ASA COMMENT LETTER TO SEC
ON AUDITOR & APPRAISER INDEPENDENCE RULEMAKING
September 25, 2000
Jonathan Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
e: File No. S7-13-00 (Auditor Independence Rulemaking)
The American Society of Appraisers (ASA) appreciates the opportunity to comment on the appraisal and valuation provisions of the SEC's auditor independence rulemaking proposal.1 Because the Commission has tentatively concluded that auditor independence is unacceptably compromised (or perceived by the investing public to be so compromised) if accounting firms provide "appraisal and valuation" (and certain other non-audit) services to their audit clients, it proposes to prohibit them in most circumstances; and it seeks public comment on the appropriateness of and the necessity for this remedy.
ASA is an international professional appraisal society with more than 6,500 members worldwide. Established in 1936, it is the nation's largest multidiscipline appraisal society that teaches, tests and privately designates its members for professional achievement in business valuation and in the appraisal of real estate, machinery and technical specialties, fine arts and other categories of personal property, both tangible and intangible. Because our members are professional appraisers who provide a full range of appraisal services to public companies and because they have experience in both the accounting firm and non-accounting firm worlds, ASA is in a unique position to comment on the valuation portion of the SEC's rulemaking.
II. Executive Summary Of ASA Comments
(1) ASA SHARES THE SEC'S PUBLIC POLICY GOALS:
ASA shares the SEC's commitment to the independence of the audit process and the importance of eliminating even the perception of conflict-of-interest that might result from an accounting firm's providing both audit and non-audit services to its clients;
(2) APPRAISALS CONDUCTED FOR AUDIT CLIENTS SHOULD NOT BE PROHIBITED WHEN THEY COMPLY WITH THE UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE (USPAP)2:
Notwithstanding our support for the Commission's public policy objectives, ASA believes that the potential for conflict-of-interest involving accounting-firm-provided valuation services to audit clients is negligible when the appraisal is performed in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP) and the appraiser is bound by USPAP's ethics independence requirements. Many Federal statutes and agency regulations require adherence to the Uniform Standards for valuations performed in connection with various federally-related transactions.
When appraisers and appraisals adhere to USPAP, ASA does not believe that a ban on appraisal services for audit clients is justified or appropriate:
(A) USPAP Contains A Strong & Enforceable Independence Requirement: Appraisers with designations from the American Society of Appraisers and from many other professional valuation societies are required by strict and enforceable ethics rules to conduct appraisals independently and totally without regard to client interests. For example, in addition to ASA's own Code of Ethics, ASA-designated appraisers are bound by the Ethics Rule of the Uniform Standards. USPAP's Ethics Rule states, in pertinent part, that "An appraiser must perform assignments ethically and competently [and] with impartiality, objectivity, and independence, and without accommodation of personal interests.... An appraiser must not accept an assignment that includes the reporting of predetermined opinions and conclusions." In essence, both sets of ethics require independence and prohibit "advocacy appraisals". Violations of the ethics independence requirements can and occasionally do result in the loss of professional designation and livelihood.
(B) USPAP Appraisals Are Governed By Generally Accepted Methodology: Estimates of value by ASA members and by many other professional appraisers are governed by strict adherence to generally accepted appraisal methodology (e.g., the Uniform Standards of Professional Appraisal Practice or USPAP) and a commonly understood body of knowledge (published by ASA and other professional valuation societies). Even when appraisers are required to exercise professional judgment in arriving at opinions of value, these judgments are exercised within the "four corners" of the Uniform Standards.
(C) Appraisers Are Not Permitted To Be Advocates: Unlike lawyers, appraisers are not advocates for their clients. Quite the opposite is the case. The nature of the appraisal process is to find value objectively without consideration of client interests.
(D) Because Client Interests Are Not A Factor In USPAP Appraisals, Auditors Should Have No Reluctance To Review Them For Accuracy: Given the ethical independence obligations of many professional appraisers and their required adherence to USPAP, ASA does not believe a reasonable basis exists for concluding that a firm's auditors would be reluctant to review the legitimacy and reasonableness of their work. In our opinion, any such reluctance could only result from an improbable belief, by the auditors, that the appraisals were designed to be client-friendly (a motivation which, if true, would breach the appraiser's ethics obligations and jeopardize his or her professional standing) and that any challenge to those client friendly appraisals would upset the accounting firm's business relationship with the audit client. We believe such a scenario is far-fetched.
(E) Both Appraisers & Auditors Are Obligated To Be Independent: ASA believes that the strong and enforceable ethics obligations of professionally designated appraisers and their mandated adherence to uniform valuation methodology should, by themselves, provide investors and the SEC with reasonable assurance that valuations are performed without any contemplation of how they will impact a company's financial statements or other business interests. It is also important to note that both accounting firm appraisers who adhere to USPAP and accounting firm auditors operate under strict ethics requirements and liability exposure. Accordingly, ASA takes the position that efforts to bolster investor confidence in the independence of audits can be achieved without a ban on a firm's ability to provide appraisal services to its audit clients. Moreover, such a ban seems unnecessary - or at the very least premature - given other less onerous options available to the Commission and the strong trend in the accounting industry towards the separation of audit and non-audit services.
