The Legal Intelligencer Blog

Business Valuations – Assessment of Risk

By Terry Silver
Special to the Legal

Business valuations that utilize the Income Approach judge, weigh and calculate the risk associated with the business being valued. Financial markets assess risk by the assignment of a rate of return. Low-risk investments such as U.S. Treasury bonds carry low interest rates to reflect the lower risk. Alternatively, high-risk investments reward the investor with higher returns.

In valuing a privately owned company, where public markets do not assess the risk, the assessment is determined by the valuation analyst. This assessment is one of the most significant and subjective aspects of business valuation.

The analyst must develop the discount rate, which can be thought of as a “cost of capital,” or the expected rate of return that the market requires to attract funds to a particular investment. This rate of return reflects both the time value of money and risk. The key question in the development of this discount rate is: What is an appropriate rate of return to expect if the future cash flows were purchased?

The market value of invested capital (MVIC) of a company is the total value of the company to all invested capital, not just equity stakeholders, but also debt holders. The MVIC includes the market value of all outstanding classes of stock, including long-term, interest-bearing debt. This is useful because it allows comparisons with other companies with varying capital structures.

When using the Income Approach to determine the MVIC, it is critical that the discount rate is relevant and appropriate to the economic income being discounted. In particular, the weighted average cost of capital (WACC) should be utilized when one is discounting cash flows to all capital providers. The result of this calculation gives rise to the MVIC. Said differently, it is the value of the entire investment to all stakeholders, both equity and long-term debt holders. Once the MVIC is determined, one would subtract the interest-bearing debt to arrive at the value of the company’s equity.

To determine the WACC, one needs to determine the company’s cost of equity and debt. Many analysts utilize either the Morningstar-Ibbotson Association Yearbook or the Duff & Phelps Risk Premium Report, and sometimes both. In our business valuations at Citrin Cooperman, we utilize both sources of data to assess risk. We seek to quantify market return, small stock risk and specific company risk (inclusive of macro-environmental and industry risk), using a build-up approach to arrive at the cost of equity. We then compare this result to a blending of historical equity risk indicators over a multi-year period from various business portfolios. If the multiple data sources yield comparable results, there is a higher degree of confidence in our research.

The cost of equity is converted into the WACC by weighting with the tax-impacted debt interest rate via an iterative process. The development of WACC is critical to the valuation conclusion. Care, knowledge and credible research all contribute to the WACC calculation, determined with specific company, industry and economic knowledge and information.

Terry Silver is a certified public accountant, certified valuation analyst and certified in financial forensics for Citrin Cooperman, an accounting, tax and business consulting firm in Philadelphia, where he is a partner with more than 33 years of experience as an accountant and auditor. He focuses his practice on business valuation and financial forensic services, expert testimony and matrimonial actions. He can be reached at [email protected] or 215-545-4800.

Written Expert Reports - Retaining Counsel Assistance and Proofreading

By Joseph S. Barbagallo
Special to the Legal

In my previous post, Legal Proceedings and Written Expert Reports, I discussed the considerations that legal professionals should keep in mind regarding written expert reports. This post is an extension of that article but focuses on the potential disadvantage of the expert significantly relying upon counsel's assistance in the editing and proofreading of his/her report.

Attorneys are "word smiths," and as such, it is common for counsel to offer "stylistic changes" to the expert's report. Of course, the more assistance counsel provides, the more vulnerable the expert report will be on cross-examination.

All things being equal, a well-written expert report that is free of grammatical mistakes is more compelling than a sloppy, error-laden alternative. Recognizing this fact, counsel might be tempted to offer typographical or grammatical suggestions. Quite frankly, if these suggestions are minor, then the ramifications carry very little risk or exposure to the expert.

However, wholesale or substantive changes to the expert's report might render a perceived impairment of the expert's credibility and independence. To reduce the chance of that perception, attorneys should refrain from revising the expert's opinion or report in any significant way. 

