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A Cog in the Wheel or a Spanner in the Works:

Examining the Perspectives of Valuation Service Providers

DERECK BARR-PULLIAM

University of Wisconsin-Madison

STEPHANI A. MASON

DePaul University

KERRI-ANN SANDERSON

Bentley University

April 2018

We thank Jean Bedard, Helen Brown-Liburd, Emily Griffith, Jennifer Joe, Jeffrey High, Tom

Linsmeier, Cosimo Montagu, Sophie Serhan, Donna Street, Katherine Schipper, Jay Thibodeau,

participants at the 2017 Midwest Accounting Research Conference, and workshop participants at

Bentley University and the University of Wisconsin-Madison for helpful comments. We thank the

Association of International Certified Public Accountants (AICPA), International Valuation

Standards Council (IVSC), American Society of Appraisers (ASA), New York State Society of

CPAs (NYSSCPA), Business Valuation Resources, and Informa/Infoline for administering our

survey. We especially thank the International Association of Accounting Education and Research

(IAAER), the Institute of Chartered Accountants of Scotland (ICAS), the International Audit and

Assurance Standards Board (IAASB) and the Wisconsin Alumni Research Foundation for funding.

* Although funding for the research project described in this paper was provided in part by IAAER,

ICAS, and the IAASB, the views expressed in this paper are those of the authors and not those of

the funding organizations or the organizations that allowed us to administer our survey.



ABSTRACT

This study examines the professional profiles and challenges valuation specialists encounter during

the production of fair value measurements (FVM) for auditors and management. We include

multiple categories of FVMs but focus specifically on complex financial instruments reported in

financial statements. Auditors and management increasingly relying on specialists in response to

the increases measurement uncertainty associated estimates that require FVMs. As a result, this

study fills a gap in the literature examining the use of specialists but through the lens of the

specialist. We survey and or interview highly experienced valuation specialists from accounting

firms, independent valuation firms, and private/public companies. We note X primary findings.

First, we find that valuation talent is concentrated in the PCAOB annually inspected accounting

firms and a few global independent valuation firms. Because these firms operate primarily in the

global financial centers, gaps in geographic coverage may occur. Second, we find that the supply

of valuation talent is constrained by the scarcity of professionals with technical and accounting

skills required to produce high quality FVMs. Specialists believe that auditors and management

lack sufficient valuation knowledge which adversely affects the valuation process; however, they

acknowledge their own tradeoffs between technical and accounting knowledge and how such

deficiencies affect the auditability of FVMs. Third, we find that specialists perceive an apparent

commoditization of valuation as a result of advanced technologies, fewer restrictions on access to

market data, and an influx of low-cost and seemingly lower quality providers due to these lower

barriers to entry. This commoditization directly affects the demand for valuation services. Fourth,

contrary to prior research, we find that specialists perceive significant price sensitivity among both

auditors and management that directly affects the degree to which they are engaged. Lastly,

specialists believe that the current regulatory regime for auditors and management presents

additional challenges because standards and oversight focus is out of step with current practice,

focusing on documentation rather than quality. Our results provide insights for regulators,

standard-setters, practitioners, and academics.

Key Words: Valuation Specialists, Specialists, Fair Value Measurement, Complex Estimates

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1. INTRODUCTION

As the complexity of financial instruments and the methods used to value those instruments

increases, and the pressure from regulators to improve the reporting and auditing of fair value

measurements (FVMs) intensifies, both financial statement preparers (“management” hereafter)

and accounting firms increasingly rely on specialists’ expertise. Given the level of management

and auditor reliance on valuation specialists (“specialists” hereafter) and the extreme measurement

uncertainty associated with FVMs (e.g., Canon and Bedard 2016; Bratten, Gaynor, McDaniel,

Montague, and Sierra 2013; Joe, Janvrin, Barr-Pulliam, Mason, Pitman, Rezaee, Sanderson, and

Wu 2015), it is important to understand the background and context of the specialists who develop

and analyze these values as it has direct implications for audit and financial reporting quality.

