To discuss business appraisal review, we need to look at the definition of appraisal review in the Uniform Standards of Professional Appraisal Practice (USPAP):
APPRAISAL REVIEW: The act or process of developing and communicating an opinion about the quality of another appraiser’s work that was performed as part of an appraisal, appraisal review, or appraisal consulting assignment.
Comment: The subject of an appraisal review assignment may be all or part of a report, workfile, or a combination of these.
A search of Google under the term, Appraisal Review, yields minimal discussion of the topic, all of which is geared to real property appraisal review. Neither “appraisal review” nor “business appraisal review” is mentioned in the Index of Pratt’s 5th Edition of Valuing a Business. The fifth edition does provide a useful checklist in Chapter 22, “Reviewing a Business Valuation Report,” but this checklist does not describe how to perform an appraisal review, and USPAP’s Standard 3, Appraisal Review, Development and Reporting, is not mentioned in the chapter. In fairness to Dr. Pratt, I have not previously written on the subject of appraisal review to any extent at all, either. However, the growing importance of business appraisal review in litigation and other contexts suggests it is a topic worthy of examination.
USPAP’s Standard 3 is introduced with the following:
In developing an appraisal review assignment, an appraiser acting as a reviewer must identify the problem to be solved, determine the scope of work necessary to solve the problem, and correctly complete research and analyses necessary to produce a credible appraisal review. In reporting the results of an appraisal review assignment, an appraiser acting as a reviewer must communicate each analysis, opinion, and conclusion in a manner that is not misleading.
Standard 3 contains eight pages of text in the current (2010-2011) version of USPAP. While the requirements for a standards’ compliant appraisal review are provided, there is little guidance regarding what an appraisal review actually is or how to conduct one.
USPAP’s Advisory Opinion 20 (AO-20) is titled “Subject: An Appraisal Review Assignment That Includes the Reviewer’s Own Opinion of Value. APPLICATION: Real Property, Personal Property, Intangible Property.” AO-20 is applicable to business appraisal review as well as all other types of properties. The advisory opinion provides illustrative, but nonbinding guidance and clarifies that an appraisal review can be issued without an opinion of value by the review appraiser or with an opinion of value. According to AO-20, a business appraisal review that concluded an appraisal reached a conclusion that was excessively high (or low) would be an opinion with an opinion of value.
If a review appraiser issues an appraisal review with an opinion of value, he or she must also comply with the development requirements of the relevant Standard, which in the case of business appraisal is Standard 9, Business Appraisal, Development.
The bottom line is that business appraisers need to learn more about what constitutes a business appraisal review and what does not. We will explore this topic in more depth in future posts.
In the meantime, if you have any questions or comments that you would like me to consider as this line of posts develops, please comment below or send me a separate email (mercerc@mercercapital.com).
Chris:
You raise a timely topic from my perspective. The trial where the Butler Pinkerton Calculator (BPC) was subject to the Daubert Challenge and passed, I also was subject to the following line of questioning during trial:
First, as way of background: I was hired by the defense to analyze another appraiser’s calculation of damages, which actually was a business valuation. The business never got off the ground due to alleged actions by the defendants. The attorneys who hired me only asked me to analyze the other appraisers’ report/opinion of damages. So, that is what I did.
My conclusion was that the other appraiser’s calculation of damages was aggressive due in large part to his use of a low discount rate – for a start-up company. (I used the BPC to help with that determination). I never gave the jury an estimate of alleged damages, however, as I was not asked to.
In any event, the cross-examing attorney accused me of violating ethical (ASA) principles because I did not value anything – I merely observed, commented and criticized the other expert’s opinions. I told the cross-examining attorney that I did value something – the discount rate. The judge also told the cross-examining attorney that he has never heard this line of questioning (ethical violations, etc.) before and allowed the jury to consider my opinions.
I do agree that this is an area that we all need to take a closer look at!