I am aware of some recent changes in the federal rules of evidence that reduce the discoverability of an expert's draft report(s) by opposing counsel. Notwithstanding, opposing counsel is still permitted to request details as to what information was provided to his/her expert by the attorney. Legal professionals and experts should be mindful that wholesale changes offered by an attorney to his/her expert may become the fodder of vigorous cross-examination and detract from an expert's otherwise favorable opinion and professional stature.

Advice given to counsel for deposing an expert witness might include the following:

- Determine whether the expert was asked to prepare a report or written documents;
- If a report was prepared, inquire as to the nature of the information provided by counsel;  
- Inquire as to the instructions or information given to the expert;
- Determine if opposing counsel participated in the preparation or editing of the report; and
- Consider questioning the expert about any differences in the contents of various reports, the answers to any expert interrogatories and testimony at deposition. However, part or all of this inquiry may be postponed until cross-examination at trial.

Since each mistake in a report lessens the expert's credibility, reports need to be carefully proofread for mistakes. Opposing counsel, upon finding a mistake, will argue that if there is one mistake there may be others, and the entire report is suspect. Corrections need to be made for substantive mistakes, as well as for incorrect grammar, typographical errors and misspelled words. But those corrections are properly the province of the expert and not the attorney.

In today's computer-driven world, spelling mistakes should never occur. But they do happen. Computer editing suggestions can and do take words out of context, and the spell check and grammar programs cannot always differentiate between homophones and heterographs. 

Since it can be difficult for an expert to proofread his own work, the expert and at least one other person should read it several times. Any spelling or grammatical error can make the expert look sloppy and needlessly damage his/her credibility. Imagine the expert being questioned on cross-examination as to whether he was careful and diligent in his investigation, formation of an opinion and preparation of his report.

The obvious answer from the expert would be yes. The next questions could be, "Were you rushed in the preparation of your report?" or "Did you carefully review your report for errors before it was submitted?" After the spelling or grammatical error is pointed out and the expert is forced to admit the mistake in the report that was carefully reviewed, the next question most likely would be, "Are there any other mistakes in your report?"

In any case involving the use of an expert, it is critical for the expert and counsel to have a clear understanding and communication from the initial "expert conference" until the end of the case. Once it is determined that a written report will be prepared, communication must continue between the expert and counsel concerning format, assumptions, content, language and opinions offered by the expert. From there, it is incumbent on the expert, not the attorney, to draft a clear and well-written report.

Joseph S. Barbagallo is a partner with Citrin Cooperman, an accounting, tax and business-consulting firm in Philadelphia. With more than 35 years of experience, he focuses his practice on business valuation and financial forensic services, expert testimony and litigation consulting services in fraud cases. He can be reached at [email protected] or 215-545-4800.

Legal Proceedings and Written Expert Reports

By Joseph Barbagallo
Special to the Legal

Counsel should, early on in a case, determine whether its retained expert should prepare a written report. It is extremely important that the expert coordinates with counsel and does not prepare any unrequested reports.

There are many reasons why counsel may want an expert to prepare a written report. Some of the reasons include the following:

- It may be required by the court (for example, in federal court under Federal Rule of Procedure 26(a)(2)(B);
- Those that are introduced into evidence and marked as exhibits may be taken into the jury room for review and deliberation by jurors;
- It may assist in settlement negotiations, in some arbitration proceedings or during bench trials; or
- It may be needed to support or oppose a motion for summary judgment.

Before the preparation of a written report, an attorney-expert conference should be arranged, either by telephone or, preferably, face to face. The purpose of this early conference is to determine whether a written report is appropriate, and if so, the type of report, the issues that counsel wants the expert to address, any factual statements that the expert may rely upon and the opinions that the expert will likely offer. Assuming that there is a "meeting of the minds," then the expert should be able to commence his or her work.

It is critical that experts not opine in areas that are beyond their true expertise. Experts who do this will open themselves to a difficult cross-examination and/or even worse a Daubert Challenge.