Accordingly, this study examines this important cog in the financial reporting wheel, especially in

light of suggestions from management, auditors, and regulators that there are unique challenges in

engaging high quality valuation expertise (PwC 2013). We provide a holistic view of the structure

and professional profiles of valuation service providers. Through a valuation specialist’s lens, we

identify and further contextualize challenges inherent in the production of FVMs.

While, prior research informs our understanding of how auditors use the work of specialists

when they audit clients who have significant positions measured at fair value (e.g., Bratten,

Gaynor, McDaniel, Montague, and Sierra 2013; Hux 2017) and the unique challenges auditors

face during these engagements (Glover, Taylor, and Wu 2018), most research regarding specialists

largely focuses on auditors’ use of specialists and their integration of the specialists’ work-product

into their audit documentation and decision making (e.g., Boritz, Kochetova-Kozloski, Robinson,

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and Wong 2017; Jenkins, Negangard, and Oler 2017; Griffith 2017; Joe, Vandervelde, and Wu

2017; Griffith, Hammersley, and Kadous 2015). This study differs from prior qualitative and

experimental research in that we directly elicit the perspectives of valuation specialists to produce

qualitative and quantitative evidence on the challenges specialists encounter in the production of

FVMs in general and specifically when working with management and auditors. This approach

fills a gap in the literature and allows us to examine how a constrained supply of high quality

specialists who value FIs affects the demand and presents challenges for specialists as they interact

with stakeholders in the financial reporting process.

To explore our research questions, we survey and interview experienced specialists with

expertise in the production of FVMs for FIs and other categories of valuations and who represent

each of the three sources of valuation expertise (accounting firms, independent firms, and

private/public companies). We survey a broad spectrum of valuation specialists across the three

sources. The field survey asked specialists about the structure of their organization; specifics about

their job; and about their professional profile and qualifications. As the primary specialists engaged

to prepare FVMs outside of financial institutions and the primary specialists engaged or employed

by auditors to evaluate these FVMs, we also conducted a targeted firm-level survey (“census”) and

interviewed valuation practice leaders of accounting and independent firms.1 The census elicited

information on the firms’ breadth and depth of valuation services, headcount, and geographic

distribution of valuation personnel, as well as the fees earned and hours billed from the provision

of valuation services. The interviews delved deeper into the organizational and professional

challenges extracted from the field survey.

1 These professionals are also the initial focus of efforts to increase the oversight of the valuation profession by various

oversight bodies (see Barr-Pulliam, Mason and Sanderson 2017; IFAC 2015; AICPA 2016, 2017; PCAOB 2015).

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We find that the global market for valuation services for FIs is dominated by the PCAOB

annually inspected accounting firms and global independent valuation firms.2 Additionally, the

supply of competent valuation specialists is both constrained and largely concentrated in the largest

financial centers in the U.S., as well as global financial centers like London and Hong Kong. These

concentrations present potential gaps or business opportunities across geographic regions. The

complexity of the FIs and the mathematical models used to value them add to constraints on supply

due to the technical knowledge and training required to produce FVMs in this area. We also find

that the perceived commoditization of valuation services through the introduction of new

technologies, free access to market data, and an influx of low-cost providers due to low barriers to

entry affect the demand for high quality valuation services such that valuation advice and reports

have been devalued. This commoditization also increases competition for business and fee

pressure for high quality valuation providers.

Specifically in our interviews we identify evidence of a perceived expectations and

communications gap between specialists their auditor and management clients. While prior studies

using an auditor’s lens find that cost is not a determinant in whether auditors involve a specialist

(see Hux 2017 for a review), we find the contrary. Prior studies focusing on auditors also attribute

coordination and communication problems to specialists’ need to better understand auditing.

