Consider the following language. “We relied on information received as fairly reflecting the operations of XYZ Company and have made limited investigation as to the accuracy and completeness of such information. We, as valuation consultants, have not verified this information as part of this appraisal.”
Litigated divorces involving small businesses or professional practices regularly incorporate business valuations into the divorce process. The written valuation reports just as regularly incorporate disclaimers such as the one above. So, if little or no work has been done to determine the accuracy and completeness of the financials, what’s the chance of receiving a good business valuation? Were the company’s financials audited or reviewed or compiled? What is the old saying, “garbage in, garbage out?”
One possible solution is to perform a forensic examination of the closely held business in conjunction with the business valuation. However, the valuation professionals may not be qualified to do the forensic work. Traits of a forensic accountant include: experience as a financial auditor, training and or experience in forensic examination procedures, ability to spot alterations or forgeries, knowledge of civil and criminal law and the ability to draw inferences from the documents. In light of the potential for incurring additional costs, consideration of the costs and benefits of the forensic examination should be performed at the outset and continually throughout the process.
When do you need a forensic valuation?
Certain factors should be considered to determine the need for a forensic valuation.
- Are outside CPAs involved with the financials?
- Does the client spouse suspect the opposing spouse of using business assets and/or business income for his or her own personal benefit beyond the amount of reported compensation?
- Does the client spouse have a high level of comfort with the representations and disclosures made by the opposing spouse?
- Does the valuation consultant suspect that significant GAAP adjustments should be made to accurately value the business?
- Does the client’s attorney want a forensic examination performed in order to avoid possible contention of legal malpractice?
Small business valuations are expensive for most clients to bear as part of a divorce. Nevertheless, some thought ought to be made about their value absent a forensic examination.