Experts should avoid using legal terms or expressing legal opinions in their reports, and at all times they should only express themselves in language that they completely understand.

Any factual assumptions relied upon by the expert should be specifically expressed in a detailed and unambiguous manner. Factual assumptions should be based on reliable, verifiable information and should cite the source of the information used.

Obviously, an expert's purpose in a case is to express an opinion, and a written report may be used to communicate that opinion. The expert's opinion, therefore, needs to be effective, defensible and stated in a clear, confident and explicit manner.

The use of hedge words such as "I feel," "I believe" or "it would seem" should be avoided. A more effective way to express an expert opinion would be to state that the opinion is "based upon a reasonable degree of professional certainty." It is also a good idea for the expert to avoid the use of absolute words such as "always" and "never."

In my next post, I will further discuss retention issues, proofreading for mistakes and other considerations related to providing a written expert report.

Joseph S. Barbagallo is a partner with Citrin Cooperman, an accounting, tax and business-consulting firm in Philadelphia. With more than 35 years of experience, he focuses his practice on business valuation and financial forensic services, expert testimony and litigation consulting services in fraud cases. He can be reached at [email protected] or 215-545-4800.

Creating an Effective FCPA/UKBA Compliance Program

By David A. Anderson
Special to the Legal

Last month I discussed the potential risks that a company faces under the U.S. Foreign Corrupt Practices Act of 1977 (FCPA) and the U.K. Bribery Act of 2010 (UKBA) when conducting business in foreign countries. This month, I'll present the key components of an effective FCPA/UKBA compliance program.

There are seven key components to an effective FCPA/UKBA compliance program. They are the following:

1) Establish standards and procedures to prevent and detect criminal conduct and ensure compliance with government regulations and industry standards.

2) Create a culture of compliance led by the company's senior management. This means that senior management must:

- Be knowledgeable about the content and operation of the compliance program;
- Exercise reasonable oversight of the implementation and ongoing review of the effectiveness of the compliance program;
- Assign specific senior level manager(s) overall and day-to-day operational responsibility for the program; and
- Provide the necessary authority and resources to enable successful implementation and ongoing review of the program.

3) Use reasonable efforts to exclude known violators from activities that could lead to program violations. This also requires that the company exercise due diligence in the screening of current and prospective employees for past illegal or improper conduct.

4) Provide reasonable ongoing communication and training to senior management, employees and third-party agents regarding the standards and procedures of the compliance program.

5) Monitor, audit and evaluate the effectiveness of the compliance program on a regular basis. Included within this component are:

- The establishment of a monitoring/auditing program to verify that the compliance program is being followed, which will necessitate the use of internal audit staff or external forensic auditors;
- Evaluation of the effectiveness of the compliance program at regular intervals, including analysis of monitoring/auditing results as well as use of feedback from senior management, employees, third-party agents and others; and
- The use of hotlines to enable employees, third-party agents and others to anonymously or confidentially report or seek guidance about potential criminal conduct without fear of retaliation. 

6) Establish of appropriate performance incentives and disciplinary measures that are promoted and enforced consistently within the company to support the compliance program.

7) Establish appropriate response to detected criminal conduct, and subsequent reassessment of the compliance program to reduce the risk of the same conduct occurring again. This requires that the company take the appropriate steps to report detected criminal conduct and cooperate with law enforcement. In addition, the company must take reasonable steps to modify, if necessary, its compliance program to prevent similar conduct in the future.

Of course, no program can prevent rogue employees or agents from violating the FCPA or UKBA, but a well-designed and implemented compliance program -- with effective communication and training as well as regular monitoring and evaluation -- can minimize the risk of a company and/or its employees violating the FCPA or UKBA. In addition, the existence of such a program can mitigate punishment of the company in event of violation of either statute.

