June 2007 Newsletter

CPA Business Valuation Standards

Long-awaited business valuation standards from the American Institute of Certified Public Accountants were issued June 21, 2007 with an effective date for engagements accepted on or after January 1, 2008. The news release with links to the standard and supplemental information may be found at: http://www.aicpa.org/download/news/2007/Statement_on_Standards_for_Valuation_Services_Issued.pdf

This Statement on Standards for Valuation Services No. 1 (SSVS 1) has special relevance to anyone “holding out” as a CPA, whether in a licensed firm or not, because Texas and other states require a CPA publicizing the license to comply with AICPA standards.

The standard applies to valuations of businesses, business ownership interests, securities, and intangible assets. It does not apply to lost profits or economic damage calculations unless those determinations include an engagement to estimate value.

SSVS 1 provides for two types of engagements: valuation engagements and calculation engagements. In the valuation engagement, the valuation analyst CPA estimates the value of a subject interest by applying 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 in an oral report, a written detailed report, or a written summary report. In the calculation engagement, the valuation analyst CPA calculates the value based upon valuation approaches and methodology agreed upon between the valuation analyst and client, and expresses the results as a calculated value in an oral report or a written calculation report. Under either engagement, other professional standards such as the Code of Professional Conduct remain in effect with the requirements of integrity, freedom from conflict of interest, competence and objectivity inter alia.

For each form of written report, SSVS 1 provides specific minimum disclosure guidelines. We note that regardless of the type of engagement, each written report must include the standard and premise of value, as well as the business interest’s ownership control characteristics, if any, and its degree of marketability. Additionally, any hypothetical conditions used in the valuation engagement, including the basis for their use must be provided in the written report. A reporting exemption, but not a methodology exemption, exists for controversy proceedings.

Finally, documentation forms the principal record of the work done and should be retained for a period of time sufficient to meet the needs of applicable legal, regulatory, or other professional requirements for records retention.

Non-Profit Governance

Many of our readers work with non-profit entities, particularly serving as directors and being accountable for transactions made by the staff of the non-profit. At this firm, we see increasing frequency of suspected fraud in non-profit entities. Moreover, in the wake of Sarbanes-Oxley and the corporate and accounting scandals that led to it, organizations nationwide are being held to greater standards of transparency and accountability. The not-for-profit sector is no exception. Motivated by donor demand and their own desire to demonstrate proper stewardship, not-for-profits continue to change and strengthen their governance policies, increasingly implementing conflict-of-interest policies, audit committees, and other controls against potential corruption.

According to Grant Thornton’s National Board Governance Survey of 960 not-for-profits, some of the most widely utilized policies to ensure sound governance are:

Generally, a failure to set up adequate checks and balances results in unfortunate losses to otherwise respectable organizations. We encourage those involved in not-for-profit entities to consider the need for policy improvements to ensure sound governance. We are glad to generally discuss our experiences.

Preliminary Check-List for Business Valuation Documentation Requests

When valuing a business in an adversarial matter, the business valuation practitioner’s ability to obtain information is limited. There may be no opportunity to interview business management or for site visits. In such situations, information gathering becomes more formal. Having the advice of a valuation practitioner early in the discovery process may increase the accuracy and adequacy of data collection and reduce the cost.

While the nature of the business (i.e. manufacturer, retailer, etc.) will influence the specific material necessary, we offer a general and preliminary list of documentation to request:

Background Information

(May need to be obtained through interrogatories and/or depositions)

  • Brief description of the Company’s products, services, suppliers, customers, regulation, facilities, market details, business risks, strategy and future plans before the valuation date and any factors that make the Company unique.
  • Brief history, including how long the Company has been in business, initial ownership structure including classes of equity, organizational structure, management team and any changes in ownership over time.
  • Identification of the specific industry, the main competitors, including their location and relative size as well as identification of supposedly comparable companies.
  • Identification of advantageous assets (e.g. a below-market lease) as well as contingent liabilities.


  • Any annual, quarterly, monthly, or other interim financial statements for the Company for the last five years
  • Federal income tax returns for the last five years.  Same for state tax returns, if applicable
  • Copies of any forecasts, projections, or budgets prepared by/for the Company in the last five years
  • Copies of any business plans prepared by/for the Company
  • Corporate documents (articles of incorporation, bylaws, stock register, etc.)
  • Minutes of board of directors’ meetings.  Same for shareholders’ meetings
  • Any appraisals and/or other reports on the value of the Company or any ownership interest therein
  • Reports of independent auditors or accountants

Detailed financial Information 

  • Electronic copy of the general ledger or other accounting system used to record the Company’s financial information
  • Schedule of annual revenues or sales by customer and/or project. 
  • Summary property, plant, and equipment list and depreciation schedule.
  • Aged accounts receivable summary
  • Aged accounts payable summary
  • Inventory summary and description of inventory accounting policies
  • Copies of existing contracts (employment agreements, covenants not to compete, supplier agreements, customer agreements, royalty agreements, equipment lease or rental contracts, loan agreements, labor contracts, employee benefit plans, etc.)
  • Schedule of insurance in force (key person, property and casualty, liability)
  • Key personnel compensation schedule, including benefits and personal expenses
  • Franchise or operating agreements, if any

Prior Transactions 

  • Copies of any buy-sell agreements and/or written offers to purchase or sell company stock.
  • Copies of any major sale or purchase contracts. 
  • Details of transactions in the company’s stock during the last five years.


  • Organization chart.
  • Resumes or a summary of the background and experience of all key personnel.
  • Any Company brochures, rate sheets, or other promotional material.
  • Details of any contingent liabilities (such as guarantees, warranties, etc.) or any off balance sheet financing (such as letters of credit).
  • Details of any litigation (personal or professional), including pending or threatened lawsuits.


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