It has recently become apparent that a number of attorneys and users of valuation services are confused between what forensic accountants do and what business appraisers do. First and foremost, the forensic accountant is an accountant who has been (or should be) trained in being a financial detective "finding where the body (money) is buried." Forensic accountants are typically instructed by their clients, "Dig the dirt until you find something." Therefore forensic accountants are most definitely advocates.
We often see forensic accountants in litigation situations (divorce, partner and shareholder disputes, bankruptcy). After finding the money the forensic accountant will typically develop new financial statements based on the new information. If the purpose for all of this is to establish the value of a business or a professional practice, it is at this point that the business appraiser takes over. The appraiser's opinion will be based upon the reports that the forensic accountants has created.
The primary differences between forensic accountants and business appraisers are:
* Forensic accountants create financial documents and reports. Business appraisers do not create financial documents. They analyze reports created by others.
* Forensic accountants are advocates for their clients. Appraisers are, or should be, totally independent and advocate only for their opinions. The appraiser who acts as an advocate loses independence and credibility.
There are some accountants who practice both forensics and valuation. However, when they do, they must or should be very careful not to cross the line of advocacy. There are many accountant-appraisers who are members of the Institute of Business Appraisers or the American Society of Appraisers or certified by them. They are bound to perform by professional standards and codes of ethics.
The professional standards of the Institute of Business Appraisers address some of the issues such as disinterestness. One of the standards, for instance, reads, "It is unethical for a business appraiser to accept any assignment when the appraiser has a present or contemplated interest in the property being appraised, or a bias for or against any person associated therewith, either directly or indirectly. Such interests include, but are not limited to, present, contemplated or prospective activity with the business enterprise, it's officers, directors, or owners, including possible acquirers."
There is absolutely no question that a forensic accountant who is under orders to find the money has a bias for the client. The primary concern is in catching something or someone. The forensic accountant is therefore an advocate.
Another standard reads, "Nonadvocacy is considered to be a mandatory standard of appraisal."
Another misconception among many users of valuation services has to do with the licensing of business appraisers. Whereas all real estate appraisers nationwide must be state licensed, there is no such thing as a business appraising license in any state. In fact, anyone can call themselves a business appraiser. In fact, many business brokers, accountants, bankers, and economists, regardless of their valuation education, training or experience, call themselves "business appraiser." There are however, business valuation organizations and societies that confer professional designations upon those who have met their education, testing, experience and performance standards.
The two premier organizations are the Institute of Business Appraisers (IBA) with about 3,500 members, and the American Society of Appraisers (ASA) with about 3,000 members in its Business Valuation Section. The difficulty of becoming certified or accredited is indicated by the fact that approximately 350 IBA members have been designated as Certified Business Appraisers (CBA) and approximately 29 have been designated as Master Certified Business Appraisers (MCBA). ASA has only conferred their ASA and AM designations upon approximately 400 of their members.
What are the differences between IBA and/or ASA certified or accredited appraisers and those who are not? The primary difference is that IBA and ASA designees have had to prove before a body of their peers that they, in fact, have the ability to appraise businesses and professional practices at an acceptable level of competence. They must prove that they have mastered the recognized approaches and methods of valuation.
What are the differences between IBA certified and ASA accredited appraisers? IBA's emphasis is on the smaller, closely held private companies whereas ASA's emphasis is on the larger, closely held private companies. That then begs the question, "What is smaller and what is larger?"
*The Small Business Administration sets forth the following criteria for size:
*Very small: Any business with fewer than 20 employees.
*Small: Any business with 20 to 100 employees.
*Medium: Any business with 101 to 500 employees.
*Large: Any business with more than 500 employees.
*The 1988 Business Reference Guide sets forth the following criteria for size:
*Small: Any business priced at less than $1 million.
*Mid-size: Any business priced between $1 million and $20 million.
*Large: Any business priced at more than $20 million.
And The Mergers and Acquisition Handbook sets forth the following criteria for size:
*Small: Any business with less than $1 million in annual sales and fewer than 10 employees.
*Mid-size: Any business with between $1 million and $20 million in annual sales and with between 10 and 249 employees.
*Large: Any business with more than $20 million in annual sales and with more than 249 employees.
The SBA reports that the vast majority of businesses bought, sold and appraised in the United States are in the very small to small range, followed by mid-size.
Jerry F. Golanty, president of BizVal in Reno, is a Master Certified Business Appraiser and the southwest region governor of the Institute of Business Appraisers. He may be reached at 775-332-4881 or jerrtygolanty@bizval.net.
