfortable with the value conclusions of this individual appraiser. But it certainly raised some concern and caused a bit of scrambling to make sure that we addressed this independence issue.
The Uniform Standards of Professional Appraisal Practice (“USPAP”), Standards Rule 10-3, states that “Each written appraisal report for an interest in a business enterprise or intangible asset must contain a signed certification that is similar in content to the following form:…” and then goes on to list the statements that most of us are familiar with, regarding impartiality, present or prospective interest regarding the property and parties involved, contingent fees and compensation, etc. Similarly, the AICPA’s Statement on Standards for Valuation Services No. 1 (“SSVS-1”) states that, “Each written report should contain the representation of the valuation analyst. The representation is the section of the report wherein the valuation analyst summarizes the factors that guided his or her work during the engagement.” SSVS-1 lists several factors to be addressed in the representation, similar to those described in USPAP Standards Rule 10-3.
Why is it important that the appraiser certification/representation be signed by the individual appraiser, rather than the valuation firm issuing the report? Well, as stated in ASA Business Valuation Standard BVS-VIII, “Clearly, at least one individual is responsible for the valuation conclusion(s) expressed in a report. A report must contain a certification, as required by Standard 10 of USPAP, in which the individual(s) responsible for the valuation conclusion(s) must be identified.” SSVS-1 adds, “The analyses, opinions, and conclusion of value included in the valuation report ….. are the personal analyses, opinions, and conclusion of value of the valuation analyst. The valuation analyst and the person(s) assuming responsibility for the valuation should sign the representation in their own name(s).”
If a valuation report is not required to be in compliance with USPAP, is a signed appraiser certification/representation still required? The answer is that it may very well still be required in most cases, depending on who the individual appraiser is. If the individual appraiser is at all associated with the American Society of Appraisers (and association includes candidates, Accredited Members, and Accredited Senior Appraisers), then they are required to follow USPAP, and USPAP requires a signed appraiser certification. And if the individual is a Certified Public Accountant, then they are required to follow SSVS-1, and SSVS-1 requires a signed appraiser representation.
I hope the above discussion is helpful in understanding why review appraisers in the public accounting firms look to the signed appraiser certification/representation as evidence to support their review conclusions, not only regarding valuation methodology and valuation assumptions, but first and foremost regarding appraiser independence and objectivity.
Lee C. Russell is an Executive Director with Ernst & Young and a member of the ASA’s Business Valuation Committee. He is an ASA, a CPA with the ABV accreditation, and a CMA. Contact him at 215-448-5099 or at email@example.com.