While the objective of the Credential is to enhance the quality of the valuation process, it is expected to also provide consistency and transparency in valuation methodology and documentation
Valuation professionals assist company management in the preparation of financial statements by providing fair values of both tangible and intangible assets. Fair value, in the context of financial reporting, was initially introduced in 2001, and has continued to evolve through the current day. Sophisticated financial models and valuation approaches are frequently utilized in fair value measurements for financial reporting.
Beginning in 2005, U.S. capital market regulators suggested changes may be needed in the valuation profession and commented as to the number of professional bodies providing credentials and the lack of a consistent and uniform set of professional, technical, and ethical standards. Standards in these areas existed, but were not uniform across the profession. Paul A. Beswick, as Deputy Chief Accountant of the U.S. Securities and Exchange Commission, spoke to these issues regarding the valuation industry in a prepared speech at the 2011 AICPA National Conference on Current SEC and PCAOB Developments. In his speech, Mr. Beswick suggested that the valuation profession develop a single set of qualifications, standards of practice, and ethics and a code of conduct to ensure consistency and transparency in financial reporting measures for public interest entities.
During this same time, one of the focuses of PCAOB auditor inspections related to the auditing of fair value measurements.
In early 2014, in response to the U.S. capital market regulators, as well as protecting the public interest stakeholders, not-for-profit valuation professional organizations (VPOs) consisting of the American Society of Appraisers (ASA), the American Institute of Certified Public Accountants (AICPA) and the Royal Institution of Chartered Surveyors (RICS), major accounting and valuation firms, and valuation standards setting organizations came together to develop a proposed solution for the issues raised by U.S. capital market regulators. That collaboration resulted in the formation of the Fair Value Infrastructure Quality Initiative, which includes several “work-stream” groups and observers focused on the following areas:
- Governance and Coordination
- Performance Requirements
- Quality Control
The Certified in Entity and Intangible Valuations credential (CEIV or the Credential) was the result of this initiative. The Credential is intended for professionals who perform fair value measurements for entities required to submit registration statements or filings with the SEC as well as for privately held entities that prepare and issue financial statements in accordance with United States generally accepted accounting principles (U.S. GAAP).
While the objective of the Credential is, of course, to enhance the quality of the valuation process, the Credential is expected to also provide consistency and transparency in valuation methodology and documentation by providing for:
- A single set of qualifications including education level and work experience
- Mandatory initial training including a standard assessment that all credential holders must pass
- Standards of practice, ethics, and conduct including the new Mandatory Performance Framework (MPF)
- Continuing education requirements over a five-year cycle including annual minimums
- Minimum hours of experience in fair value engagements over a rolling five-year cycle
- A quality control/inspection program including a disciplinary mechanism
Of the above points, the MPF, the continuing education requirements, and a quality control/inspection program sets the Credential apart. Within a year of obtaining the credential, every credential holder will be inspected with an ongoing inspection cycle developed based on risk metrics.
The quality control/inspection program will focus on application of the MPF. Overall, the MPF requires that the valuation professional provide within the work file sufficient documentation to support a conclusion of value such that an experienced professional not involved in the valuation engagement could review and understand the significant inputs, analyses, and outputs and how they support the final conclusion of value.
The valuation profession has gone through many changes since the introduction of fair value measurements in 2001. The development of the Credential unifies the valuation profession. Compliance with the MPF will enhance consistency and transparency in the performance of fair value measurements for the benefit of public interest. All auditing and valuation professionals have a collective interest in ensuring the adoption of the credential is widespread.
Nancy Czaplinski is Managing Director, Duff & Phelps.
Valuation Hot Topics, a 1-hour breakfast session at FEI’s CFRI conference in New York on November 13, 2017, will discuss PCAOB’s proposals related to an auditor’s use of specialists and the required procedures for the audit of fair value measurements and recent Fair Value-related developments.•