Joel D. Gonia, ASA
Senior Review Appraiser, KATS Machinery & Equipment Appraisals, LLC
Abstract: USPAP’s Scope of Work Rule allows us to fine tune each appraisal review to specific criteria based on the intended use. We often forget that the burden for determining the scope of work is on the appraiser. This scope of work—as we have performed it—must be disclosed in the report: The appraiser must disclose what he or she did not do as well as what he or she did do. This article will focus on the scope of work decision, performance, and disclosure for use within the Review Report.
The review process allows for broad flexibility in how the review is performed. USPAP provides minimum requirements with limited explanation and discussion. Review Appraisers are encouraged to supplement/expand this process based on their unique application, knowledge, and expertise. We are attempting to ensure, as part of the overall review process, that the level of detail within the original report is sufficient for the intended user to understand the methodologies employed to reach the stated value conclusions.
So right off we begin to understand the importance of an appropriate scope of work. Within my practice I address the assignment elements initially within the proposal process—I determine the scope and then seek clarification and eventual authorization from the client! If the client prefers another scope, we move on to Draft 2 and further discussion until all parties can agree.
Many scope of work discussions lie with limiting assignment conditions and the extent of liability (or responsibility) the client is willing to accept. With MTS appraisals, often the original appraiser was not required to personally observe the subject property, so who provided the estimate of operating condition? Or where did the descriptive data originate? To what extent is the data reliable? As a review appraiser, you got to know! You should not guess what the original appraiser was tasked to do or what is now required of you, as the review appraiser. Thank God for a detailed scope of work!
Remember that the review appraiser is only required to provide an opinion of value if that service is specifically requested. Otherwise, we are only reporting on the quality of work and if the reported value conclusion is supported, or not. Should you receive a request to provide your own (independent) opinion of value, please remember to fully disclose this additional unique service within the scope of work for the review assignment.
It is our responsibility as the review appraiser to identify the appropriate scope of work based on the intended use. Is it an administrative review for internal procedures? Is it to be used externally within financial reporting per SEC requirements? Who are the intended users who will review the review appraisal? Is the reviewer to include an opinion of value? These are all scope of work elements to be disclosed within the review report. If not, a reader may be misled and not fully understand the intended use.
The foundation for our appraisal review, including the development and reporting requirements, are contained within USPAP. For reviews, as for all appraisals, we must identify the problem to be solved to determine the appropriate scope of work. Assignment elements that must be defined and analyzed for appraisal reviews include:
Once properly determined, the appraisal scope of work must be disclosed to clients and other intended users who rely on the assignment results.
I typically receive two types of appraisal review requests: (1) Is the original report credible, in compliance with USPAP and other applicable codes, regulations, and standards; and (2) Do I agree with the values? The first is rather straightforward. However, the second requires me to further clarify with the client, if they wish me to provide a separate opinion of value. Both of these can be provided within the same report. I prefer to enter into a separate contract agreement and issue a separate report, but this is not required by USPAP. Remember that although an appraisal report will have an effective date, an appraisal review report does not—unless it also provides an opinion of value.
The review appraiser must be competent to adequately perform the assignment based on conditions set forth within the scope of work. The appraisal review report includes a quality of work statement regarding whether the content, analyses, and conclusions stated in the report under review are (or are not) in compliance with applicable standards and requirements, and if the value conclusions are accepted or rejected. If the scope of work includes a separate opinion of value, the review appraiser must have the necessary knowledge and experience to complete the appraisal, even if on a limited or restricted basis. If it does not, the review appraiser should be at a minimum familiar with the methodologies typically used to appraise the subject.
Proper identification of the problem to be solved is required for compliance with the Competency Rule, which states:
An appraiser must determine, prior to agreeing to perform an assignment, that he or she can perform the assignment competently. Competency requires (1) the ability to properly identify the problem to be addressed; (2) the knowledge and experience to complete the assignment competently; and (3) recognition of, and compliance with, laws and regulations that apply to the appraiser or to the assignment.”[i]
[i] USPAP: 2020-2021 Uniform Standards of Professional Appraisal Practice, The Appraisal Foundation, Competency Rule, p 11. The 2020-2021 edition of USPAP is effective through December 31, 2023.
For this reason, very few review appraisers are competent to appraise multiple types of assets. An appraiser who is experienced in commercial real estate typically isn’t familiar with the unique methodologies used to appraise metalworking machine tools. Nor is the business appraiser familiar with the gems and fine art markets, and so on. It is not enough to understand that multiple approaches to value are used, you must understand how to correctly employ each to the market for subject assets. Additionally, very few appraisers have a good understanding of USPAP beyond their primary appraisal practice. The American Society of Appraisers encourages its membership to only provide appraisal services within their personal expertise. Additionally, considering a potential lawsuit, it is good common sense.