Specialists in our study agree that they have opportunities for improvement related to accounting

and auditing knowledge that complements their technical knowledge and recognize its value. Their

lack of knowledge potentially inhibits the auditability of the work product they provide to auditors

and management. However, specialists suggest that both auditors and management either lack

sufficient knowledge of or the willingness to acquire valuation knowledge which adversely affects

2 The PCAOB annually inspects accounting firms who audit more than 100 SEC registrants.

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the valuation process. Finally, we find that specialists believe that the regulatory standards and

oversight is intensifying and is out of step with current practice. Greater emphasis on

documentation, for example, results in a focus on creating FVMs with a clear audit trail that is

likely to withstand regulatory scrutiny rather than providing high quality FVM. This challenge is

more salient for specialists employed by accounting firms.

Our collective results contribute to knowledge in several important ways. First, we extend

prior research by providing a detailed view of the organization and structure of the valuation

profession, particularly as it relates to the valuation of financial instruments. We show that there

is generally a robust supply of specialists who perform valuations across the primary categories,

but that the proportion who value the most complex FIs is comparatively constrained in light of

the demand. Further, specialists employed by PCAOB annually inspected accounting firms spend

a greater proportion of their time evaluating FVMs for FIs for auditors than preparing valuations

for management. These findings suggest that, in the market, management may be less focused on

retaining qualified specialists to prepare critical valuations (Salzsieder 2016). Specialists also

indicate that management may pursue a lower quality and lower cost specialist because they do

not fully appreciate the scrutiny required by auditors for FVMs reported in the financial statements.

This particular concern is partially mitigated when management permits their auditors and

specialists to communicate early in the process.

Second, we outline key challenges faced by the valuation profession as seen directly by

members of the valuation community and show that specialists are keenly concerned about the

quality of their work product especially in light of fee and commoditization pressures as well as

the effects of knowledge deficiencies of auditors and management. Third, and of critical

importance, we highlight issues affecting the supply of and demand for valuation expertise and

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how the organization of valuation firms, the backgrounds and experiences of specialists as well as

the nature of the FIs affect these supply and demand factors. Lastly, we offer new insights on the

expectation and or communications gaps between specialists and their clients with a particular

emphasis on views on the current regulatory regime that guides auditor and manager behavior.

Overall, our results suggest that institutional characteristics of the specialist market and

individual specialists could affect the reliability and informativeness of financial reporting. Related

to the audit practice, our results provide insights into factors that constrain the effective transfer of

knowledge and incorporation of expertise into auditors’ and specialists’ judgements and decisions

and offers suggestions for improvements to practice. Additionally, our results provide a context

within which to interpret specialists’ perspectives on the valuation process and how these

perspectives could affect current and proposed regulatory pronouncements. Finally, these findings

enhance the understanding of researchers, regulators, and standard-setters about the market for

valuation service and the challenges faced by the valuation profession. Our approach provides a

breadth of knowledge (Power and Gendron 2015) that motivates more in-depth studies of the

specialist market and how these providers affect valuation, audit, and financial reporting quality.

Section 2 of our paper discusses the background and relevant prior literature. Section 3

describes the research design, Section 4 presents the results, and Section 5 concludes.

2. BACKGROUND

The Who, the What, and the Why Related to Specialists

Understanding the organization of the market for valuation service providers requires

identification of who offers the services (firm type), what specialists value (type of instrument),

and why specialists perform these services (purpose of valuation) for auditors and management.

Related to the first question (i.e., who offers valuation services), Figure 1 illustrates that accounting

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firms often employ specialists who act as employed3 specialists who evaluate FVMs for audit

teams within the firm (Channel 1) or as engaged specialists who derive initial FVMs for non-audit

clients (Channel 2). Similarly, independent firms employ specialists who act as engaged specialists

who evaluate FVMs for accounting firms or as engaged specialists who prepare initial FVMs for

management in public or private companies. Specialists employed by public or private companies

(in-house specialists, hereafter) only prepare FVMs for their employer.

