When the Savings and Loan crisis hit the financial markets in the 1980’s, the real estate appraisal profession was widely criticized as being responsible, in part, for the problem. The Appraisal Foundation was formed by Congress and its Appraisal Standards Board produced the Uniform Standards of Professional Appraisal Practice (USPAP). Interestingly, the Appraisal Standards Board chose to cover three appraising professions with one set of standards. Of the 10 original Standards in USPAP, the first 6 were dedicated to real estate appraisal, standards 7 and 8 were dedicated to personal property appraisal and standards 9 and 10 were dedicated to the appraisal of businesses. While there may be some question as to whether the mandate of the Appraisal Foundation extended to personal property and business appraising, the USPAP standards were an important early step in the formation of the appraisal profession.
Early founders in the business appraisal profession included Dr. Shannon Pratt of Willamette Management and Mr. Ray Miles of The Institute of Business Appraisers. From the AICPA perspective, a practice aid on business valuation had been written in 1986 but there had been little activity since then. Terry Korn’s 1989 letter to the AICPA encouraged it to look into a “specialization” in business valuation. The concept of specialization was in its infancy at the AICPA. Long time CPA practitioners opposed the concept of specialization suggesting that the CPA certificate was specialization enough. As the CPA profession grew into the “trusted advisor” profession, clients demanded information and knowledge in an expanding number of areas and it soon became apparent that no one CPA could be an expert in every subject in which clients were demanding expertise and consulting support.
Task Force/Committees Form
The AICPA set up a formal Appraisal Task Force in 1986 to represent the appraisal community within the AICPA because of the threat of a bill introduced in Congress that would repeal the general utilities doctrine and effectively eliminate the need for BV and fixed asset appraisals in transactions that could qualify for a tax-free step up in basis. This was a very big deal to the larger accounting firms and major appraisal firms. It was housed under the AICPA tax directorate, as its first mission was to deal with the repeal of general utilities that eventually occurred in the Tax Reform Act of 1986.
The task force had one representative from each of the national firms, as they represented a great deal of this appraisal business within the accounting community. Terry Korn was elected chair of that task force. It also started to discuss an AICPA specialty designation and standards.
In the early 1990’s, consulting services within the AICPA were vested in the Consulting Services Executive Committee (CSEC). Joe Puleo, an early chairman of the CSEC, was receptive to the concept of specialization. Following encouragement from Terry Korn, Carl Alongi and others, Joe appointed the first AICPA Business Valuation Task Force with Carl Alongi as its chair. The members of this first task force included, in addition to Carl Alongi, Larry Cook, Gary Trugman, Terry Korn, AICPA VP Monty Kuttner and others. Steve Sacks was the AICPA liaison. Sacks continued to serve until 2001 and was instrumental in helping the subcommittee succeed.
Larry Cook and Gary Trugman served as the “small firm” representatives to the task force. This group made a formal presentation to the CSEC in early 1991 urging the formation of a business valuation subcommittee. After long deliberation, the CSEC approved the concept of a BV Subcommittee and chairman Joe Puleo appointed the subcommittee with Carl Alongi as its first chair.
The subcommittee enthusiastically set to work and identified a business valuation credential (Business Valuation Specialist – BVS) and business valuation standards as its first priorities. In 1993, a new AICPA practice aid on business valuation written by Gary Trugman was published. This practice aid was such an improvement over earlier works that the state of Florida adopted it as part of its accountancy regulations.
The enthusiasm of the BV Subcommittee continued and it was decided that the first objective should be a credential by the AICPA in business valuation. The subcommittee put together its criteria and together with the chair of the CSEC, presented the concept to AICPA Council in 1993. Council turned down this initial request suggesting that the subcommittee first had to:
• more fully develop its educational offerings,
• prepare the operating budget for this membership specialization section, and
• had to plan its target audience and estimate the number of potential candidates for this credential.
There was also objection within Council to the concept of specialization.
The subcommittee was disappointed but not bowed. Filled with passion for this newly developing segment of our profession, the subcommittee vowed to make the needed improvements and to return to Council.
Simultaneously, the BV Subcommittee was working with other national BV organizations. The American Society of Appraisers (ASA) granted CPAs one year of experience toward ASA’s credential experience requirement. AICPA and ASA also agreed to reciprocate level one and two experience requirements.
The subcommittee sought models for its business valuation education. The Illinois CPA Society business valuation education program was selected as the prototype for the first AICPA education module in business valuation education. Ron Seigneur and Jim Alerding chaired a committee that put together the first AICPA business valuation course. They enlisted the assistance of Dr. Shannon Pratt to review the course offering.
At the time, early drafts of potential AICPA business valuation standards were being prepared under the leadership of Larry Cook. This was the era of “standards overload” and it was strongly suggested that this was not the time to bring forward BV standards while the Accredited in Business Valuation (ABV) was being considered by AICPA Council. The standards project was tabled.
