How to Get Experience in M&A-Related Disputes

Editor’s note: This is a sidebar to “The CPA’s Role in Quantifying Post-Acquisition Dispute Damages,” March 2010.

Most CPAs with an accounting and auditing background have advised a client who has acquired or sold a business or business interest. Disputes may arise related to the M&A transaction as outlined in the accompanying article. Having the requisite skills and experience to assist the client in resolving the dispute can add tremendous value to the relationship.

“If you are an experienced CPA able to interpret GAAP, you are qualified to get involved in a working capital dispute. If you’re a valuation professional, you can assist in valuation and damage issues as to what the buyer paid for the deal or the bargain, versus what the deal was worth given certain misrepresentations, which may have been made by the seller,” says Jeff Litvak. “CPAs with an accounting background, who are valuation experts as well, can get involved by working with attorneys who specialize in deal litigation.”

A CPA can become involved in post-acquisition disputes in a number of ways. The CPA, as an expert in GAAP, can serve as a mediator or arbitrator in a post-acquisition dispute that involves an assertion that the target company’s closing financial statements, and specifically the closing balance sheet, were not presented in accordance with GAAP or contained material errors. A CPA can also serve as an accounting expert for either the plaintiff (usually the buyer) or the defendant (usually the seller) to establish or rebut assertions surrounding the GAAP presentation contained in the target company’s financial statements. A CPA also can serve as a damages/valuation expert to quantify the alleged decline in the value of the target company related to fraudulent/material misrepresentation by the seller, not properly disclosed to the buyer.

CPAs who want to become involved in working capital disputes should be very comfortable with the following core competencies:

Fundamental expertise in GAAP. “An early mistake I made in a marketing call with an attorney was to naively overlook the GAAP interpretation issues that were at the center of the working capital dispute. I made an assumption that the nature of the case would be drawing on my background as a valuation and damage expert. What the attorney wanted to know was what my expertise was in GAAP matters,” says Bill Kennedy.

“An important nuance to understand is that what necessarily would apply in accounting and auditing in strict terms may not be the way it will play out in a working capital or indemnification dispute,” says Litvak. “For example, on the topic of materiality, generally, most items are material to an arbitrator. Whereas, in an audit, certain items may be deemed to be material by the auditors, most every item is material in a dispute.”

Valuation. “In a post-M&A dispute, valuation analysis is not a traditional USPAP (Uniform Standards of Professional Appraisal Practice) valuation but more akin to a damage analysis. The CPA will need to have expertise to understand how to recalculate the purchase price, but it is much simpler than what is done under SSVS1 (Statement on Standards for Valuation Services no. 1),” says Kennedy. The valuation aspects are very straightforward and almost fundamental, except for the issue of whether the buyer is entitled to a multiple of the misstatement.

“CPAs typically misunderstand that much of what we do is damage analysis and not pure valuation,” explains Litvak. “In order to do the damage analysis in a post-M&A dispute, you have to have a valuation background. But on the valuation issues, you do not necessarily have to revalue the company—you have to value the alleged misstatement and determine if the damages are dollar for dollar or to be calculated at the multiple. So you’re doing your damage analysis based on the misstatement. This is a common mistake, and performing a full-scale valuation instead of a damage analysis does not provide the best insight and information for the trier of fact. The way to prove the benefit-of-the-bargain damages is to value the misstatements, using both accounting and valuation analysis.”

Experience as a testifying expert. “CPAs who are looking to obtain more experience in M&A disputes should seek out projects within their firms to try to obtain more exposure to the M&A process and become involved in transactions,” says Ken Mathieu. “This will assist them in obtaining the background they need.”

An important difference regarding working capital disputes is that a lot of these cases are heard in arbitration, as opposed to in court. CPAs do not necessarily need familiarity with arbitration, but they need to understand the difference. “In arbitration, you’re dealing with a more sophisticated trier of fact,” says Kennedy. The arbitrators involved are chosen because of their technical expertise. So the CPA may be testifying before a CPA arbitrator who is hearing evidence on the GAAP issues and making a ruling. “In a courtroom situation, the panel of jurors and perhaps even the judge probably will not understand the nuances of the more sophisticated issues of GAAP and its interpretation.”

“Get to know the due diligence people in your firm or in your community,” says Litvak. “As you begin to mature in this area, you’ll get to know the lawyers who write the contracts and who would think of you as a neutral accounting arbiter or an expert in M&A disputes.”

“It is also important to have nonlitigation exposure on M&A issues in valuation before getting into this business,” says Mathieu. “Having nonlitigation exposure to these issues is important for having the credentials necessary to do this type of work.”

—By Loanna Overcash (lovercash@aicpa.org), a JofA senior editor.