Ethics in Valuations

Valuations are performed for a number of reasons:

  • Sales of businesses
  • Share swops
  • Mergers
  • Acquisitions
  • Deceased estates
  • Divorce matters
  • Buy and sell agreements
  • Etc.

Some of these are rather simple. You are engaged by the shareholders of a business and asked to value the business, as the shareholders wish to take out buy-and-sell cover. It appears straightforward. However, at times there is an acrimonious split or a sale situation where the buyer and seller have very different values in mind. Emotions of the parties are running high and you are under pressure by one party to achieve a certain result.
Where is the boundary? How much are you willing to do to please your client? What if you are the Receiver in a divorce matter and one of the parties has behaved appallingly? Is bias ever justifiable?
Quite simply, no!  Those of us who are Registered Auditors, Chartered Accountants or Professional Accountants are all governed by the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants, as amended in 2016. IRBA, SAICA and SAIPA have amended the Code slightly for their professionals (removing nothing, simply making it relevant for the local environment and adding a few “extras”). This code sets out five fundamental principles:

  • Integrity
  • Objectivity
  • Professional Competence and Due Care
  • Confidentiality
  • Professional Behaviour

These principles apply to ALL Registered Auditors, Chartered Accountants and Professional Accountants. But what do they mean in the context of valuations?
To have integrity is to be honest and straightforward in all professional and business relationships. We can never manipulate our discount rates or P/E ratios etc. in order to achieve a specific valuation. This would be dishonest. The question I ask myself is, “Would I be comfortable defending this valuation in court?”
To be objective means never to allow bias, conflict of interest or undue influence of others to override professional and business judgements. Valuations are all about the valuer’s professional judgement. It would be easy to be swayed in one direction or another by the parties and the emotions that they have towards the business/marriage etc. However, the code is clear: bias, conflict of interest or undue influence cannot override our professional judgement. It is best to stay clear of valuations that are for family members, close friends or colleagues.

Professional competence and due care
This means that professional knowledge and skill are to be maintained at the level required, to ensure that the client receives competent professional services based on current developments in practice, legislation and techniques. The valuer also has to act diligently and in accordance with applicable technical and professional standards.
The way we perform valuations has modernised from simple Price Earnings ratio valuations to discounted cash flows, and we need to move with the times. Valuers who insist on only performing Price Earnings ratio type valuations and stick to a set ratio (which harks from the late 1990s and early 2000s), are not displaying the due care required by the Code. Times change, and so should our methods and research.

Needless to say, confidentiality is a cornerstone of the profession. However, it goes beyond keeping our client’s information private and includes the requirement that we do not use the information obtained for our own personal advantage.
In the instances where the valuation is being prepared for a court case, confidentiality will not fall away entirely, as the information disclosed will be limited to the court room.
Professional behaviour
This means we have to comply with relevant laws and regulations and avoid actions that discredit the profession. Bias in a valuation would most certainly discredit the profession.
A recent judgement confirms that IRBA has the right to discipline a member for work that is beyond assurance, such as valuations, matrimonial work etc. if that person is a Registered Auditor.
There are, however, valuers that are not auditors or accountants and are not bound by the same Code as we are. How can we be sure that they follow the same ethics that we would? The first step would be to ensure that they belong to the South African or International Institute for Professional Valuers. If they are, there is a Code of Ethical Principles for Professional Valuers. The five fundamental principles set out in this code are virtually identical to those set out in the IESBA Code. These valuers, in theory, should be trustworthy.
Valuations are dependent, to a large degree, on the professional judgement of the valuer. You need to ensure that the valuer is somebody that you trust to make the ethical call, even if it means they may not agree with you.