Determining the fair value of the assets listed on your company’s financial statements, or even a portion of them, is not an easy task. It often leads to ethical dilemmas because of the significant professional judgment required. This is particularly true when valuing investments that are not actively traded, such as securities, debt instruments and other hard-to-value assets. As an analyst with your company’s best interests in mind, it’s important to focus on two key areas to create a sound valuation that will not only aid your company in fairly evaluating its assets, but also can stand up to an audit by an accounting firm down the road.
One approach to ensure you are doing all you can to remain ethical is to have a solid understanding of the standards that apply to you if you are credentialed by one or more professional organizations, such as the AICPA for example. If you are not a CPA or do not possess any valuation certifications, then no professional standards may apply; however, you can still use these standards as a roadmap for best practices in the industry. Without taking a deep dive into this area, there are a couple items worth mentioning:
Be impartial, not an advocate. Even in a management-prepared valuation, best practices are that the analyst is an advocate of their own opinion, not that of the employer. This is a critical point because it defines your primary role in the valuation, which is generally to determine the value in an independent fashion, free from the agenda of others.
Know what you know (and what you don’t). Professional competence is the foundation of functioning ethically within any specialized field. Simply put, you must be confident in your own skill set to perform the valuation in a sound manner. If you are unsure for any reason you are up to the task, it’s in the best interest of your company to seek assistance from an outside qualified professional.
By their nature, the types of valuations we are discussing are subjective and require professional judgement. Notionally, this is the root of the phrase that valuation is more of an art than science (or at least as much art as it is science). In reality, there is a chasm between creating a piece of artwork and a qualified, competent professional using his or her judgement based on training and experience to make a subjective determination.
That said, because there is subjectivity in a valuation, the most ethical approach is to provide a well-documented, fact-driven determination rather than an agenda-driven one — which can influence and often skew conclusions in favor of a company’s desired outcome. The difference between a well-documented, fact-driven determination and an agenda-driven assumption is most often identified by the corroborating support and evidence that drives the assumption. An analyst approaching the valuation with an agenda already in mind will often:
In the end, your ability to make a sound, professional judgment will rely upon the quality and integrity of the evidence you use.
These two foundational yet critical steps to preparing your company’s valuation — understanding best practices in valuation and using sound judgement to avoid the agendas of others — can set the stage for a supportable valuation that your company, and your auditors, can rely on.
Please contact a member of your service team, or contact Josh Lefcowitz at jlefcowitz@cohenco.com for further discussion.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.