June 2008

Amid Diverse Business Valuation Standards, an Expert's Credentials and Competence Are Crucial

To maintain their credibility, experts should be prepared to answer questions that relate to their credentials and also their competence

The lack of unified standards has become a critical topic for the business valuation (BV) profession. As a result, BV litigation experts may be more susceptible to intense examination regarding compliance with the appropriate professional standards. That is an area of concern for which they and their attorneys should be prepared – and to use to their advantage when cross-examining an opponent’s expert.

To maintain their credibility, experts should be prepared to answer questions that relate to their credentials and also their competence – that is, whether the opinions set forth in their reports comply with the appropriate standards. By the same token, accredited BV experts can help guide attorneys in developing the same questions for cross-examining their opponent’s expert, identifying areas where credentials or compliance may be lacking.

Many believe that professional BV standards “began” in 1959 with IRS Revenue Ruling 59-60, which is applicable by law to federal estate and gift tax valuations. The influence of that revenue ruling carried over into the BV standards that began to appear in the 1980s and 1990s: first, with The Appraisal Foundation’s 1987 issuance of the Unified Standards of Professional Appraisal Practice (USPAP), followed by standards from the American Society of Appraisers (1992), the Institute of Business Appraisers (1993), and the National Association of Certified Valuation Analysts (1993).

More recently, the American Institute of Certified Public Accountants (AICPA) issued its Statement on Standards for Valuation Services No. 1 (SSVS 1). As a result, BV professional standards are dispersed among five organizations, with continued federal guidance. The U.S. Tax Court has recognized USPAP, as has Congress in legislation such as the 1989 Financial Institution Reform, Recovery and Enforcement Act and the 2006 Pension Protection Act. In 2006, the IRS issued Notice 2006-96, which cited USPAP as a generally accepted appraisal standard.

The pressure to adhere to these emerging standards is impacting all BV professionals, irrespective of their accrediting organizations. For example, beginning in January 2008, when SSVS 1 became effective, many of the AICPA’s approximately 300,000 members became bound by the standards when they perform valuation-related engagements. ■