BUSI 534 Week 4 Discussion Board Forum 2 Example

Discussion Board Forum 2: Report Writing and Business Valuation Standards

BUSI 534 Business Valuation, Discussion Board Forum 2 Thread and Replies

Thread by [Student Name]

The forum prompt, the two classmates and the dispute in the thread are composites standing in for the course's own prompt; the standards, the textbook and the research cited are real, and the requirements follow Liberty's public course guide for BUSI 534.

Thread

Imagine a composite dispute in which two siblings disagree about the value of a family distribution company. The appraiser hired by the sibling being bought out concludes that the company is worth $9 million; the appraiser hired by the sibling buying concludes $7 million. Both are credentialed, both cite the same standards and both describe their opinions as objective. My answer to this week's question is that each appraiser probably believes it, and that this is exactly why the standards' requirement of objectivity cannot be met by good intentions alone.

The standards are clear about the goal. The Uniform Standards of Professional Appraisal Practice require an appraiser to act with impartiality, objectivity and independence and prohibit advocating for a client's cause (The Appraisal Foundation, 2024). The AICPA's valuation standard applies its code's requirements of integrity and objectivity to every valuation engagement (American Institute of Certified Public Accountants, 2007). Hitchner (2017) treats these requirements as the foundation of a credible report, and the standards back them with rules on what a report must disclose, including the standard and premise of value, the sources relied on and any limiting conditions. On paper, then, both appraisers in the sibling dispute had the same obligations and the same tools. If their conclusions still differ by more than 20 percent, the difference must have come from somewhere the rules did not reach: the judgments about growth, risk and discounts that no standard can make for the appraiser.

The research shows how hard the goal is. Murrie et al. (2013) paid 108 forensic psychologists and psychiatrists to score the same offender files with standard risk instruments, telling some that they were working for the prosecution and others that they were working for the defense. Those who believed they worked for the prosecution assigned higher risk scores to the same offenders, with effects as large as 0.85 standard deviations. The experts were not lying; their judgment had shifted toward the side that hired them. Cain et al. (2005) found a further problem: when advisers disclosed a conflict of interest, recipients did not discount the advice enough, and some advisers exaggerated more, as if disclosure had licensed it. Disclosure tells the reader that bias is possible; it does not tell the reader where the bias went.

If allegiance works on judgment unconsciously, the defense has to be procedural. A report should state every key assumption, such as the growth rate, the discount rate and the discounts for lack of control and marketability, along with the evidence for each. It should show how the conclusion changes when the most contested assumptions change, so a reader can see which inputs drive the gap between two opinions. It should be detailed enough that another appraiser could reproduce the result, which is the practical meaning of a credible report. In the sibling dispute, a judge reading two reports written that way could see whether the $2 million difference came from the business or from the appraisers. Some practitioners add a further safeguard by having a colleague who has not met the client review the key assumptions before the report is issued, which brings in a reader with no allegiance to protect.

Reply to Carlos

Carlos, your thread made a strong point that many small business owners ask for a "quick number" without understanding what they are getting, and you described a client who used a short estimate from a broker to negotiate a partner buyout. I think the AICPA standard speaks directly to your example, and it adds an important distinction.

The Statement on Standards for Valuation Services separates two kinds of engagements (American Institute of Certified Public Accountants, 2007). In a valuation engagement, the analyst is free to apply whatever approaches and methods are appropriate, and the result is a conclusion of value, presented in either a detailed or a summary report. In a calculation engagement, the analyst and the client agree in advance on the approaches and methods to be used, the analyst does not necessarily consider everything a full valuation would, and the result is a calculated value, presented in a calculation report. The standard requires the report to say which kind of engagement it was, so a reader can tell the difference.

That distinction would have helped your client. A calculated value can be perfectly appropriate for internal planning, for example when an owner wants a rough sense of whether a sale is worth exploring. It is risky when used as if it were a conclusion of value in a negotiation or a dispute, because the other side can point out that the methods were chosen by agreement rather than by the analyst's independent judgment. Hitchner (2017) notes that the type of engagement should match the intended use of the report, and a partner buyout is a use where a full valuation is usually warranted.