David A. Anderson, CPA, CFE, is a director in the Valuation & Forensic Services Group of Citrin Cooperman, an accounting, tax and business-consulting firm in Philadelphia. He has more than 30 years combined experience in public accounting and consulting as well as service at the CFO and COO level in private and public companies. Anderson specializes in business valuations, insolvency and reorganization, and litigation support including commercial and matrimonial litigation. He can be reached at [email protected] or 215-545-4800.

Are Your Clients at Risk Under the Foreign Corrupt Practices Act or the U.K. Bribery Act?

By David A. Anderson
Special to the Legal

If any of your clients conduct or plan to conduct business in any foreign country, then you should read this blog.

The U.S. Foreign Corrupt Practices Act of 1977 (FCPA) makes it a crime for a business or any of its officers, directors, employees, agents or shareholders to bribe a foreign official, foreign political party or candidate for political office, for the purpose of influencing a foreign official in order to obtain or retain business.

The U.K. Bribery Act of 2010 (UKBA), which is due to take effect on July 1 and has been described as "the FCPA on steroids," takes this further by giving the U.K. jurisdiction over any commercial organization that conducts operations in the U.K., regardless of where the bribe is paid.

This means, for example, that if an agent of a U.S. company with operations in multiple countries, including at least one U.K. country, pays a bribe to a foreign official in any of those countries (U.K. or not), the U.S. company could be convicted under the UKBA. The UKBA also prohibits facilitation payments and certain entertainment and promotional expenditures permitted under the FCPA.

Recently, the Securities & Exchange Commission, U.S. Justice Department and FBI have aggressively investigated and prosecuted companies for FCPA violations. In 2010, the top eight FCPA settlements (with either the SEC or DOJ) totaled more than $1.5 billion. As of December 2010, the U.S. Justice Department had about 150 ongoing investigations and prosecutions.

Both the SEC and DOJ have also been focusing on prosecuting individuals, including company management, in addition to the financial settlements. In one recent case, the SEC brought claims against both the CEO and the CFO of a large nutritional/personal care products company for failing to adequately supervise the miscreant employees of a foreign subsidiary. The U.K. Justice Ministry, instead of providing specific written guidance regarding the key provisions of the UKBA and the applicability of the UKBA to non-U.K. companies, has decided to let the U.K. courts decide these issues.

All of this means that a company currently conducting or planning to conduct business in any foreign country could face a significant financial risk and a risk of prosecution of its management under either the FCPA or UKBA.

So, how does a company minimize this risk? The answer is to put in place an effective and robust FCPA/UKBA compliance program and to actively audit and/or monitor compliance, especially in high-risk locations. Having such a program will minimize the risk of violating the FCPA and UKBA and is the only acceptable mitigating factor to reducing the size of financial settlements and penalties if a company is convicted of violating either statute. Forensic accountants can assist you in this role.

In the next edition of this blog, I'll address the key components of an effective FCPA/UKBA compliance program. Stay tuned.

David A. Anderson, CPA, CFE, is a director in the Valuation & Forensic Services Group of Citrin Cooperman, an accounting, tax and business-consulting firm in Philadelphia. He has more than 30 years combined experience in public accounting and consulting as well as service at the CFO and COO level in private and public companies. Anderson specializes in business valuations, insolvency and reorganization, and litigation support including commercial and matrimonial litigation. He can be reached at [email protected] or 215-545-4800.

The Lost and Found of Embezzled Law Firm Funds

By Joseph S. Barbagallo
Special to the Legal

Many firms have annual financial statement audits, internal control reviews and complete background checks on all prospective employees. In my last post, I listed eight preventive measures you can put in place to avoid internal fraud. Even with all these efforts, many still suffer from embezzlements.

Are all of these lost funds gone forever? Maybe not -- when a problem is detected, sometimes a CPA who specializes in forensic accounting or fraud can identify offenders, help determine damages and possibly get assets returned.

Forensic accountants will begin by reviewing a firm and its daily operations. They will interview relevant employees about procedures and activities and partners/shareholders about related entities that the firm deals with regularly. Even if these interviewees have no direct knowledge of embezzlement, they can provide valuable clues or may know connections between entities that others don't.