Insert Figure 1 about here

Concerning the second question (i.e., what types of valuations specialists perform), the

types of FVMs specialists prepare or evaluate fall under five primary categories that include

business entities, financial instruments, tangible assets, intangible assets, and real estate (see

Figures 2A and 2B). Specialists may be generalists or focus on a specific category or sub-category

of valuations. For example, a generalist might value business entities, financial instruments, and

intangible assets. Conversely, specialists with a more narrow focus might value only financial

instruments; or a specific type of financial instrument like structured products. Accounting firms

with a global footprint tend to prepare and review FVMs in each of the categories while firms with

more of a regional footprint provide business valuation services and may produce FVMs for one

or more across the remaining categories. Within the independent firms, global and to some extent

regional and national providers prepare and review FVMs in all of the categories, smaller niche

firms typically focus on a single category and many focus on a specific sub-category.

Insert Figures 2A and 2B about here

3We use the terms “employed” and “engaged” consistent with PCAOB Staff Consultation Paper 2015-01 to refer to

specialists employed by the firm to which they provide valuation services (e.g., specialists employed by accounting

Firm X who assist Firm X’s audit teams in the evaluation of FVMs prepared by their audit client). Engaged specialists

employed by any type of firm act as a third-party specialist to either auditors or managers.

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Why specialists produce FVMs, the third question, varies largely with the customer (e.g.,

management or auditors) and the type of entity requesting the service. Management utilizes

valuation talent for a variety of purposes that include financial reporting; tax compliance and tax

planning; deal making such as mergers, acquisitions, divestitures, or restructuring; and litigation

and dispute resolution. Valuation for financial reporting purposes, however, has been a significant

focus of the regulatory efforts geared towards reforming the valuation profession. Much of that

focus centers on fair value accounting and the valuation of financial instruments, which were

heavily criticized in the aftermath of the Financial Crisis of 2008 (Barth and Landsman, 2010).

One accounting firm valuation practice leader described the market in the following manner:

“In an accounting firm we do a lot of external valuations for non-audit clients for financial

reporting purposes, for tax purposes, for M&A, for strategic planning, and for litigation

support expert testimony. Of the firms that you're interviewing – the [annually-inspected]

and whoever else – you won't find a single firm where they do only valuations for financial

reporting. Generally, it's a mix of other services. The valuation group is not part of the

audit practice, but supports the audits. For smaller firms like us, we are strictly audit

support where we are part of the audit team for the review.

P10 – Principal – Other Annually Inspected Accounting Firm – US

Auditors almost exclusively rely on specialists in a financial reporting context as part of

the annual integrated audit. According to reports by the PCAOB (2014, 2017), there is considerable

variation in the frequency and type of specialists used across accounting firm size. These reports

note three findings relevant to our study. First, in global network firms such as the Big4, auditors

use mostly employed specialists on 85 percent of engagements. Second, in smaller accounting

firms, auditors use specialists on less than 10 percent of their engagements. Lastly, smaller firms

typically use engaged specialists and another 10 percent use the work of management’s specialist.

Prior Research on the Use of Specialists

Several studies have examined auditors’ use of the work of specialists (e.g., Cannon and

Bedard 2017; Glover, Taylor and Wu 2017; Joe, Vandervelde and Wu 2017; Brown-Liburd,

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Mason and Shelton 2017; Joe, Wu and Zimmerman 2017; Griffith 2017). However, little of this

prior research explores the background of valuation specialists, the nature and composition of the

specialist market, as well as specialists’ perspectives on the challenges noted by regulators such as

the PCAOB (PCAOB 2010) and the IAASB (IASB 2013) and in prior research regarding the use

of specialists (Hux 2017 reviews this prior literature).

