Appraisal disciplines have a confusing array of credentials. This occurs because:
There are numerous asset types (e.g. real estate, businesses, machinery, fine arts, jewelry), with each asset type having its own sponsoring organizations, and
There are numerous appraisal and other organizations that sponsor appraisal certifications, with wide variance in the standards employed.
This is important for anyone attempting to evaluate the quality of appraisal reports or proposals to complete such work. Knowing that quoted credentials and standards are on an "apples to apples" basis is a critical starting point. Because the differences are quite substantial, this subject must be addressed.
All appraisal work should comply with the Uniform Standards of Professional Appraisal Practice, or "USPAP." USPAP is promulgated by the Appraisal Foundation. Congress established the Appraisal Foundation in 1989 in connection with Title XI of the Financial Institutions Recovery and Enforcement Act (FIRREA). This legislation gives a unit of the Appraisal Foundation responsibility to ensure that all certified appraisers meet certain qualifications, and that all appraisals for federally related transactions conform with USPAP.
Even if the federal government does not regulate the transaction, clients should insist that their appraisal work and reports comply with USPAP. Unfortunately, there are numerous people providing valuation services who are silent on the issue of USPAP compliance, and/or will attempt to convince you that USPAP is unnecessary. Some may not even know that standards exist.
Sponsors of the Appraisal Foundation include the Appraisal Institute, the American Society of Appraisers, and other appraisal organizations that have a more narrow and focused membership (e.g. farm appraisals, tax assessors, right of way appraisals). Generally, organizations sponsoring the Appraisal Foundation insist that their members follow USPAP, and will discipline any member that fails to do so. Importantly, some of the organizations that offer easy-to-obtain credentials (listed below) do not sponsor the Appraisal Foundation. These non-sponsoring organizations do not support USPAP.
The credentials that you should look for in your search for an appraiser include the following:
ASA (Accredited Senior Appraiser) - This is sponsored by the American Society of Appraisers. To obtain an ASA, one must:
For those who can meet all other requirements, but have not had five years of full-time appraisal experience, a person can receive the designation of AM (Accredited Member)
The ASA is the credential of choice, particularly in the appraisal of privately held businesses and intangible business assets, such as trade secrets, patents, trademarks, etc.
MAI (Member of the Appraisal Institute) - This is strictly a real estate credential, so everyone having this designation is a real estate appraiser. The MAI is the credential of choice in real estate appraisal. To obtain this credential, one must:
For appraisers performing only residential appraisals of 1-4 units, the Appraisal Institute offers the SRA designation. The SRA has fewer education and experience requirements, and no testing.
CFA (Chartered Financial Analyst) - This credential is sponsored by the CFA Institute (formerly the Association for Investment Management and Research or AIMR). The CFA Institute is not strictly an appraisal organization in that its members are primarily securities analysts, portfolio managers, investment bankers, and other investment consultants. However, the CFA is relevant to the appraisal field and is difficult to obtain. This is the credential of choice among public company stock analysts and other professionals listed above.
To obtain a CFA, one must pass three rigorous full-day examinations, each a year apart. The exams cover a broad knowledge base, including the analysis and appraisal of closely held companies.
One will frequently see other credentials that claim to be of high quality. By analyzing the requirements, you will probably conclude otherwise. None of the following organizations insists that their members follow USPAP.
CVA (Certified Valuation Analyst) - A privately held, for-profit business sponsors this credential. To obtain a CVA, one must:
In the event that these requirements are too difficult, the same organization sponsors a lesser credential. In order to get the AVA (Accredited Valuation Analyst), one must have an undergraduate degree instead of having an unrevoked CPA license.
CVAs and AVAs need not comply with USPAP in order to comply with rules of their sponsoring organization or to maintain their certificates. Most CVAs and AVAs do not follow USPAP.
ABV (Accredited in Business Valuation) - The American Institute of Certified Public Accountants ("AICPA") sponsors this credential. The AICPA accurately noted that many CPAs were interested in getting additional recognition for valuing businesses, and were obtaining the CVA credential described above.
Since the AICPA designed the ABV to compete with the CVA, the ABV is not a difficult credential to obtain. To obtain this credential, one must:
ABVs need not comply with USPAP in order to comply with rules of their sponsoring organization or to maintain their certificates. Most ABVs do not follow USPAP.
CBA (Certified Business Appraiser) - A privately held, for-profit business sponsors this credential. The organization is the Institute of Business Appraisers (IBA). To obtain a CVA, one must:
CBAs need not comply with USPAP in order to comply with rules of their sponsoring organization or to maintain their certificates. Most CBAs do not follow USPAP.
Economists receive specialized training in markets. Some economists claim that this means they know how to value businesses properly.
Appraisals performed by economists are usually incomplete. Generally, Economists will rely exclusively on a discounted cash flow calculation to value the enterprise; they will usually ignore valuation indications derived from the market and cost approaches. In addition, because most economists disdain accounting, there is rarely an analysis of the financial statements, footnotes, and other accounting information that addresses additional business risks. Most economists do not realize that there are appraisal standards and generally accepted procedures that they are ignoring.
Investment bankers generally work with large, publicly traded firms. Although there have been a few high profile examples of corporate misdeeds, public companies are generally characterized by (i) security trades in highly liquid and efficient markets, (ii) established corporate governance procedures with independent directors, (iii) reliable, consistent, audited financial statements, (iv) large size with a more (relatively speaking) predictable future, (v) professional management and identified succession plans, and (vi) earnings motivations that are not dominated by tax avoidance.
In these circumstances, valuation conclusions can be made by considering primarily a market approach to value. Investment bankers have this tendency. Investment bankers rarely know what USPAP is, and almost never meet these requirements.
Appraisers of privately held businesses face numerous challenges caused by the differences between public and private firms. To overcome these challenges, additional approaches to assessing value are needed. USPAP should be followed.
Most business people who perform ad hoc appraisals also deliver unreliable results. The vast majority of these "appraisals" rely on rules of thumb that are based on a few past transactions. Applications using rules of thumb will usually lack (i) a careful evaluation of marketplace changes occurring since the rule of thumb was developed, (ii) a thorough search for other transactions which may conflict with the rule of thumb, (iii) an analysis of the similarities and dissimilarities of businesses that might cause the rule of thumb to be unreliable, and (iv) any of the work that is required by USPAP or generally accepted appraisal practices.
Remember why you wanted an appraisal in the first place. Unless for purely compliance purposes (like a home financing), it is usually for one of two reasons:
A complete appraisal (i) goes through the same thought processes and (ii) performs the same due diligence that actual parties will perform. Anything less is an incomplete job. For the sale of a privately held business, a large commercial real estate project, or any other complex commercial transaction, a lot of work needs to be performed. If short cuts are taken in order to spend less on the appraisal, you have just wasted your money.
At Fulcrum Inquiry, we will not waste your money. Our clients receive an appraisal that complies with both USPAP and ASA's Principles of Appraisal Practice. MAIs, ASAs, or CFAs (as the engagement requires) lead our projects. A CPA who is also an appraiser leads the financial statement analysis.
David Nolte is a principal at Fulcrum Financial Inquiry LLP with over 30 years experience performing forensic accounting, auditing, business appraisals, and related financial consulting. He regularly serves as an expert witness.
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