With a wave of Baby Boomers nearing retirement, there is a good chance CPAs will come across clients who need a business valuation. A valuation may be necessary for gift and estate purposes, transfers of ownership, tax planning purposes, and divorce. CPAs need to determine whether they should perform the valuation themselves or refer the work to a more qualified CPA. Before accepting the engagement, CPAs should consider:
Do you have professional competence? Rule 201A of the AICPA Code of Professional Conduct states that a member shall “[u]ndertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence.” Paragraph 11 of the AICPA Statement on Standards for Valuation Services No. 1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, (tinyurl.com/2uk4gt2) further clarifies that “[a] valuation analyst should possess a level of knowledge of valuation principles and theory and a level of skill in the application of such principles that will enable him or her to identify, gather, and analyze data, consider and apply appropriate valuation approaches and methods, and use professional judgment in developing the estimate of value.”
Are you independent? CPAs should review Interpretation 101-3, Performance of Nonattest Services, of the code. Independence would be impaired if a member performs an appraisal, valuation, or actuarial service for an attest client where the results of the service, individually or in the aggregate, would be material to the financial statements, and the appraisal, valuation, or actuarial service involves a significant degree of subjectivity.
For new clients, CPAs should ask themselves the following:
If you accept this engagement, will there be client considerations that could impair your objectivity in appearance or fact? If CPAs are asked to perform a valuation for the spouse of a major client or the client in a divorce proceeding, the client may have an expectation that the CPA will arrive at a value that is advantageous to him or her. CPAs are required to be objective in a valuation engagement. In divorce proceedings, in which emotions run high, CPAs risk alienating a major client.
Have you discussed the cost/benefit with the client so he or she understands the fees to be charged? This is a tough discussion, but it is one a CPA should have with a client. A quality business valuation can result in considerable professional fees being charged to the client. If the client is a minority shareholder, sufficient funds may not be available to cover your fees. As with any engagement, the CPA should assess of the ability to collect his or her fees on a timely basis.
What is the reputation of the client or referral source? A CPA’s reputation is his or her most valuable asset. Strong consideration should be taken when evaluating potential clients to ensure that they complement the CPA’s positioning in the marketplace.
Have you reviewed any regulations that might affect the valuation? The IRS, the U.S. Small Business Administration, and the U.S. Department of Labor have regulations related to business valuations. CPAs should ensure that they are aware of all applicable regulations and can comply accordingly.
—By Eddy Parker, CPA, CGMA, (firstname.lastname@example.org) an AICPA technical manager for forensic and valuation services.
(The AICPA Forensic & Valuation Services Conference will be held Nov. 11–13 in Orlando, Fla. Details, including registration information and agendas, are available at tinyurl.com/d2t58wo.)