In 1995, Ed Dupke succeeded Carl Alongi as chair of the BV Subcommittee. During Dupke’s term, the work on the educational offerings and the fiscal plans for the proposed ABV Credential were completed. With the assistance of AICPA senior management, the ABV Credential was approved by AICPA Council in 1997.
The first ABV Exam was given in San Diego in the late fall of 1997. It was a difficult exam prepared by an exam team consisting of Terry Korn (chair), Art Brueggeman, Jim Hitchner, Jim Rigby and others. To assist those who had been away from the books for a few years, the BV Subcommittee developed an ABV Exam review course that has proven very popular over the years. Jim Hitchner chaired this initial endeavor. The impact of this course has contributed to the success of those taking the exam. The first exam was taken by many of the skilled practitioners in the country. More than 800 passed that first exam.
The ABV Exam Committee thought they would receive the ABV Credential without an exam since they knew what was on the first exam. Wrong! They were called to New York to take oral examinations in front of the members of the Credentials Committee. They also had to submit four reports for review. Everyone receiving the ABV Certification that first year took and passed a tough exam. Certificate No. 1 was granted to Terry Korn for his long period of work on behalf of the credential. Terry said he wanted to be the number one ABV in the country. There are now approximately 3,100 ABV Credential holders.
In 1998, James “Butch” Williams succeeded Ed Dupke as chairman of the BV Subcommittee. During Williams’ term as chair, the AICPA BV Hall of Fame was established. Also during this time, the AICPA established the National Accreditation Commission (NAC) to assume independent control over credentials and the certification and recertification of CPA experts. The NAC made it more difficult for the BV Subcommittee in that some of the committees dealing directly with the ABV were controlled by the NAC instead of the technical subcommittee that gave them birth. Over time, a working relationship was established between the BV Subcommittee and the NAC.
During Butch Williams’ term, relationships were established with the ASA, IBA, NACVA, CICBV, FBI and IRS. These were important first steps in the continuing relationship between the AICPA BV Committee and these other organizations.
In 2001, Tom Hilton succeeded Butch Williams as chair of the BV Subcommittee. During Tom Hilton’s term, the BV Standards Writing Task Force was established to prepare and to present for approval AICPA Business Valuation Standards. Ed Dupke was appointed to chair that task force with the members being Jim Alerding, Jim Hitchner and Greg Forsythe. At the time of his appointment, Ed Dupke’s wife Judy, asked him how long he thought this project would take. He replied possibly 6 to 9 months. The actual process took about 6 years. Dupke’s wife has threatened to put the following words on his eventual tombstone: “It took just a little longer than I thought.”
During Tom Hilton’s term, discussions began regarding the formation of a joint BV/FLS practice section. Together with Sandy Johnigan, the chair of the Forensic and Litigation Services (FLS) Subcommittee, presentations were made to the AICPA Board and to Council. The new BV/FLS Membership Section was approved and the BV and FLS Subcommittees were elevated to full committee status under the BV/FLS Executive Committee. To better identify the scope of services provided by this membership base, the name of the Membership Section was changed in 2007 to Forensic and Valuation Services (FVS).
In 2004, Mike Crain succeeded Tom Hilton as chair of the BV Committee. It was during Mike Crain’s tenure that the Statement on Standards for Valuation Services No. 1 (“SSVS1” or “BV Standard”) was finally issued in June of 2007, effective for engagements accepted on or after January 1, 2008.
One of the reasons the BV Standard writing process took 6 years was a decision made by the task force early on in its deliberations and approved by the BV Subcommittee. Prior AICPA standards for CPAs had been written exclusively for one discipline. That is, auditors wrote standards for auditors and if a CPA did not practice in auditing, that particular standard had little or no impact on that person’s practice. But the business valuation standards were the first to cross disciplinary lines. Auditors were impacted because of fair value for financial reporting, tax preparers were impacted because of the need for valuations for estate and gift taxes, members in industry were impacted because of merger and acquisition assignments from their executive team, litigation practitioners were impacted because of the use of valuations in litigation, personal financial planning practitioners were impacted because of the use of valuations in their client financial planning work, and the list goes on and on.
The task force and the BV Subcommittee decided that the best way to handle this diverse constituency was to provide a copy of the standards draft to the respective executive committees, to ask for their comments and to work with them to achieve a workable draft for all. Ultimately, this “advice and consent” approach made the eventual implementation of the BV Standards a smooth transition.
The BV Standards went through a first internal exposure draft by all of the ABVs. Constructive suggestions were offered and changes were made. Two public exposure periods followed. Again, constructive suggestions were offered and the Standards were improved. All of these constructive suggestions made the draft better. The suggestions received when stacked from bottom to top exceeded four feet for each draft. Some individuals who were especially helpful were Ed Karl and Bob Zarzar of the Tax Executive Committee and AICPA’s in house legal counsel Rich Miller. Their input was most important working with the Standards Writing Task Force to make the BV Standard one that tax practitioners could incorporate into their practice. Other individuals who made significant contributions are listed on the back pages of the published standard.
