Assessments: where experience, independence and intent become the deciding issue
This is an examination of certain relevant deliberations by Boddice J of the Queensland Supreme Court in a civil trial which took place during 2015, relating to a disputed commercial valuation.
At this hearing, Your Honor accepted that a Chartered Accountant, being a partner in a public practice based in a large city, was qualified, but determined that those qualifications held did not meet the needs anticipated by the parties.
Also, that the actual independence of that accountant became a matter of concern
And finally, that there was not enough evidence of proper process and methodology in that person’s valuation opinion to justify changing his position.
Accurate.
The case in question was a dispute between ex-partners and the commercial appraisals they presented in court. These two people had only been in the business for a short time when their professional relationship soured.
They determined that a “Licensed Valuer” would be hired to provide an opinion on value, and that value would be distributed on a 50/50 basis when one party purchased from the other.
The elements highlighted in this report, from the transcript of the minutes, have to do with three aspects within the deliberations of Boddice J. [Leach v Ross & Anor (2013)]
Point 1: What did the parties mean when they reached an agreement to seek the opinion of a Licensed Appraiser? and did a qualified accountant meet the criteria?
Point 2: Did the accountant approach the task with true independence?
Point 3: Was the process and methodology applied by the accountant “Fit for Purpose”?
Of particular importance is the fact that in Queensland a “licensed valuer” (which was the term used in the agreement between the disputing parties) is qualified as a land valuer and no more. The parties were not seeking a valuation of the land, but of a business.
His Honor stated: “There is an agreement between the parties… (but) there is no such thing as an authorized security… the terms of the agreement included a person who does not exist.”
Your Honor in trying to determine what the parties meant and who the parties wanted to provide their valuation, asked the question “Who might be the kind of person who might fit the description of the contract?”
In his deliberations and comments, the honorable Member reached someone “where a securities registration scheme exists, where that person has gone through a process… of being recognized and accredited; And that includes issues of being the right person and all the issues that a board has to consider.”
“Now there is no such person (such as a licensed appraiser), but where there is, a license suggests a form of registration. There is a person called a Registered Appraiser.”
Their experts are not duly qualified as appraisers… They are not Registered Appraisers. They are accountants… “Furthermore, your honor stated; “The experts you have proposed do not fall into that category and, under the circumstances, I do not see… that you could find that they do fall into the category of persons that the parties agreed would evaluate the value of the business.
In short, when first party counsel asked the judge to rule on the appropriateness of the differing skills of the authors of two separate appraisals…between a well-qualified Accountant and a well-qualified Registered Business Appraiser, it was the Accountant who did not possess the necessary relevant qualifications.
As further examination of the actual work of accountants proceeded, His Honor asked questions about the work of accountants and confirmed:
• The accountant’s initial scrutiny and investigation also included scrutiny (of the business) on behalf of a potential investor, a person identified as the accountant’s “co-investor” in the business.
• The accountant received only two sheets of paper and, although “proper books” were requested, no other information was provided.
• The accountant “made an offer” based on that limited scrutiny.
The limited work that the accountant actually did, and on the fact that his opinion of value was derived solely from summary financial statements (two sheets of paper) was incredibly risky.
The accountant actually made a purchase offer on behalf of his third party; a “co-investor”
This leads me to believe that the role of accountants was not sufficiently identified in its scope, nor sufficiently independent, and would never be admissible. Indeed, his lordship commented on this, but ultimately he was not required to pronounce on independence.
Continuing with the minor point of the scope of work; His honor resisted allowing the admissibility of the work carried out by the Public Accountant. He rejected the work on this basis… “What is in dispute is whether the value-what methodology is adopted-is adequate for valuing this type of business.
The party that trusted the accountants’ assessment lost, because that assessment was not accepted…
Summary.
Relying on work that is not fit for purpose, that cannot be defended by its author on the basis of the scope, process, and methodology adopted; fail to.
A valuation and a valuer must be, and be viewed as, truly and objectively independent.
A Registered Business Appraiser has gone through a process of education, testing, evaluation and ultimately accreditation by a professional body. That person is recognized as meeting the professional standards of the evaluating body and maintaining his or her qualification under the professional and ethical conduct of the bodies.