Concerns From an Auditor's Standpoint

Editor's note: This is a sidebar to "Valuations for Financial Reporting in Today's Market," May 09.

Having never done a valuation, I have an alternative view from the valuation panel participants since I am from the audit and accounting side. I have been working with Dixon Hughes PLLC’s valuation group, which has brought a lot of questions to the forefront. For example:

• When looking at valuations, I have difficulty determining how much emphasis to place on the most recent historical results versus normalized operating results over the last five or 10 years, especially when looking at discounted cash flow analyses that project results for the future. Which historical periods should be given the most weight?

• I would like to see the standard setters provide some guidance on whether it is appropriate to use a longer-term view and to not put 100% weight on the most current year results. In the context of a business valuation, does that make sense?

• How much emphasis should be placed on a point-in-time valuation if you’re a public company and you have publicly traded stock? How do you reconcile valuation to that stock, which may have gone up 30% yesterday and down 25% today? Did the fair value really change that much between those two days?

• Is it reasonable for this publicly traded price that supposedly represents the fair value of the company to fluctuate by 30% in a day? The way the accounting standards work, it forces you to look at the market price and perform some sort of reconciliation.

• I look for use of reasonable assumptions, including the appropriate discount rate that market participants would demand.

• Which approach to value (market, cost or income/discounted cash flow) should be given more weight in the final determination of value, particularly if the values are far apart?

• To the extent cash flow/income projections are used, do they portray a return to historical norms for a company that has had a bad year or two? If so, is it reasonable to assume the company, and the company’s industry, the economy, etc., will migrate to these norms?

Walter McNairy is member in charge of Dixon Hughes PLLC’s public company practice in Raleigh, N.C.