Fraud professionals also scrutinize a firm's books and financial records. They will pay attention to the vulnerabilities associated with wire transfers and checks made out to cash or to unusual payees. Work programs are typically created to identify and track misappropriated funds. Visual aids are often used to explain complex embezzlement schemes.

There are numerous ways to abscond with funds, and many sophisticated perpetrators are very adept at covering their tracks. Embezzlers use numerous schemes such as improperly expensing embezzled funds as sales refunds, general and/or administrative expenses; and recording stolen funds as prepaid expenses or other assets.

Tech-savvy thieves may discover new ways to use computer applications to extract even greater sums of money. Forensic accountants, with assistance from IT professionals, can determine if a suspect has accessed or edited files and can often recover altered or even "destroyed" data. They also use specialized software to analyze transactions, to sort and group embezzled funds and to calculate damages.

If a matter goes to court, a CPA forensic specialist can be used as an expert witness to help the judge or jury understand complex financial concepts and how to follow the path of the embezzled funds. It is essential, especially in a jury trial, to keep the demonstratives simple and easy to understand.

Sometimes, even after exposing embezzlement and identifying the perpetrator, stolen funds cannot be recovered. It is not unusual for a person who has committed fraud to spend most of the money. A forensic specialist can often see whether a perpetuator converted embezzled funds into real estate or other assets. This may facilitate freezing and later seizing those assets.

Just as you would want a detective on the crime scene early, you should retain a forensic accountant as early as possible when embezzlement is suspected. This greatly increases your chances of finding the criminals and getting embezzled funds back. Unfortunately, time is often on the embezzler's side, so call as soon as you suspect or see something that seems out of line.

Joseph S. Barbagallo is a partner with Citrin Cooperman, an accounting, tax and business-consulting firm in Philadelphia. With more than 35 years of experience, he focuses his practice on business valuation and financial forensic services, expert testimony and litigation consulting services in fraud cases. He can be reached at [email protected] or 215-545-4800.

Preventing Embezzlement in Your Law Firm

By Joseph S. Barbagallo
Special to the Legal

According to a 2010 Report to the Nations on Occupational Fraud and Abuse, prepared by the Association of Certified Fraud Examiners, fraud and abuse worldwide can cost upwards of $2.9 trillion per year. A typical organization loses 5 percent of its annual revenue to fraud, while the median loss caused by the occupational fraud cases was $160,000.

The report also concluded that small organizations are disproportionately victimized by occupational fraud because these organizations are typically lacking in anti-fraud controls compared to their larger counterparts.

Law firms and their clients are not exempt from financial fraud. In fact, just read the headlines. In 2009, the National Law Journal reported, "Law Firms Make Easy Pickings for Embezzlers." Just last year, a paralegal who had worked for more than 11 years at a Lackawanna County law firm was convicted for embezzling more than $75,000 from her firm. She forged a partner's signature on 130 checks while fabricating expense allocations in the general ledger.

There are, however, preventative measures that law firms can put in place in order to avoid internal fraud. They include the following:

- Employing solid anti-fraud measures, including separations of various accounting duties, and physical safeguards;
- Requiring dual signatures on all large checks;
- Conducting reconciliations of escrow accounts to subsidiary ledgers;
- Educating management and employees by implementing an anti-fraud training program;
- Implementing an anonymous and confidential fraud reporting mechanism;
- Conducting random fraud audits in addition to regularly scheduled fraud audits;
- Implementing a process for oversight of fraud risks via a governance or audit committee; and
- Implementing HR background checks (when permitted by law) that include past employment verification, criminal and civil background checks, credit checks, drug screening, education verification and reference checks.

If you or a client suspects financial fraud, a forensic accountant should review the books and financial records to identify suspicious or unusual transactions.

