Enhancing the Uniformity of Fair Value
In 2014, valuation professionals responding to an American Institute of CPAs (AICPA) survey identified a 30% rise in demand for fair value for financial reporting. Specifically, the survey highlighted both fair value and intangible assets as emerging issues. This comes as no surprise given an increasingly global market rife with corporate acquisitions beyond borders. Also reported was an increase in the prevalence of complex assets such as intellectual properties, whose values cannot be calculated with complete objectivity. The growing demand for fair value – coupled with the subjectivity of valuing entities and intangibles – carry with them an obligation for the profession to protect the public interest by lending clarity, consistency and transparency to fair value practices.
- Better defining the scope and documentation of work.
- Providing a system for quality monitoring.
- Establishing a code of ethics for credential holders.
Establishing scope-of-work parameters and documentation levels was one of the first steps in creating the supporting infrastructure for the CEIV credential program. These parameters and guidance are presented in a new performance framework and its related applications. The framework promotes a level of documentation that allows an experienced professional not involved with the engagement to review and understand the significant analyses of inputs and outputs and how they support the final conclusion of value. This will help clients, auditors and others understand the quantitative analyses in the final valuation report. More importantly, it will increase understanding of the qualitative analyses that support the conclusion of value.
So why is this important?
Quantitative and qualitative inputs are used by every valuation professional in every valuation engagement. Quantitative inputs are typically mechanical in nature. While they still require an appropriate level of documentation to ensure proper support of the findings, they tend to need less explanation and support than qualitative inputs. By comparison, valuation professionals commonly base qualitative inputs on their expert judgment. This is where the valuation professional can bring the most value to a client; however, qualitative inputs, when not well documented, rely on the valuation professional to explain or support them should questions arise. For example, a valuation professional may choose a 6% discount rate when an 8% discount rate could also be reasonable. If the justification for choosing the 6% discount rate is undocumented and the valuation professional is unavailable to answer questions regarding this decision (e.g., changed firms, retired, etc.), others are left to interpret the rationale. This can have unintended and harmful consequences.
It’s important for valuation professionals to recognize that documenting the reasonableness of an assumption is analogous to the saying “an ounce of prevention is worth a pound of cure.” The CEIV performance framework is a solution to the documentation dilemma for various assets and liabilities.
The credential program also protects the public interest by establishing a quality monitoring system. The valuation profession has forms of quality control interspersed throughout its procedures, but until now, there’s been no single oversight process. Those who understand the importance of uniformity, expectations and enforcement will value the CEIV quality control process, which requires credential holders to submit to an annual, proactive engagement-level Quality Monitoring Program. The program’s goal is to ensure that high-quality valuations are performed in accordance with the new performance framework.
Knowing that CEIV credential holders are held to high expectations and strict rules will strengthen public trust and regulator confidence.
Lastly, many professions have a code of ethics as part of its quality control process. Valuation professionals who obtain the CEIV credential through the AICPA must adhere to the AICPA Code of Professional Conduct. Similar to the quality monitoring process, the code of ethics requirement provides confidence to regulators and to the market that the CEIV designees are performing quality valuations while upholding high professional standards.
In today’s rapidly changing international marketplace, the demand for fair value measurement increases as entities and intangibles grow in complexity. The AICPA’s CEIV credential program improves market confidence and brings a higher level of professionalism and accountability to those committed to enhancing audit quality, consistency and transparency in fair value measurements for financial reporting purposes. Learn more.
Mark O. Smith, JD, CPA, Lead Technical Manager - Forensic and Valuation Services, Public Accounting, Association of International Certified Professional Accountants.
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