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THE ARGUMENT AGAINST ADOPTION OF THE PROPOSED
If you have not reviewed the proposed Valuation Standards they are available on the AICPA’s website at www.aicpa.org/, under the Exposure Drafts tab and then the Consulting Services Executive Committee heading. INTRODUCTION AND CALL FOR ACTION At the present time CPA’s providing valuation services within the Business Valuation / Forensic and Litigation Services (BV/FLS) section of the AICPA are subject to the AICPA Code of Conduct but have no specific technical standards with respect to valuation services. We applaud them for their substantial effort in adopting Valuation Standards. Other valuation organizations have standards for their members and AICPA members credentialed in the Accredited Business Valuation (ABV) program believe that they will obtain a competitive position in the marketplace by having these Valuation Standards to assure the quality of valuation work. But tax practitioners already have their own Tax Standards adopted by the Tax Executive Committee for those providing tax services and they are written so that they enhance the tax service product. Additional Valuation Standards that do not meet the needs of the tax practitioner, as discussed below, should not be imposed on them. There are an estimated 20,000 members of the AICPA Tax Division who now have Tax Standards that are understandable to the tax practitioners and promulgated by the Tax Executive Committee; there are approximately 4,450 members of the BVS/FLS section who are looking for similar standards for their area of practice. This paper focuses solely on the proposed inclusion of tax services in the scope of practice to which the proposed Valuation Standards for Valuation Services will apply. The Consulting Services Executive Committee does not have the authority to issue standards in any area other than consulting services.2The Consulting Services Executive Committee definition of consulting services has traditionally not included tax services and there has been no demonstrated need to abandon that long-standing principle, even if the Consulting Services Executive Committee had the authority to do so. In addition, even if the Consulting Services Executive Committee is determined to have that authority by AICPA Council, the proposed Valuation Standards are not in the public’s best interest and are not in the interest of those AICPA members providing tax services. Accordingly, AICPA leadership should instruct the Consulting Services Executive Committee to eliminate all references to tax services from the proposed Valuation Standards and include a specific statement that they do not apply to tax services as defined in Statement One of the Valuation Standards on Consulting Services. BACKGROUND The Exposure Process The Consulting Services Executive Committee was authorized by a Resolution of AICPA Council at its April 1992 meeting to issue standards with respect to the offering of management consulting services. The process for adopting standards is to expose them for comment to the general membership of the AICPA and then the Executive Committee is authorized to publish the standards in the Journal of Accountancy. Proposed standards become effective at the end of the month in which they are published. The Standards for Valuation Services were exposed for comment on March 30, 2005 and the comment period ended on June 15, 2005. It is our understanding that the schedule now calls for the publication of the Valuation Standards in the Journal of Accountancy so that they might become effective for engagements commencing after December 31, 2005. Since the proposed Valuation Standards have now been exposed for comment, the Consulting Services Executive Committee can adopt the Valuation Standards for publication with no further changes other than the changes which they in their sole discretion may adopt. The Business Valuation Standards Writing Task Force and the Business Valuation Committee have invested heavily in the proposed Valuation Standards as drafted to include tax services; there is fear that their bias will cause them to reject any proposal through the comment process for the elimination of tax services from the Valuation Standards. It should also be noted that those drafting the Valuation Standards had an on-line town forum to discuss the applicability of the Valuation Standards in practice. This opportunity was only announced to members of the BV/FLS section – which generally do not include tax division members so that voices of tax practitioners were not heard in that forum. The request for comments in the exposure draft specifically asked that comments be addressed to seven issues: 1) Interaction with Valuation Standards of other valuation groups, 2) Documentation of understanding with the client, 3) Use of specialists, 4) Post-valuation events, 5) Oral valuation reports, 6) Guideline language for conclusion or indication of value, and 7) Glossary. Unfortunately, the fundamental question of importance to the tax practitioner community was not emphasized: should these Valuation Standards apply to tax services? Applicability to Tax Services There is no doubt after reading the exposure draft that the