Regarding the challenges specialists face, Staff Consultation Paper 2015-01 (SCP) and

proposed auditing standards related to the use of specialists (e.g., PCAOB 2017) describe

widespread audit deficiencies relating to FVMs and related disclosures, with a significant

percentage related to FVMs for financial instruments. These reports categorize many of the

deficiencies as severe enough that they could potentially result in audit failures and materially

misstated financial statements (PCAOB 2010). These reports further identify a number of

deficiencies related to the auditors’ reliance on evidence from the specialists, including failure to

understand the methods, the models, and the assumptions used by valuation specialists.

Our study extends prior research and contributes to the evolving regulatory standards on

the use of specialists by filling a gap in the literature. We focus primarily on specialists who value

financial instruments and whom accounting and independent firms employ because these

specialists are the primary sources of expertise for the production of FVMs for auditors and

management in a financial reporting context.

3. RESEARCH DESIGN

Following Gibbons, Salterio, and Webb (2001) and Brown, Call, Clement, and Sharp

(2015), we use a field-based survey and semi-structured interviews to gain insights into specialists’

perceptions about market participants, their roles, the organization structure of the profession, and

significant challenges that affect the production of FVMs. We also conduct a census of accounting

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and independent valuation firms to further assess the supply of providers in the various valuation

disciplines, to identify additional characteristics of market participants, and to identify other

challenges to the profession. This three-pronged approach allows us to holistically explore a

critical component of the financial reporting cycle through direct interaction with participants

uniquely positioned to offer insights into the implications and consequences of their interactions

with auditors, management, other specialists, and regulators.

Field-Based Survey of Valuation Specialists

We first developed a targeted field-based survey using insights from the SCP and

associated comment letters (including Joe, Janvrin, Barr-Pulliam, Mason, Pitman, Rezaee,

Sanderson, and Wu 2015); exploratory interviews with audit partners, valuation specialists, and

professional associations; academic research; and review of current and proposed auditing

standards in the U.S. and internationally. To increase external validity, senior valuation and audit

practice leaders reviewed early versions of the survey to ensure that the questions clearly and

concisely addressed issues relevant to the valuation profession. We also conducted two pilot tests

at professional conferences focused on FVMs before finalizing the instrument.

The final survey includes three sections that present participants with both objective and

open-ended questions and a fourth section that captures participant demographics consistent with

prior studies (e.g., Gibbins, Salterio, and Webb 2001; Nelson, Elliott and Tarpley 2002). In the

first section, participants separately describe the type(s) of FIs they prepare for management and

or evaluate for auditors. Participants currently employed by an accounting or an independent

valuation firm (also referred to as “independents”) completed section two while specialists

employed by other types of firms (i.e., in-house specialists) completed section three. Sections 2

and 3 are similar but frame the questions in the context of the specialist’s employer type. Both

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sections elicited participants’ perceptions of factors that affect their judgments and decisions as

well as their perceptions of stakeholders involved in the FVM process with particular focus on

auditors, management, and regulators. The fourth section collects demographic information about

participants such as prior valuation and non-valuation experience, certifications, and education.

We distributed surveys at valuation continuing education workshops and conferences held in New

York, London, Hong Kong, Los Angeles, and San Francisco. We distributed approximately 250

hard copy surveys at a variety of valuation continuing education workshops in New York, London,

Hong Kong, Los Angeles, and San Francisco. One hundred twenty-seven participants completed

the survey with 121 of the responses being usable, resulting in a 48 percent response rate.4

Census of Accounting and Independent Valuation Firms Providing Valuation Services

We administered a targeted survey (“census”) accounting and independent valuation firms

in order to capture the firms’ breadth and depth of valuation services provided, with a particular

focus on financial instruments. The census also solicited information related to the human capital

and geographic organization of valuation personnel.5 Further, the census asked firms to report on

the proportion of the firm’s total and valuation specific fees and hours billed for the production of

FVMs.6 Moreover, the census inquired about the types of certifications supported by each firm for

recruiting and promotion purposes, as well as the firm’s beliefs about the adequacy of the number