In 2005, the AICPA launched its six day business valuation training based on the books Financial Valuation Applications and Models and the Financial Valuation Workbook, co-authored and edited by Jim Hitchner. Jim designed this course, originally entitled Business Valuation Essentials and currently offered as the five day AICPA National Business Valuation School.
In 2007, Robin Taylor became chair of the BV Committee succeeding Mike Crain. Robin’s committee members expanded the offerings in business valuation education, improved the ABV review course, and published guidance for practitioners in the BV area. They continually looked forward to see if new standards were needed and continually evaluated the services offered to members. Robert Reilly headed the BV Standards Subcommittee that monitored the status of the Standard and determined what tweaks and revisions might be needed. To date, the original BV Standard is performing well but the profession is continuing to evolve and change and Robert Reilly’s group was ever vigilant to see that SSVS1 continued to meet the needs of the AICPA membership.
One remarkable factor in the success of the BV Standard was that the original BV Standards Writing Task Force was together for the entire 6 years of the process. The BV practice profession within the AICPA owes special gratitude to Jim Alerding, Jim Hitchner, Greg Forsythe and our special contributor Robert Reilly for their work on this standard. We also thank the AICPA staff lead by Vice President Jim Metzler. Jim and his team were tireless workers on the standard while in the Jersey City location and later in the Durham location.
In 2010, Carol Carden succeeded Robin Taylor as chair of the BV Committee. During Carol’s term, the BV Committee updated the AICPA SSVS1 Toolkit including sample engagement letters, reports and reporting checklists. This toolkit is offered free of charge to AICPA FVS Section members. These offerings assist practitioners in implementing the SSVS1 Standard.
Also during Carol’s tenure, the BV Committee continued to expand the offerings in business valuation education, developed the AICPA Business Valuation Web Seminar Series on core competencies in BV, developed the ASC 805 Business Combinations Quick Reference Guide and is currently developing several practice aids and technical whitepapers.
Evolution and Technical Growth
Over this first 15 years, our profession has continued to evolve. We have seen improvements in standards with the leading standards moving closer to commonality. Some would argue that the profession has morphed into four segments including financial reporting, estate and gift tax, litigation, and mergers and acquisitions.
While the procedures and techniques used by each of these groups may differ, the fundamental concepts of the Income Approach, the Market Approach and the Asset (or Cost) Approach remain the cornerstones of our profession. Valuation methods and techniques continue to develop and to be vetted by the profession, yet the cornerstones remain firm as our foundation.
The last few years have seen some twists and turns in the continued evolution of our profession. What many thought would be a combination and merger of the North American BV Standards with the International BV Standards has taken a turn toward the concept of valuation for financial reporting and has focused its attention there to the exclusion of the other areas of BV practice.
In response to fee pressures, calculations have been used more frequently in estimating the value of businesses, business interests, securities and intangible assets. In doing so, practitioners have exposed themselves to cross examination determined to demonstrate that had a full valuation been prepared, the answer might have been different. It is difficult to refute this contention when SSVS1 itself says exactly this.
While not coming out and stating specifically that a full valuation is the only acceptable choice for estate and gift tax purposes, the IRS and the Tax Court have made it clear that they expect a “qualified appraisal prepared by a qualified appraiser”. With the limitations inherent in a calculation, it seem clear that a full valuation is the preferred valuation alternative for estate and gift tax purposes.
Some entities have done substantial research of their own into specialty areas. The IRS, for example, has prepared the IRS Job Aid for its field agents describing and summarizing the most popular methodologies for computation of the Discount for Lack of Marketability (DLOM).
For financial reporting, the Securities and Exchange (SEC) has strongly indicated that a calculation does not contain sufficient work to be used for financial reporting purposes. This clearly implies that a full valuation is the appropriate level of work for financial reporting purposes.
And the evolution of our profession continues. Theories are put forth and vetted by the valuation community. We saw this in depth in the evolution of valuation for pass through entities. We continue to see it in additional methodologies for computation of DLOM and the Discount for Lack of Control (DLOC) and in additional methodologies for computation of the specific company risk premium.
It is fun to look back 15 years and see how far ABVs have come in the development of our profession. But our progress to date is nothing compared to what it will be in the future. We have an increasing number of advanced tools at our disposal to assist in our growth. These tools will speed up the process of research and development. The challenge for the profession is to keep up with current developments and to continue to educate the courts, the legal profession, bankers and other users of our valuation reports. Because only when we are able to assist the users of valuation and calculation engagements and the triers of fact in understanding valuation and arriving at a reasonable estimate of value is our profession truly accomplishing the client service mission for which it was formed.
The author wishes to thank Jim Hitchner, Jim Alerding and the past BV Committee chairs for their contributions to this article.
Edward J. Dupke, CPA/ABV/CFF/CGMA, ASA is a G-400 relationship manager for the Office of the CEO with the AICPA. He served as chair of the Business Valuation Committee from 1996-1998 and as chair of the Business Valuation Standards Task Force from 2002-2007. He is a member of the AICPA Business Valuation Hall of Fame and a past Chairman of the Michigan Association of CPAs.