(3) COMMISSION POLICIES DESIGNED TO ENSURE THE INDEPENDENCE OF APPRAISALS SHOULD BE EXTENDED TO THE PERFORMANCE OF ALL "FAIRNESS OPINIONS":
ASA notes that while the Commission's rulemaking addresses, as it should, the independence of "fairness opinions" (which are essentially "appraisals"), none of the remedies being considered by the SEC impact investment banks which are the leading providers of "fairness opinions". We believe that the potential for conflict-of-interest in "fairness opinions" is far greater than in the auditor independence area. We base this conclusion on three factors: First, investment bankers have a huge financial stake in the positive outcome of the financial transaction which is the subject of the fairness opinion. That financial stake creates a much higher level of independence risk, both real and perceived, than anything involved in an accounting firm's provision of non-audit services to audit clients; Second, while the activities of investment banks relating to public companies are within the Commission's jurisdiction, the degree of SEC scrutiny (and liability) is considerably less than for accounting firms; and, Third, to the extent that professional appraisers are not part of the investment banker's "fairness opinion" process, the ethics requirements which ensure the likelihood of independent appraisals, are absent from the fairness opinion process. We believe it would be appropriate for the Commission to study the issue of the independence of all "fairness opinions".
III. ASA Responses To SEC Questions On Appraisal Services Issues
In connection with its proposed ban on a wide-variety of accounting firm-provided appraisal services to audit clients,3 the Commission asks for specific comment on -
-- Question: Whether providing valuation services and issuing fairness opinions or consideration-in-kind reports to audit clients would impair, or appear to reasonable investors to impair, an accountant's independence.
ASA Response: As previously stated in the "Executive Summary" portion of this comment letter, ASA believes that impairment (or the perception of impairment) of the independence of an audit of appraisals performed by the audit firm, is dependent on whether there is reasonable assurance that the appraisals being audited were themselves performed in an objective and totally independent manner and understood by others to be independent. Such reasonable assurance exists in situations where the appraiser and the appraisal are in compliance with the Uniform Standards of Professional Appraisal Practice or with enforceable independence ethics requirements of private professional appraisal societies. In the case of ASA, members are required to be in compliance with ASA's own ethics independence standards and with those of the Uniform Standards. On occasion, professional appraisal designations have been suspended or revoked because appraisers violated ethics obligations.
-- Question: Whether providing valuation or appraisal services that are unrelated to the financial statements, such as for income tax purposes, impairs an accountant's independence?
ASA Response: ASA believes that the purpose of the appraisal performed for the audit client is less important than assurance that the appraisal is independent and understood to be independent. In some situations tax-related appraisals may have an impact on a public company's financials. In other situations, tax-related appraisals may be inconsequential.
-- Question: Whether an exception to the valuation and appraisal proposal should be established when the "amounts involved are likely to be immaterial to the financial statements"; and, if so, "would the auditor be able to determine in advance of the valuation work being performed whether amounts may be immaterial...currently and in the future"?
ASA Response: We are unable to comment on whether an auditor could determine in advance of valuation work whether the amounts involved were immaterial. But, again, if there is reasonable assurance that the appraisal is independent and known to be independent, the question of materiality becomes moot.
-- Question: Whether there are "certain types of appraisal or valuation services, or certain instances in which they are provided, that do not raise auditor independence issues"?
ASA Response: Same as response above.
-- Question: The Commission also asks for comment on its: (1) general standard of auditor independence and the four governing principles for determining when an auditor is not independent; its proposed (2) alternative "independence" formulations and why any such alternatives would be preferable to the one proposed; and the (3) the reasonableness of the SEC's distinction between providing non-audit services, such as appraisal services, to audit clients (mostly prohibited) and providing those same services non-audit clients (permitted).
ASA Response: We believe that our alternative "independence" formulation - which is based on an assurance that the appraisal is performed in compliance with USPAP (or with other enforceable ethics independence requirements) - is superior to the blanket prohibition contained in the proposed rulemaking.
American Society of Appraisers
Business Valuation Committee
American Society of Appraisers
Government Relations Committee
American Society of Appraisers
ASA submitted written comments to the Independence Standards Board in response to Discussion Memorandum 99-3 "Appraisal and Valuation Services".
2 The Uniform Standards are promulgated by the non-profit Appraisal Foundation, which was founded in 1987 and is recognized by Congress as the source of appraisal standards and appraiser qualification requirements for many federally-related transactions. The process utilized by the Foundation for issuing valuation standards is similar to that used by the Financial Accounting Standards Board for issuing accounting standards.
3 Appendix A to the rule discusses the "appraisal and valuation of target assets, including receivables, inventories, property, plant and equipment, intangible assets and in-process research and development." An Independence Standards Board Discussion Memorandum (DM 99-3, September 1999) on "Appraisal and Valuation Services", referenced in the SEC rulemaking, states that "Audit firms may provide a wide-variety of appraisal and valuation services," including, "the allocation of the purchase price of an acquired business to its individual assets and liabilities; valuation of in-process research and development costs; valuation of derivatives; valuation of stock options; calculation of pension plan and other post-employment benefit liabilities; valuations for estate and gift tax purposes; valuation of environmental liabilities; appraisal of real estate or collateral supporting loans; and valuation of insurance reserves."