Valuation Standards are intended to apply to tax services. The introductory Foreword specifically states that the proposed Valuation Standards are intended to apply to business valuations “performed in connection with… compliance-oriented engagements, including (1) financial reporting and (2) tax matters such as corporate reorganizations; S corporation conversions; income, estate, and gift tax planning and compliance; purchase price allocations; and charitable contributions.” Even though the Foreword purports to answer the question of why these Valuation Standards are being issued, the needs of tax practitioners are not addressed. The Introduction and Scope of the proposed Valuation Standards provides that the term ”valuation engagement” as used in the Valuation Standards “refers to an engagement, or any part of an engagement (for example, a tax, litigation, or acquisition-related engagement), that involves determining the value of a subject interest.” Members should closely read the Q&A portion of the Appendix. However, some of the responses set forth in the materials will be summarized here to clear up the doubt of the nonbeliever that tax is included. ►Q&A #8 provides that a Valuation Report must be prepared and delivered to the client in accordance with the Valuation Standards even if the sole purpose of an engagement is reporting a value in a tax return. While the report is not required to be attached to the tax return, the formal report must be given to the client and will then be available to the tax authority during routine audit or future litigation through subpoena. The answer recognizes that there is a report exception in the case of litigation, but this litigation exception does not apply to tax compliance engagements if there is no litigation in place at the time of the engagement or at the time the valuation is completed. The exception does not recognize the fact that all tax engagements have the potential for litigation with the tax authorities, the only difference being that in a litigation case you know that litigation exists when you are first engaged - in the case of tax services litigation is a possibility but after a return is filed. ►Q&A #9 provides that valuing stock that is not publicly traded and computing the fair market value of a business interest held by a charitable remainder trust (CRT) are covered engagements in completing the annual tax reports of the CRT if the use of professional judgment is required. ►Q&A #10 provides that if a member determines and reports values using procedures mandated or allowed by the Internal Revenue Code, U.S. Treasury regulations, court cases, or other published guidance or other sources of federal, state, and local law solely for the purposes of preparing a tax return, the member is performing a valuation engagement covered by the proposed Valuation Standards requiring a written Valuation Report to be delivered to the client. ►Q&A 12 provides that if an AICPA member “calculates an ’estimated estate tax’ to illustrate various planning options, he or she may fall under this Statement with regard to [the valuation of] various assets”. While the use of an assumed hypothetical value may be used for illustration purposes without completing a valuation report, ”if the member applies valuation approaches and methods and uses professional judgment to determine the value of the ownership interest in the …business or the interest in the private…limited partnership in order to provide estate planning advice, this Statement would apply.”
The very first comments submitted by the Tax Executive Committee in 2002 or 2003 when the Business Valuation Standards Writing Task Force first announced the development of Valuation Standards pointed out that the Consulting Services Executive Committee did not have the authority to issue Valuation Standards affecting tax services. The issue as to the authority to adopt these all-inclusive Valuation Standards has been buried, possibly with the hope that the conflict will disappear if no one focuses on it. The resolutions authorizing the issuance of standards by the Tax Executive Committee for tax services and the Consulting Services Executive Committee (formerly the Management Consulting Services Executive Committee) for consulting services were adopted by AICPA Council. The power to issue standards is the result of these resolutions. They do not give the Consulting Services Executive Committee the authority to issue standards for tax services. The respective resolutions were:
There may be some confusion as to whether tax services are within the scope of consulting services. That has been previously resolved in Statement One of the Valuation Standards on Consulting Services which was issued in 1992 and defines consulting services as:
This is fundamentally different from tax services where the work is performed in connection with tax planning or compliance and where there is significant and continuing oversight by a third party, the tax authorities. Statement One also specifically provides that “The definition of Consulting Services excludes the following:
STATEMENTS ON STANDARDS FOR VALUATION SERVICES With this background in mind, we must now examine the threshold question of whether the Statements for Valuation Services should be applied to those AICPA members performing tax engagements where a valuation may be required. Existing Standards for Tax Services Currently those providing tax services are subject to the Statements on Standards for Tax Services. The Tax Executive Committee issued these Tax Standards as enforceable Standards of conduct for those in tax practice in August, 2000. They were not new when they became enforceable, rather they had been published over many years commencing in 1982 as Statements on Responsibilities in Tax Practice. Even though the Statements on Responsibilities had been identified as unenforceable standards in their former life, they became de facto enforceable standards of professional practice because state disciplinary organizations and malpractice cases regularly held CPAs accountable for failure to follow the Statements on Responsibilities when their professional practice conduct failed to meet the prescribed guidelines of conduct. There currently are eight statements with one additional statement now in development to address quality control in the tax practice arena. The Tax Standards address all facets of tax service including positions taken in returns (which include valuation positions), knowledge of error, tax planning, use of estimates, and form and content of advice to taxpayers. Regulatory Oversight The Internal Revenue Service also has regulatory oversight over those providing tax planning and compliance services through their Office of Professional Responsibility. As a key element of that oversight the U.S. Treasury Department long ago issued Circular 230 setting forth Standards of Conduct for tax practitioners. Coincidentally, Circular 230 was recently updated, effective June 20, 2005, setting higher standards for professional conduct, prescribing for the first time form and content of written tax advice – including valuations and quality assurance for professional tax practices. In addition to setting higher standards of professional conduct, the penalties for failure to comply with the provisions of Circular 230, particularly with respect to written tax advice, have been substantially enhanced. While Circular 230 generally applies only to federal tax matters, many states have independently adopted Circular 230 for their state tax planning and compliance practices and Circular 230 also has become an enforceable standard of conduct for disciplinary action by many state boards of accountancy. The Internal Revenue Code also includes substantial penalties for valuation misstatements of which a tax practitioner must be aware and protective on behalf of client reporting. Standards Overload There has been no demonstrated need for the inclusion of tax services in these Valuation Standards. Any abuses in tax practice should be addressed by applying the existing enforceable Statements on Standards in Tax Practice and Circular 230. These Tax Standards are now applied by the Internal Revenue Service’s Office of Professional Responsibility, many state boards of accountancy, plaintiff lawyers in malpractice cases, and the AICPA’s own enforcement of its professional ethics cases. Just as the Statements on Standards for Tax Services (SSTS) are enforceable standards not only by the AICPA but by many state boards of accountancy and through civil malpractice litigation the Statements on Valuation Standards for Valuation Services will similarly become enforceable for disciplinary and liability purposes. Additional Standards beyond the SSTS and Circular 230 are not needed in tax practice and become duplicative if the Valuation Standards apply when completing tax compliance or planning services. In the tax area there are already adequate tools to enforce quality standards by the AICPA, the Internal Revenue Service, and state boards of accountancy. It now appears that we are giving the regulator or the plaintiff attorney multiple bites of the apple in attacking the work of a tax practitioner. If the plaintiff attorney cannot impeach the work of an AICPA member who prepared a tax return through the application of the Statements on Standards in Tax Practice, then they will try to apply the Standards of Circular 230, and then if they again fail, they will now be able to continue the attack through the Valuation Standards. Somewhere there will be enough doubt created that the AICPA member crossed all the ”i’s” and dotted all the ‘”t’s” in applying professional judgment and care that the AICPA member will be found to have inadvertently violated some standard and disciplined accordingly. We are our own worst enemies in promulgating unnecessary standards. The Statements on Valuation Standards for Valuation Services are written in a prescriptive format with thirty five pages of rules for the performance of a valuation engagement, twelve pages of Q&A to interpret the rules as applied to specific circumstances, two pages for a listing of possible assumptions and limiting conditions that may be encountered in a client engagement, and thirteen pages for defining the terms used in the Valuation Standards. That is a total of sixty-three pages which must be studied and absorbed for tax compliance purposes regardless of the value of the business interest being