In my next post, I will address the process by which financial fraud is investigated and dealt with. Suffice it to say that having an expert on your side greatly increases your chances of finding criminal activity and getting embezzled funds back. Unfortunately, time is often on the embezzler's side, so remember -- haste makes waste. Most frauds last a median of 18 months before being detected.

Joseph S. Barbagallo is a partner with Citrin Cooperman, an accounting, tax and business-consulting firm in Philadelphia. With more than 35 years of experience, Barbagallo focuses his practice on business valuation and financial forensic services, expert testimony and litigation consulting services in fraud cases. He can be reached at [email protected] or 215-545-4800.

Business Valuations: Types of Engagements and Reports

By Terry Silver
Special to the Legal

Business valuations are governed by professional standards. Organizations such as the American Society of Appraisers (ASA), the Institute of Business Appraisers (IBA), the National Association of Certified Valuation Analysts (NACVA), and the American Institute of Certified Public Accountants (AICPA) promulgate these standards. Federal regulators have asked that the valuation profession speak with one voice using one set of standards. The NACVA and the IBA recently agreed to unify theirs. The Uniform Standards of Professional Appraisal Practice (USPAP), overseen by the Appraisal Foundation, can also come into play in valuations.

In 2007, the AICPA issued its Statement on Standards for Valuation Services (SSVS-1), which applies to all CPAs and became effective Jan. 1, 2008. The rest of this article specifically addresses SSVS-1.

The statement defines two types of valuation engagements: calculation and valuation. A calculation engagement arises when the client and the CPA "agree on the valuation approaches and methods" to be used, whereupon the CPA "calculates the value in compliance with the agreement" with the client. A calculation report costs less, but the underlying work is not comprehensive. In fact, SSVS-1 requires the analyst to declare that the calculation is "not a valuation" which, if undertaken, might render a different result. A valuation, on the other hand, requires a breadth and depth of work to be done and results in a "conclusion of value."

SSVS-1 also provides for three types of written reports: a detailed report, a summary report and a calculation report. The first two apply to valuation engagements only; the substance differs only in the degree of explication. In our firm, the difference is manifested in the report writing -- including risk assessment. The economic modeling found in either the detailed report or the summary report is the same.

A detailed report tends to be necessary in tax matters because the IRS must be able to replicate the analysis and conclusion of value the analyst reached. Because of its transparency, a detailed report can be an excellent choice in high-stakes litigation. A summary report provides an abridged version of the information provided in a detailed report. SSVS-1 also permits an "oral communication to the client" for either type of engagement. Because of the potential for misunderstanding, we don't typically offer oral reports.

SSVS-1 exempts from its reporting provisions work done "for a matter before a court, an arbitrator, a mediator or other facilitator, or a matter in a governmental or administrative proceeding." However, SSVS-1's developmental provisions apply in all cases, including litigation.

Under SSVS-1, the choice of work engagements (valuation or calculation) and of report type (detailed, summary or calculation) is up to you. As valuation professionals, we are advocates for our report, not for our client. The lawyer is the client’s advocate. Understanding these choices will enable you to select the engagement and report type that meet your needs and fit your budget.

Terry Silver is a Certified Public Accountant, Certified Valuation Analyst and Certified in Financial Forensics, for Citrin Cooperman, an accounting, tax and business-consulting firm in Philadelphia, where he is a partner with more than 33 years of experience as an accountant and auditor. He focuses his practice on business valuation and financial forensic services, expert testimony and matrimonial actions. He can be reached at [email protected] or 215-545-4800.

The ABCs of Business Valuation Certifications for the Courtroom

By Terry Silver
Special to the Legal

Business owners and others need valuations for a variety of reasons. They might want to gift some stock. They might be nearing retirement age and not have an exit plan in place. They might have received an unsolicited offer for their business. They might be getting divorced, quarreling with a business partner, or wanting to get incentives in place to reward their key people if business value increases. There might be a buy-sell or operating agreement that requires a valuation.

The list goes on, and the possibilities are numerous. But a large source of business for valuation professionals is litigation support.

