One of the key duties of a Forensic Accountant is to provide business valuation reports. As the name implies, valuation reports estimate the value of a business.
These reports are used by litigators for a variety of legal purposes including evaluating various partners’ share of ownership in facilitating buy-sell agreements, mergers and acquisitions.
Valuation reports can be a powerful tool in the courtroom, but litigators need to ensure that their experts have correctly prepared the valuation reports.
There are several common errors that have been observed in valuation reports. Litigators should ensure that the purpose of the valuation has been clearly defined by the report.
It is also essential that an overview of the company’s background, market, industry and competitors has been prepared.
(A) Attorneys need to make certain the report adheres to the standard of value, and that the applicable standard of value has been appropriately articulated.
There are three different approaches that are commonly used to define value: the income approach, the asset-based approach and the market approach.
- The income approach calculates the net present value of the business’ benefit stream.
- Asset-based approaches add up the net asset value of each part of the business.
- The market approach to valuation compares the business to similar-sized businesses in the same industry and region.
(B) Attorneys need to also check to make sure that there was adequate due diligence.
Has the business site been visited by the forensic accountant? Have all relevant contracts and corporate documents been reviewed?
Has the expert examined all relevant internal financial statements and external marketing statements?
(C) Attorneys need to go over the math to make certain that there aren’t any errors before presenting the report in a courtroom.
It’s no secret that the math in valuation reports doesn’t always add up.
(D) Attorneys need to also examine the internal analysis for consistency.
Intangible asset operational data must be appropriately adjusted to match different time periods.
If financial statements are normalized, it is vital that competitors’ financial statements are equivalently normalized.
Experts sometimes have the tendency to make speculative, subjective or far-fetched statements based on their experience in the industry. However, these speculations will not hold up in court. It is the responsibility of the attorney to ensure that all statements are based on concrete facts.
If valuation reports are not properly prepared, attorneys will be vulnerable during cross-examination.
Even minor errors could cause your report’s credibility to be questioned, while more major errors could force the valuation report to be dismissed.
It is better to spend the necessary hours of preparation to ensure that your report can stand up to any and all scrutiny from the opposition.