Can a Calculation Engagement be Used in Litigation?
Written by: Erica Johnson, CPA, CFF, ABV
About a month ago, I had the opportunity to testify in my first case as a financial forensics and business valuation expert. We were hired by the attorney representing the “out spouse” in a divorce case where the husband was a 50% owner of a small business. I was asked to value (and then testify to the value of) the husband’s 50% interest in the company for division of marital property.
One of the tricky parts about valuing a company, or a percentage interest in a company, when hired by the side representing the out spouse is the limited access to information. For example, in a typical valuation, we would have the opportunity to have a management interview with the owner(s) of the company, the company’s accountant, etc., in which we would have a discussion regarding the qualitative and quantitative aspects the company. This process is quite valuable since it helps us to better understand the company’s history, direction, and expected outlook. Since the matter was in Oregon State Court, there was no expert discovery, and given the contentiousness of the matter, we were not granted the opportunity to interview the owners. However, both owners were deposed, and we were provided their deposition transcripts; unfortunately, these depositions took place before we were involved in the case and over a year before the trial date (which was also the valuation date).
All of this said, we were left with the difficult decision of whether a valuation scoped engagement or a calculation scoped engagement would be more appropriate in this situation. Ultimately, we determined that a calculation engagement was most appropriate in this case given that we had limited access to information, yet we still had sufficient information to arrive at a reliable value of the husband’s ownership interest.
The use of calculation engagements, especially in the context of litigation, has gained increased visibility and discussion over the last few years. Much of this discussion has been controversial.
In a valuation engagement, the analyst is free to apply the valuation approaches and methods he or she deems appropriate in the circumstances and expresses the results of the valuation as a conclusion of value which may be either a single amount or range.
For a calculation engagement, the valuation analyst and the client can agree on the valuation approaches and methods to be performed, and the valuation analyst calculates the value in compliance with the agreement. Similarly, the valuation analyst expresses the results as a range or as a single amount. A Calculation does not include all of the procedures required for a Valuation engagement as defined by the American Institute of CPAs or American Society of Appraisers.
It is up to each valuation analyst to decide whether a valuation or calculation engagement and report are appropriate for a particular purpose of valuation and for the specific facts and circumstances of the engagement.
A common question, and one that is addressed in the November 2017 published AICPA, Valuation Services, VS Section, Statements on Standards for Valuation Services, VS Section 100, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, Calculation Engagements, Frequently Asked Questions (FAQs), is whether a valuation analyst can provide an opinion of a calculated value in a litigation where the valuation analyst is an expert witness.
According to the publication:
“There is no prohibition or endorsement in the Standards on the use of an opinion of a calculated value or, for that matter, an opinion of a conclusion of value that is part of the more detailed valuation engagement. It is up to each valuation analyst to decide whether a calculated value in a calculation engagement can be offered as an opinion of calculated value for a particular purpose of valuation and with regard to the specific facts and circumstances of the calculation engagement.
From a practical perspective, the valuation analyst must decide whether he or she believes the “opinion” of a calculated value meets the requirements of the legal venue in which the valuation analyst is to testify.”[1]
Additionally, in 2018, Jim Hitchner, CPA, ABV, CFF, ASA published an article[2] discussing the controversy over calculation engagements sparked by Michael Paschall,[3] in which Paschall stated that the increasing use of calculation engagements “seriously compromises” historical valuation standards of reliability and independence. Jim Hitchner, along with Jim Alerding, CPA, ABV, ASA, and Ed Dupke, CPA, ABV, CFF, CGMA, ASA, wrote a rebuttal article giving what they say is the “real” story of calculation engagements.
In the rebuttal article, Hitchner states that,
“The overly broad statement that ‘the increasing use of calculation engagements seriously compromises historical standards’ is false. The AICPA, ASA, The Appraisal Founding, NACVA, and the IBA all have calculations as an acceptable service.”
The article then goes on to state that,
“Depending on the amount of work performed, the scope of services, the intended use, and the intended users, a calculated value can be sufficient, reliable, believable, or with reasonable certainty. The AICPA neither prohibits nor endorses the use of a calculation engagement in a litigation setting.”
In summary, there is no prohibition or endorsement in our Valuation Standards to whether a calculation engagement can be relied on in certain litigation settings. It is up to the valuation analyst to decide whether a calculation engagement is appropriate, given the facts and circumstances. It is all about the quality of the work carried out, not the level of scope selected.
[1] AICPA, Valuation Services, VS Section, Statements on Standards for Valuation Services, VS Section 100, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, Calculation Engagements, Frequently Asked Questions (FAQs), Non-Authoritative,” Q&A 16.
[2] Hitchner, James R., CPA, ABV, CFF, ASA, et al. “Calculation Engagements: The REAL Story.” Financial Valuation and Litigation Expert, Issue 74, August/September 2018, pp. 1 and 3-11.
[3] Michael Paschall, ASA, CFA, JD, “’Breaking Bad’ in the Business Valuation Profession,” Business Valuation Update, vol. 24. no 7, July 2018, Business Valuation Resources, LLC.