Attorneys either engage business valuation specialists directly or ask their clients to do so.  Possessing a business valuation certification will usually separate those who occasionally prepare business valuations from those who are active. First, let’s discuss the primary business valuation certifications.

1. ABV–The Accredited Business Valuation certificate is issued by the American Institute of Certified Public Accountants. This accreditation was born in November 1997, and requires a college degree and a CPA designation. To become an ABV, a CPA must pass a written test and submit proof of involvement in at least 10 valuation engagements; no report review is required. To maintain this certification, a CPA must undergo at least 60 hours of continuing professional education every three years. There are now about 2,900 ABV-holders.

2. ASA–The Accredited Senior Appraiser credential was born in 1981. It is issued by the American Society of Appraisers. In order to become an ASA, a candidate must have a college degree or equivalent, submit a log showing 10,000 billable hours of valuation experience, pass four comprehensive written examinations, submit one report that survives third-party review, and undergo 96 hours of classroom preparation time. Maintaining the ASA certification requires 40 hours of continuing professional education in each five-year period. There are now about 1,400 ASAs specializing in business valuations. The Accredited Member (AM) is a "lite" version of the ASA. The requirements are identical, except that 4,000 billable hours of valuation experience must be logged.

3. CBA– Since 1978, the Institute of Business Appraisers has issued the Certified Business Appraiser credential. The society also offers four other certifications: Master Certified Business Appraiser (MCBA), Business Valuator Accredited for Litigation (BVAL), Accredited in Business Appraisal Review (ABAR), and Accredited by IBA (AIBA). Requirements for each of these vary. To become a CBA, the candidate must have a college degree or equivalent, pass a written exam, submit two reports that survive third-party review, and take 90 hours of classroom preparation. To maintain the certification, one must take 24 hours of continuing professional education every two years. About 350 professionals hold the CBA certification. The Institute of Business Appraisers is an affiliate of the National Association of Certified Valuation Analysts (NACVA).

4. CFA –The Chartered Financial Analyst designation first saw the light of day in 1963. A candidate must pass three rigorous exams. While there is no report-review requirement to get the CFA charter, 48 months of "qualifying work experience" are required. At year-end 2010, there over 48,000 CFA charter holders in the United States, many of whom work as investment advisers. Still, their training is such that they are certainly qualified to value private equity.

5.  CVA – The Certified Valuation Analyst is sponsored by NACVA. Becoming a CVA requires having a college degree, holding an active CPA license, and passing a written examination. Maintaining the CVA certification requires 36 hours of continuing professional education in a three-year period. There are now 5,800 CVAs. NACVA also offers the AVA (Accredited Valuation Analyst) for those who are not C.P.A.s. Neither of these certifications requires a specific level of experience or report review.

So which one of the above business valuation certifications is best? Which credential would provide you with the best valuation report in your situation? Like almost everything else related to valuation, the answer is, “It depends.” A crucial consideration in your decision-making, however, should be that your business valuator has the appropriate credentials to at least initially gain the respect and attention of the trier-of-fact, the opposing counsel and of course, the client. 

Yet, credentialing is not everything. Those who do well in litigation support tend to do it often. They are not shrinking violets socially, and they do not avoid conflict. They tend to be articulate, thoughtful and well-read. I believe that, if your situation calls for a valuation professional, you should seek the very best person who can do the job that the circumstances demand. While cost is always a consideration, you probably wouldn’t want to seek out the least expensive brain surgeon or one who does one or two brain surgeries a year — that would be really “practicing medicine”!

Beyond certification and experience, I recommend that you seek an expert with a history of litigation success, of being prepared, of approaching the engagement in a team-like manner, and of communicating clearly, especially in writing. You should ask for and check references.

You should also check with the organization(s) sponsoring the credential(s) in question to make sure that there is no history of disciplinary action. If the person is a CPA, check with your state’s Board of Accountancy for any reprimands or other problems; these are a matter of public record.

