Considerations When Providing Valuation Services in Litigation and Investigations

By Jeffrey Baresciano, CPA/CFF/ABV, CVA, Mercadien – January 29, 2024
Considerations When Providing Valuation Services in Litigation and Investigations

Litigation and investigative engagements often focus on economic damages claimed by the plaintiff where a valuation practitioner is retained to determine the value (or decline in value) of a business or the loss in profits resulting from an alleged wrongful act. Typical examples of engagements include breach of contract, divorce, bankruptcy and shareholder disputes.

Valuation practitioners involved in these dispute scenarios encounter legal and regulatory environments in addition to the general standards set forth by professional organizations. Accordingly, a valuation practitioner’s understanding of relevant court rules, procedures and techniques (and when to employ them) are key considerations when delivering these services.

AICPA Standards in Litigation and Investigations

A sound understanding of governing professional standards is a critical foundation for a valuation practitioner. In dispute scenarios, an AICPA member who performs any valuation service is subject to the AICPA’s Statement on Standards for Valuation Services No. 1 (SSVS 1) in addition to its Statement on Standards for Forensic Services No. 1 (SSFS 1).

SSFS 1 applies when the valuation services being provided are part of a “litigation” or an “investigation” engagement as defined below.

  • Litigation: An actual or potential legal or regulatory proceeding before a trier of fact or a regulatory body as an expert witness, consultant, neutral, mediator or arbitrator in connection with the resolution of disputes between parties. The term litigation as used herein is not limited to formal litigation but is inclusive of disputes and all forms of alternative dispute resolution.
  • Investigation: A matter conducted in response to specific concerns of wrongdoing in which the member is engaged to perform procedures to collect, analyze, evaluate or interpret certain evidential matter to assist the stakeholders (e.g., client, board of directors, independent auditor or regulator) in reaching a conclusion on the merits of the concerns.

An AICPA member performing forensic services must follow these additional general standards regarding integrity, objectivity, understanding and communication with the client (commonly through an attorney), which are promulgated to address the distinctive nature of such services.

Conflicts of Interest, Disclosures and Waivers

The AICPA’s Code of Professional Conduct provides guidance on the identification and disclosure of conflicts of interests. The practitioner will need to reasonably conclude whether independence, integrity, objectivity and professional skepticism are compromised in fact, or would be perceived by a reasonable and informed third party. Depending on the situation, a practitioner may need to disclose a conflict of interest and obtain informed consent as well as an engagement letter appropriately identifying the scope of work, along with a written waiver of conflicts of interest from all parties.

Type of Engagements and Confidentiality

A practitioner may be approached to serve as a consultant for an attorney or as an expert witness.

As a consultant, expert testimony may not be required and workpapers may be subject to attorney-client privilege. In such a scenario, a practitioner may be involved in assisting with negotiations or the review of settlement agreements.

When engaged as an expert witness, a practitioner should be prepared to testify to their understanding of the case, the data and methods utilized to arrive at opinions.

Early in the relationship, the practitioner and client should come to an understanding about whether a consulting engagement has the potential to develop into an expert witness engagement, whether the practitioner is agreeable to such a change in scope, and what reports and workpapers may be subject to discovery by the other side.

Applicable Standard of Value

The standard of value, or the type of value being utilized, differs across jurisdictions and may differ from definitions established in the Internal Revenue Code or Generally Accepted Accounting Principles (GAAP). The applicable standard of value will affect the valuation procedures and determine whether certain adjustments are to be applied, such as discounts for marketability and control.

Fair value, a basis of value imposed by a third party (e.g., by law, regulation, contract), is commonly the standard of value in litigation matters. In determining the appropriate fair value that will be accepted by the court, a practitioner should work with the attorney to become knowledgeable about the applicable statutes and case law.

In the complex litigation and investigative environment, a practitioner’s knowledge and adherence to applicable legal, regulatory and professional standards begins with the assessment and acceptance of an engagement and continues throughout the completion of the valuation process. 

Jeffrey B. Baresciano

Jeffrey B. Baresciano, CPA, CFE, ABV, CVA, is a director at Mercadien. He is a member of the NJCPA.

This article appeared in the winter 2023/24 issue of New Jersey CPA magazine. Read the full issue.