I cannot emphasize strongly enough to support your opinions within the review, particularly when you disagree with the value conclusion. Don’t assume the intended user knows USPAP, or any part of valuation theory—You need to provide exact references to support your opinion. Also, do not provide services beyond the stated scope of work, even if you really want to! Yes, sometimes we may think the reported value is incorrect (due to previous experience, certain knowledge, or actual analysis) but you may create all kinds of liability for yourself if you report on something not anticipated within your agreed scope of work.
For consideration on a practical basis, be professional with your language and writing style. Your client and/or intended users of your appraisal review assignment may have an established rapport with the original appraiser. Should you include negative comments without sufficient documentation, your language may discredit your assignment. Remember, you are reviewing the report not the appraiser.
Assignment conditions are the essential ingredients within the scope of work. It’s where you hang your hat, so consider them as your default for performance tasks. You simply do not extend beyond the stated conditions, unless of course assignment results are not credible, and require further modification to the scope of work. For example, if the original subject data is in question and there is not a provision to gain confidence, you cannot perform the review unless the scope is modified to allow additional effort. This occurs frequently when the original appraiser was asked to complete a desktop appraisal.
In some cases, you may conclude within your review that the appraisal is not credible due to the lack of data. If you have been asked to provide an opinion of value, you can include data collection or inspection as part of your assignment conditions. You may request a modification to your scope of work at any time in which conditions or information are discovered during the assignment that will further assist in solving the identified problem.
In developing an appraisal review assignment, an appraiser acting as a reviewer must identify the problem to be solved, determine the scope of work necessary to solve the problem, and correctly complete research and analyses to produce a credible appraisal review.[1] Consistent with the reviewer’s scope of work, the reviewer is required to develop an opinion as to the completeness, accuracy, adequacy, relevance, and reasonableness of the analysis (and/or the report) in the work under review given law, regulations, or intended user requirements applicable to the work under review.[2] Because an intended user’s reliance on an appraisal review may be affected by the scope of work, the appraisal review report must enable them to be properly informed and not misled. Sufficient information includes disclosure of research and analyses performed and may also include disclosure of research and analyses not performed.[3]
It is equally important to state what we did not do, or have not been requested to do, as well as what we did do. These disclosures help to eliminate questions that may arise regarding the extent of the review and services provided.
Additionally, any limitations, restrictions or assumptions should be disclosed within the scope of work. As an example, if you are asked to provide a separate opinion of value and the original bundle of assets under review includes multiple assets, you may be requested to only appraise a sampling of assets, and report your conclusion as compared to the original appraisal.[1] The Appraisal Foundation, “Uniform Standard of Professional Appraisal Practice 2020 – 2023 Edition” (Jan 2020):
Competency Rule, page 11. Print
[2] Ibid. Std 3-3(a & b Comment), page 27
[3] Ibid. Std 4-2(g), page 30
Disclosure of the extent of research and analyses performed to develop your conclusion of value is important as well, particularly if you use different data than the original appraisal. The disclosure requirements apply to the scope of work performed rather than the work initially planned.
Appraisal reviewers have broad flexibility and responsibility to decide the extent of disclosure within the report. It is a judgement call based on the intended use, intended users, complexity of the subject property, and many other factors unique to each assignment. Ultimately our goal is to produce credible assignment results. We rely on an appropriate scope of work to allow proper procedure and performance of valuation standards.
Appraisers should consider these few suggestions regarding scope of work for appraisal review assignments:
I encourage you to read the entire USPAP Scope of Work Rule, accompanying Advisory Opinions and discussion regarding appraisal review and scope of work. This knowledge will assist in preparing review reports that are understood and not misleading, including communicating the research and analyses used to develop your quality of work statement and value conclusion.
Joel Gonia, ASA, MTS and ARM, is one of the few appraisers to spend his entire career within the valuation industry—35 years and counting. He is accredited as MTS (1989) and ARM (2016). As the Senior Review Appraiser at KATS Machinery & Equipment Appraisals, LLC, Joel is responsible for all work performed by the firm, including value accuracy and consistency, USPAP compliance, internal policies and procedures, and continuing education. KATS provides valuation and consulting services for financial reporting, commercial lending, insurance, tax and litigation purposes. Email: joelgonia@aol.com