The research I cited in my thread suggests another reason for care. If even independent experts drift toward the side that retained them, a calculation engagement in which the client helped choose the methods leaves even more room for the client's preferences to shape the result. That is not a reason to forbid calculation engagements, but it is a reason to make their limits clear.

I would add one practical suggestion to your thread. Owners who want a quick number could be offered a calculation engagement with a clear statement of its intended use and a recommendation to upgrade to a valuation engagement if the number will be used in a transaction. That protects both the client and the analyst, and it gives the client a clear path from a planning estimate to an opinion that can bear weight in a negotiation. The engagement letter is the natural place to settle this, since it records the intended use, the type of engagement and the limits of the work before any number exists. Did the broker in your example describe the estimate as a calculation, or did the client simply treat it as a value?

Reply to Erin

Erin, I agreed with your argument that valuation reports have grown so long that the people who need them most, owners, lenders and judges, no longer read them carefully. Your example of a 120-page report whose conclusion appeared on page 94 made the point vividly, and your suggestion of a two-page summary at the front of every report seemed sensible.

Research on corporate disclosure suggests your concern may be even more serious than an inconvenience. Li (2008) scored the readability of U.S. companies' annual reports. Firms reporting weaker earnings produced longer, denser reports, and firms with clearer reports enjoyed positive earnings that lasted longer. One interpretation is that managers may use complexity, consciously or not, to make bad news harder to find. A valuation report is a different document, but the same risk applies. An appraiser with a weak assumption has an incentive, perhaps unconscious, to surround it with pages of boilerplate that make it difficult for a reader to locate and challenge.

Hitchner (2017) argues that a good report allows a reader to follow the analyst's reasoning from the facts to the conclusion, and the standards require reports to include the information needed to understand the conclusion. Length and clarity are not the same thing. A shorter report can be more transparent if it puts the assumptions that drive the value where readers will see them. I would build on your summary idea by suggesting that the summary include the three or four assumptions with the largest effect on the conclusion and a small table showing how the value changes when each is varied. That would tell a reader not only what the value is but where it is most vulnerable.

There is a limit to shortening, though. Reports used in litigation must withstand cross-examination, and an opposing attorney will look for anything the appraiser failed to consider. Some of the length in those reports protects the conclusion. The answer may be a layered report: a short, clear summary for decision makers, followed by the full support for anyone who needs to test it. Each layer would serve a different reader without forcing the owner to wade through the material written for opposing counsel, and the summary would point to the pages where each key assumption is defended.

Courts have their own preferences here as well. Judges in valuation disputes regularly comment on reports they found hard to follow, and an expert whose reasoning cannot be traced is easy to discount even when the conclusion is sound. A report written for a skeptical reader, with every step visible, serves the client better than one written to impress. Would your two-page summary include the appraiser's sensitivity analysis, or would you leave that in the body of the report?

References

American Institute of Certified Public Accountants. (2007). Statement on Standards for Valuation Services No. 1: Valuation of a business, business ownership interest, security, or intangible asset (VS Section 100). AICPA.

Cain, D. M., Loewenstein, G., & Moore, D. A. (2005). The dirt on coming clean: Perverse effects of disclosing conflicts of interest. The Journal of Legal Studies, 34(1), 1-25. https://doi.org/10.1086/426699

Hitchner, J. R. (Ed.). (2017). Financial valuation: Applications and models (4th ed.). Wiley.

Li, F. (2008). Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45(2-3), 221-247. https://doi.org/10.1016/j.jacceco.2008.02.003

Murrie, D. C., Boccaccini, M. T., Guarnera, L. A., & Rufino, K. A. (2013). Are forensic experts biased by the side that retained them? Psychological Science, 24(10), 1889-1897. https://doi.org/10.1177/0956797613481812

The Appraisal Foundation. (2024). Uniform standards of professional appraisal practice (2024 ed.).