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For years auditors have depended on opinions of value supplied by valuation
specialists. With the current focus on independence and avoiding conflicts of
interests, more companies are choosing to engage outside specialists for
non-audit services, such as valuation work. However, the use of a specialist
does not allow a company's auditor to delegate his or her responsibilities.
Auditors need to have an in-depth understanding of the approaches and
assumptions used by valuation professionals. Given the complexity of many
valuation assignments, communication between a company's audit team and its
outside valuation experts has become critical. Consider the following scenarios:
1) A valuation firm is engaged to provide a valuation for a division of a
well-known retailer. The asset to be valued is a program agreement connected
with a third party transaction. The company's audit team and the outside
valuation firm do not meet at the start of the engagement. The valuation
specialists decide to use both a qualitative and quantitative analysis for this
unique valuation assignment to arrive at fair value conclusions. When the audit
team and valuation professionals meet after the report is issued, the audit team
expresses that they would have preferred a different approach than the one that
the valuation professionals utilized. Due to the lack of clarity, the engagement
required significant additional time and expense.
2) A multilocation national retail company engages a valuation firm to provide
valuations for financial reporting purposes in accordance with SFAS 141. The
audit team and outside valuation professionals meet at the onset of the
engagement to identify the assets to be valued, including real estate, personal
property and intangible assets. Of particular concern were the intangible assets
which included customer relationships, trade names, brand names, leases,
noncompete agreements, and software. The valuation professionals discussed with
the audit team the approaches which would be employed for the valuation.
Additional details and concerns about the engagement were discussed in the
initial meeting. The engagement process was managed effectively and, therefore,
the engagement was completed in the required timeframe without additional cost
to the client.
Which one of these examples sounds like the most recent valuation assignment
handled by your audit team and outside valuation specialists? The scenarios
above represent engagements completed by our valuation professionals. We have
been involved in many engagements with characteristics of both of these
scenarios. We have found that the better the communication between both parties,
the smoother the engagement goes. Additionally, handling the engagement
effectively from the start will save time and costs. Before beginning an
engagement, the audit team and valuation specialists should communicate with
each other to clarify the details of the engagement. For first-time valuations,
the initial meeting is particularly important.
Based on our experience, we have pulled together a "checklist" for
management to use when working with auditors and outside valuation
professionals:
Identify assets. Identify all real estate, personal property, and
intangible assets which will be valued in the engagement. Consider all forms of
intangible assets including trade names, noncompete agreements, leasehold
interests, and customer-related intangibles, such as customer lists and customer
relationships.
Clarify assumptions. According to the Statement on Auditing Standards (SAS)
No. 101, Auditing Fair Value Measurements and Disclosures, auditors do not
function as appraisers, but they are required to review the valuation model and
evaluate the reasonableness of the assumptions used in the valuation.
Determine valuation approaches/methodology. This issue is particularly
important in the case of unusual assets, such as the program agreement
previously mentioned. For "typical" assets, methodologies have been accepted and
refined. On the other hand, if the assets are less common, methodology often has
not yet been established. In these situations, it is particularly important for
all parties to be clear on the approaches which will be utilized to arrive at
the value conclusion.
Discuss timing and deliverables. Clarify the manner in which the value
conclusions will be delivered as well as when the deliverables are due. Although
management letters typically outline these considerations, discussions relative
to timing and deliverables may uncover potential problems which can often be
resolved if they are addressed upfront.
The valuation industry has experienced a significant increase in time allocated
to auditors in the review process. In many instances, client management is also
an active participant in the review. For the most effective use of time, prior
to a scheduled meeting, a comprehensive list of the auditor's questions should
be sent to the client and the valuation firm. All involved parties should
recognize that a more thorough review process provides a greater degree of
comfort and assurance against any perceived conflict of interest. For more
information concerning valuations, contact your Valuation Research
representative or Bryan Browning at (414) 221-6249.
VR
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