Most valuators attach statements of limiting conditions to the end of their written reports. Similar to financial statement footnotes required under Generally Accepted Accounting Principles, these appendices are worth reading, especially when you’re reviewing the opposing expert’s report.
Looking past the conclusion
Reviewing appraisal reports doesn’t stop with the final conclusion. It’s important to turn the page and review the statement of limiting conditions to better understand the valuator’s procedures. These statements also may reveal potential weaknesses or incomplete analyses.
Consider a statement that contains an admission that the valuator’s firm has also provided audit and corporate tax services for the subject company during the last 10 years. This revelation could be perceived as a conflict of interest, because failure to arrive at a favorable conclusion could potentially jeopardize audit and tax services provided to the client going forward.
Finding an Achilles’ heel
When reviewing a valuator’s statement of limiting conditions, look for potential weaknesses that could discredit him or her on the stand. Examples include:
- Scope limitations imposed by the hiring attorney or clients,
- Conflicts of interest that compromise the expert’s objectivity, and
- Unreasonable management representations about future earnings.
Many of the items contained in the statement of limiting conditions may seem to be boilerplate in order to comply with the appraiser’s professional standards. For example, statements of limiting conditions typically say that valuators rely on financial statements and tax returns prepared by outside accounting firms and don’t verify the completeness or accuracy of this information. Management may also represent certain information during site visits and interviews that the valuator has assumed to be accurate and reliable.
In connection with these customary disclosures, most appraisers require clients to sign management representation letters. You may request a copy of this letter to get a better handle on the information used to arrive at the valuator’s conclusion. In turn, the management letter may reveal other weaknesses, including reliance on unrealistic forecasts and projections.
Casting light on problematic disclosures
Review your own valuator’s statement and ask him or her to clarify or reword potentially problematic disclosures before going to court. Your valuator should also know how to explain why limiting conditions don’t compromise the quality or objectivity of his or her conclusion.
It’s equally important to review the opposing valuator’s statement and probe into potential weaknesses during deposition and cross examination. Any opportunities to cast doubt on the opposing side’s analyses or imply that he or she is a “hired gun” could be the difference between winning and losing the case.