Mr. Jerry Golanty and Mr. Richard Teichner recently published knowledgeable articles on whether a forensic accountant should perform a business valuation. I am a consumer of business valuations (six per year, at least, from various experts), and have some views which may be helpful. I submit that the real test of a valuation expert is his or her reputation for integrity. Hiring an expert with no ethical intellectual compass is wasteful, counter-productive and dangerous to the client.
1. Anyone with skill and experience can perform a business valuation. "Certification" is not always very meaningful. "Certification" from various valuation groups is only some objective measure of skill and experience. The certification bodies are groups with uneven levels of respect who bestow a "certification" on persons who apply, do an internship of a sort, take a test and who (usually) promise to follow certain ethical and technical rules. Sadly, I do not believe any of the certification bodies have a disciplinary arm for errant valuation "experts."
It is doubtful very many of the principals at the Goldman Sachs investment bank have "certification" from any of the usual groups (AICPA, NAVA, etc.), yet few doubt their valuation skills. An MBA and some years in the valuation business or some variation on the two qualifications may mean more than certification from a group about which we really know very little.
2. The issue is not the trade or practice of the valuation expert; not whether the expert is a stand-alone or a forensic practitioner. Assuming reasonable skill in valuation, it is his or her honor which is the issue, not the nature of the practice. The question is always whether the valuation expert is true to the highest standards of technical ability and professional ethical integrity.
Given an expert has the basic skills, we must ask whether the person rendering the opinion of valuation has honestly sought to determine the value of a business (or a home or a painting or a couch) within the context in which the valuation is sought. (Note that fair market value is likely not the standard of valuation of a going concern or professional practice in Nevada for divorce, instead it is "marital" value, which does not assume a sale and hence may not recognize various discounts applicable to a sale. I say "likely" because this issue has not definitively been decided by our Supreme Court.)
3. The hard numbers, e.g., adjusted gross income, value of the machinery and equipment, etc., are what they are. Routinely, experts agree on those facts or their adjustments are so close as to be immaterial. The numbers are, after all, the numbers. But there are many different valuation approaches from which to choose. The choice of approach and application of subjective estimates as to rates of return, reliability of "comparable" sales, discounts and premiums or fair compensation is where the objective numbers can be manipulated.
Given a reasonable level of reliability and honesty in dealing with the numbers, i.e., what was truly the amount of business use of a vehicle or the propriety of entertainment expenses, the numbers become irrelevant. It is always the expert's subjective choice of the applicable approaches, discount factors, etc., which drive the valuation. The concepts which the expert subjectively selects and applies are what counts, not the numbers. That is why experts rarely argue about the basic "facts" or numbers and always scrutinize the "concepts" applied.
4. Given that valuation is almost entirely subjective, whom does a businessman or litigant choose to perform a valuation? I submit it is the expert whose integrity and skill are the greatest the expert who is most honest or ethical. Whether the expert is a "stand-alone" business valuation expert or a person in a forensic practice, the person to hire is the one who is the most intellectually honest in his or her attempt to be objective. If the client wants to find someone who has no independence or integrity and will give the client the number the client wants, those experts can be found-prostitution is, after all, legal in Nevada.
5. Mr. Golanty seems to imply a person who is doing various forensic tasks for a client cannot be objective. Such tasks are usually in the context of shareholder rights, dissolution of a partnership or divorce. He suggests that because a forensic expert has been hired by one party to review the facts of the case and opine on those facts, that expert is thus an advocate. Mr. Golanty asks: If an accountant is hired to ferret out husband's waste in a divorce case, how can he be relied upon to objectively value the husband's business, also? I believe the answer is self-evident: The expert, as to both issues, must answer to his professional and personal ethical standards. He must fairly and objectively opine as to an expenditure or a value. As seen below, his very livelihood depends on it.
The assumption seems to be that by hiring a valuation expert, you are hiring someone to deliver what the customer wants. The expert cannot use liquidation value for a going, thriving business. But, why not? He is, after all, hired to do a job for his client, isn't he? That is not the case with a business valuation expert and not the case with a physician-would a patient hire a pathologist to give the diagnosis the patient wants to hear? Here we get to the nub of the issue: the definition of the expert's "job" or assignment. The "job" of the expert is to give a fair, honest opinion of value, i.e., to obey his ethical standards in an objective report to the court or client as to what something is really worth.
In the forensic contest the valuation expert does his client a disservice if he presents something unfounded and unsupportable. Once locked into a position which is untenable under any sort of objective scrutiny, much less cross examination, the expert is worthless to the client, the lawyer who hired him and, ultimately, to himself as a future expert. He will have no credibility. Lack of credibility to a court or ethical expert on the other side of a transaction, e.g., a potential buyer or seller or the IRS or a judge, is fatal a waste of time and money. The "other side" will simply not believe something far-fetched and will then discount the representations which are true and reasonable. There is no upside to using a valuation expert who is not ethical. (Another example of the worthlessness of a dishonest report: The client who receives the report may still have no idea of the true range of what his business is really worth something very dangerous in any negotiation.)
6. Is the next logical inference that a "neutral" expert be hired? No, that inference is wrong: Nothing as important as the valuation of a business should be subject to only one set of eyes. The parties may agree on one expert, but each should always reserve the right to have the report scrutinized by an expert of his or her choosing. This is not a prescription for conflict quite the opposite. When an expert knows his work is subject to scrutiny, his work is invariably better clearer, sharper and more objective. That is human nature.1 In divorce cases our experience is that the vast majority of valuation issues are resolved between the two experts before the lawyers or judges ever see them. Two ethical heads are better than one every time.
7. In summary, the only thing an expert has to sell in Washoe County (or anywhere else) is his or her credibility. The buyer might be the IRS, a divorce court or a potential purchaser but whoever the buyer, credibility is what matters. Whether the expert is a forensic accountant or in a stand-alone valuation practice, such will have nothing to do with the integrity of his or her report. Whoever the author stand-alone or forensic the report must be fair and accurate because, inevitably, it will be reviewed and scrutinized.
Gary R. Silverman is a principal in the Reno law firm firm of Silverman, Decaria & Kattelman, Chtd., specializing in marital dissolutions. Disclaimer: The author sometimes retains Mr. Teichner. and sometimes Mr. Teichner is on the opposite side of a case. Nothing in this article impugns Mr. Golanty, or his reputation for objectivity.
