Calculation Engagements Receive Mixed Reactions from Courts
There are two types of engagements to estimate value — a valuation engagement and a calculation engagement. Unlike valuation engagements, calculation engagements require fewer procedures and result in a calculated value. Valuation engagements result in a conclusion of value. If the appraisal profession is conflicted over the validity of calculation engagements, so are courts. Courts have responded in different ways to questions about the reliability and usefulness of calculation engagements depending on the circumstances of the case. The cases do not offer a bright-line rule that appraisers can follow; acceptance seems to be situational.
In Rohling v. Rohling, an Alabama divorce case that focused on the valuation of the husband’s dental lab, only the wife offered expert testimony from a certified valuation and financial forensics analyst. The expert worked pursuant to a calculation engagement. The trial court rebuffed the husband’s efforts to discredit the testimony, noting the expert was well qualified to provide an opinion based on the requirements of a calculation engagement as well as a valuation engagement and he used “methods recognized and accepted by [the] accounting industry for accountants conducting ‘calculation engagements.’” Importantly, “the husband did not employ his own expert or pay the increased fee to [the expert] to conduct the more rigorous ‘valuation engagement.’” The appeals court affirmed.
In an article in the November 2019 BVU, Michael Paschall from Bannister Financial, a critic of the use of calculation engagements, says, “[T]he case does not represent a legitimate victory for calculation engagements as much as a win by forfeit.” He warns, however, that it “represents further evidence of ‘calculation creep’ in the business valuation field.”
In Surgem, LLC v. Seitz, a 2013 New Jersey appellate ruling on a buyout dispute, the court rejected the defendant expert’s calculation of value. The expert testified that the defendant had not provided the materials necessary to perform a valuation and said “more work should have been done” to prepare a fair valuation of the company. Importantly, the plaintiff offered countervailing expert testimony. The plaintiff’s expert said the opposing expert’s per-share price was an “arbitrary amount” based on unreliable projections. The trial court noted that, by the defense expert’s own account, the work fell far short of an “actual fair valuation of [the company].” Upholding the trial court’s ruling, the appellate court said the lower court had given sound reasons for rejecting the calculation of value.
In contrast, in Hipple v. SCIX, LLC, a 2014 case litigated in federal district court, the former wife sued her ex-husband and his business for fraudulent transfer of the company’s assets and the proceeds of the assets. She offered expert testimony on the value of the company’s assets. The expert had done a calculation of value, explaining that he had limited information about the company’s financials and therefore was not able to do a full appraisal. The defendants filed a Daubert motion to exclude the testimony, which the court denied. It found the AICPA approved of both calculation and valuation engagements and there was no reason to prevent the trier of fact from hearing the expert’s testimony. The expert explained why he did not perform a full valuation. Questions about the specifics of the testimony went to weight not admissibility, the court decided.
Finally, in A.C. v. J.O., a 2013 New York divorce case, the husband offered a preliminary report from a financial expert who had done valuations of the wife’s professional practice at the beginning of the divorce proceedings, while the wife still cooperated with the expert. The expert explained that he never had been authorized to do work beyond the initial report. Had he prepared a final report, he would have audited the spouses’ books and records to confirm the accuracy of the earlier information.
When the wife contested the validity of the preliminary appraisal, saying it was only a “calculation report,” the trial court noted the expert was qualified and his work was preliminary because the wife had decided to stop cooperating. Her uncooperative attitude should be held against her interests, not the husband’s, the court found.
Digests of the cases detailed above and the courts’ opinions are available at BVLaw.
For more information on the requirements and differences between valuation engagements and calculation engagements, contact Jason Buhlinger, Principal, Transaction Advisory and Litigation Support Services, at firstname.lastname@example.org or Matt Byford, Manager, Transaction Advisory and Litigation Support Services, at email@example.com.