In the United States today, there are over 50,000 credentialed business valuators who hold at least one of the professional certifications above. Many valuation analysts hold a number of credentials. So as a minimum, your expert valuation professional should certainly be credentialed by at least one reputable association. Hiring someone who is credentialed doesn’t guarantee success in litigation but it is a good start.

Terry Silver is a Certified Public Accountant, Certified Valuation Analyst and Certified in Financial Forensics, for Citrin Cooperman, an accounting, tax and business consulting firm in Philadelphia, where he is a partner with more than 33 years of experience as an accountant and auditor. He focuses his practice on business valuation and financial forensic services, expert testimony and matrimonial actions. He can be reached at [email protected] or 215-545-4800.

Coordinating the Efforts of the Forensic Accountant and the Attorney

Accountants who provide litigation consulting services such as forensic accounting, economic damage analysis and business valuation must develop a mutual understanding with counsel regarding the goals and objectives of the case, the scope of the assignment and the methodologies to be employed. This mutual understanding is obtained through effective communication. At best, a failure to communicate will lead to an inefficient engagement and an unhappy client. At worst, it may lead to the preclusion of the expert’s testimony.

Based upon my years of experience working with counsel in litigated matters, I have identified a number of factors that lead to a successful engagement and have learned to avoid the factors that lead to an unsuccessful engagement. An effective forensic accountant will know how to maximize the former and minimize the later.

Factors that lead to a successful engagement:

 ● The attorney is fully informed of the accountant’s qualifications, expertise and experience. If the matter is one that will require expert testimony, the accountant selected has sufficient testimony experience. 

● The accountant and attorney reach a consensus regarding goals and expectations.

 ● A clear and concise engagement letter is executed between the accountant and the attorney (or the accountant and the client).

 ● The attorney and accountant agree to a reasonable timeline to perform the agreed upon tasks. The accountant provides regular status reports.

 ● The attorney and accountant establish a budget for the work to be performed by the accountant. The accountant makes the attorney aware of the effect on the budget should there be a change in circumstances.

 ● Counsel and client are informed in advance of the information and data required to prepare a credible expert’s report. If possible, the accountant should assist counsel with the discovery request.

● The accountant informs counsel of the professional accounting standards and methodologies that are relevant to the case. 

● The accountant and attorney verify that the expert report is free of errors, satisfies evidentiary and procedural rules (e.g., Federal Rules of Evidence, Rule 702 and Federal Rules of Civil Procedure, Rule 26) and is relevant and reliable (Daubert).
Factors that lead to an unsuccessful engagement:

● The accountant accepts the engagement without possessing the requisite qualifications and experience.

 ● The accountant fails to gain a complete understanding of the assignment prior to accepting the engagement.

● The accountant is unaware of the professional standards and rules governing the engagement.

 ● Counsel places unreasonable or unattainable expectations on the accountant’s work product or tries to influence the expert’s opinion.

 ● Counsel fails to seek the accountant’s input during discovery or hires the accountant too late in the process.

 ● The accountant does not have access to sufficient data to prepare an accurate and credible report.

 ● The accountant fails to consider alternative methodologies and fails to discuss reasons for excluding these approaches.

 ● The accountant fails to keep counsel apprised of his or her progress and billings.

The factors listed above are intended to serve as a common sense guideline to establishing an effective attorney/accountant relationship. In my opinion, experience and communication are the keys to a successful engagement. Attorneys and accountants working in the litigation arena often have exceedingly busy schedules. I cannot over-emphasize the importance of the team approach. In the end, the success of the case will be directly proportional to the quality of the teamwork.

Terry Silver is a certified public accountant, certified valuation analyst and certified in financial forensics, for Citrin Cooperman, an accounting, tax and business consulting firm in Philadelphia, where he is a partner with more than 33 years of experience as an accountant and auditor. He focuses his practice on business valuation and financial forensic services, expert testimony and matrimonial actions. He can be reached at [email protected] or 215-545-4800.