reported. There is no de minimis exception contained in the proposed Valuation Standards. Valuation Standards as applied to Tax If these Valuation Standards are adopted as written, the cost of planning and compliance is going to be significantly increased if there is any valuation aspect to the work. There is no assurance that the application of the Valuation Standards will result in a better product for the client. It will give those outside AICPA membership a competitive advantage in the market place both in containing professional fees, and well as responsiveness to client inquiries. CPAs who are not members of the AICPA, lawyers, life insurance sales people and enrolled agents all will have a more competitively priced product delivered more quickly in response to the client’s request. Certainly, CPAs who are not members of the AICPA, lawyers, and enrolled agents are all subject to Circular 230 and discipline of the Internal Revenue Service for the violation of Circular 230 so that tax product quality will be maintained in the public interest without the burden of these unnecessary Valuation Standards. In addition, the proposed Valuation Standards for Valuation Services apply to all valuation engagements regardless of the value of the subject interest or the tax liability resulting from the compliance reporting. The same Valuation Standards will be applied in preparing a written valuation report for the individual return of a client who received a $13,000 salary payment in the form of unlisted securities or one who wants to deduct a charitable contribution of a intangible asset expected to have a value of $20,000 (for instance, a patent right or royalty), as for the decedent who has a family limited partnership interest valued at $5 million. This does not make sense. Valuation Standards as Applied to Tax Services, The Statement on Valuation Standards for Valuation Services provides two categories of written reports: (1) the Valuation Analysis Report which is the highest-level report when a full valuation engagement has been completed and (2) a Calculation Analysis Report that is less comprehensive. There is no assurance that a fully completed Valuation Analysis will result in a more precise value than the Report of Calculation Analysis. We expect that most CPAs performing valuation services will want to use the more limited report to minimize client time and expense while meeting the Valuation Standards, if required. The problem is that the Calculation Analysis Report does not meet the requirements of tax practice, and may not comply with the written report equipments of Circular 230. Assuming the Report on a Calculation Analysis is used, it may be detrimental to a client’s interest. The prescribed form of Calculation Analysis Report has two flaws for the tax practitioner. First, it provides that the result of the engagement is only “expressed as an indication of value” and, second, it requires language stating “Had a valuation analysis been performed, the results may have been different and the difference may have been significant.” [underscoring for emphasis] The Valuation Standards require that a written report be given to the client as more fully explained in the Standard. While the written report is not required to be attached to the tax return, it will be available in the event of litigation with the Internal Revenue Service if the value used is challenged. The Calculation Analysis Report must conclude as to an “indication of value”. The last IRS form we reviewed required a specific value, not some indication of a value. All valuation reports should result in a range of possible values; yet we are required to report only one dollar amount on a tax reporting form. It is an estimate – all valuations, in the absence of a completed transaction between a willing knowledgeable buyer and seller, are estimates. There is no assurance that a fully completed Valuation Analysis will result in a more precise value than the Report of Calculation Analysis. Yet the difference in the reporting language would falsely provide greater assurance to the client than is warranted in the case of a Valuation Analysis. RESOLUTION The leadership of the AICPA should instruct the Consulting Services Executive Committee to eliminate all references to tax services from of the proposed Valuation Standards and include a specific statement that they do not apply to tax services as defined in Statement One of the Valuation Standards on Consulting Services. WHO TO CONTACT As it is the stated intent of the Consulting Services Executive Committee to have the proposed Valuation Standards in place by December 31, 2005, time is of the essence. If you oppose the inclusion of tax services within the scope of the Valuation Standards, it is suggested that you write or email Robert L. Bunting CPA, Chairman of the Board of the AICPA with a copy of your communication to Barry C. Melancon, President and CEO of the AICPA. It is also suggested that you send a copy of your communication to your State CPA Society office for delivery to your state’s delegation to AICPA Council. The AICPA leadership addresses are:
Revised July 18, 2005 1CalCPA Government Relations Committee chair.
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