.png)
The relevance of the Chartered Valuer and Appraiser Programme to Auditors
Business valuers are more in demand for audit processes now that fair value accounting has grown in prominence.
This article is contributed by Mr Terence Ang, Head of Transaction Advisory Services and Private Equity Industry Group Leader at RSM.
When I entered the profession more than 15 years ago, financial statements primarily comprised tangible assets, and historical cost was the predominant measurement basis for most assets and liabilities. Auditor judgement was only put to the test when we had to assess whether an asset was to be written down to its “lower of cost or market value”.
In recent years, changes to the accounting standards covering business combinations, intangible assets, impairment of assets, employee share options and financial instruments have increased the exposure of the preparers and auditors of financial statements to fair value measurement.
Business Valuation is an inherently judgemental process
The fair value of companies, financial assets or financial instruments that are not traded in an active market is an inherently subjective process, requiring judgement to be exercised in the selection of valuation methodologies, estimates about expected future cash flows, discount rates amongst other unobservable (i.e. Level 3[1]) inputs.
Cash flow parameters such as terminal value growth rate or discount rates are often subject to a significant degree of estimation and assumptions. Professional scepticism is critical when assessing the assumptions and estimates as a minor variation of these inputs may result in a material impact to the financial statements.
Significant reliance on valuation professionals as experts
Given the complexity of business valuation and the need for specialised knowledge and skillsets, companies and auditors would typically engage assistance from professionals. Preparers of financial statements would usually engagement independent valuation professionals to assist with fair value measurements and purchase price allocations. Auditors would typically solicit the assistance of valuation specialists (usually in-house where available) to assist in reviewing the reports issued by the independent valuation professionals.
Singapore Standard on Auditing (“SSA”) 620 on Using the Work of Experts requires auditors to assess the following when relying on valuation professionals (both internal or outside of the auditor’s organisation):
nature, timing and extent of work done;
competence, capabilities and objectivity of the valuation professional;
understanding of the field of expertise of the valuation professional; and
adequacy of assumptions adopted by the valuation professional.
Benefits of the Chartered Valuer and Appraiser Programme to Auditors
The Chartered Valuer and Appraiser Programme (the “Programme”) seeks to provide a structured and formalised professional development framework aimed at raising the quality, ethical and professional standards amongst valuation professionals, which will bring the following benefits to auditors:
Enhanced competency and capabilities of valuation practitioners
The Programme seeks to introduce a formal certification system requiring the charter holder to have:
successfully completed the Programme;
satisfied the required number of years of relevant experience; and
committed to continuing professional education as required by the Institute of Valuers and Appraisers of Singapore (IVAS)
The rigour behind the certification process will give auditors a benchmark which they can use to assess the competency of the valuation professionals engaged by their clients.
Increased confidence over the quality and consistency of work performed
The Body of Knowledge for the Programme was developed in consultation with several industry practitioners from the Accountancy, Banking, Legal and Investment communities, and based on the competency standards advocated by the International Valuation Standards Council (IVSC).
Auditors can be assured that the body of work behind the valuation report issued by a charter holder would encompass performance standards benchmarked against international standards, allowing auditors to have assurance over the rigour, quality and adequacy of work done to issue the valuation report.
Ethical and professional standards of practice
The objectivity and independence of the valuation professional is of utmost importance to the auditor when relying on a valuation report. The Programme would also instil upon charter holders the importance of independence, conflicts of interest, and a code of conduct which would provide auditors with the necessary confidence over the ethics and professionalism of CVAs.
In summary
As the use of fair value measurement has gained prominence in financial reporting, so has the need for valuation practitioners. The development of a professional framework aimed at enhancing the competency, quality and the standards of the business valuation profession would undoubtedly be a benefit to the preparers, users, and very much so, the auditors of financial statements.