4 While this survey rate is lower than response rates reported in recent auditing studies using surveys (e.g., 71 percent

reported by Jenkins et al. (2017), our study required that specialists have experience producing FVMs for financial

instruments. Conference attendance included specialists who value many types of assets; consequently, the number

that qualified for our survey is reflective of the narrow subset of specialists with this expertise in the larger market for

valuation specialists. The four responses removed from the analyses were conference attendees who are former

specialists but currently serving as regulators (2), academics (3), or had retired more than 5 years prior (2). 5 We supplement the responses related to types of valuations, headcount and geographic organization of valuation

personnel with information publicly available on firms’ websites. 6We excluded valuation practices within public and private companies (e.g., in-house specialists) because of the

unique challenges specialists face in those organizations (Barr-Pulliam, Mason and Sanderson 2018) and because they

produce FVMs only for management. The latter point limits comparisons among the firm types other than for the

broader discussion of challenges and valuation methodology. Because these professionals attended the professional

meetings where we distributed the field-based survey; we retain them but note where we exclude them from analyses.

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of professionals in the market who are sufficiently qualified to produce FVMs of financial

instruments. The census concluded with an open-ended question inquiring about firm-level

perceptions of the challenges facing the valuation profession. We elicited responses in both hard

copy and electronic formats. Based on insights from Barr-Pulliam, Joe, Mason and Sanderson

(“BJMS” hereafter, 2018), we targeted the top 50 accounting firms, the five global independent

firms, and five “boutique” independent firms who provide a significant number of valuations of

FIs in niche areas and who work with both auditors and management. We report firm

characteristics in aggregate, only separating results by firm type, because firms consider much of

the human capital information sensitive and part of their competitive advantage.7

Semi-Structured Interviews

To enhance and delve deeper into our field-survey findings, we conducted semi-structured

interviews with 22 valuation practice leaders from a cross-section of firms representing accounting

and independent firm valuation professionals domiciled in the U.S., the U.K., European Union,

and Asia and Pacific region. We also interviewed a senior leader of one professional association.

We used insights from the comment letters submitted for the SCP (PCAOB 2015) and from our

field-based survey of specialists to develop the interview protocol (Creswell 2012). Research

colleagues and two experienced valuation specialists reviewed the protocol and provided helpful

feedback. The final protocol focused on the professional profile of the participant, the organization

of his or her valuation practice within the firm, and perceptions of the market for valuation

providers similar to the question included in the census. The interviews focused heavily on the

challenges facing the profession. The census represents the firm perspective, whereas we asked

interview participants to provide their individual perspectives as experienced professionals.

7 We include a statement in the informed consent that results will only be reported in aggregate.

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Two or more members of the research team conducted each interview either in person or

via telephone. Prior to starting each interview, we discussed the protocols employed to ensure

confidentiality and obtained verbal informed consent. We assigned a unique identifier to each

participant (e.g., P1 for Partner 1) and reference that identifier when direct quotes appear in our

analysis. This approach and asking participants to provide general rather than firm-specific

responses, where practicable, allowed the participant to speak freely without fear of reproach. We

also collected demographic data on each participant to demonstrate that each has the appropriate

level of expertise for our task (see Table 2). Two authors independently coded responses (Cohen’s

Kappa = 0.90) and a third author reviewed and reconciled any coding differences.

Insert Table 1 about here

Data Collection

Participants – Field-Based Survey

The 121 respondents represent 12 countries that span three geographic regions (Table 1,

Panel B). Participants include 18 (14%) specialists employed by Big4 firms, 44 (36%) employed

by non-Big4 firms, 33 (27%) employed by independent valuation firms, and 26 (21%) in-house

specialists employed by public and private companies.8 The participant pool is highly educated,

experienced in valuing complex financial instruments, and well credentialed. Of the 121

participants, common professional certifications include 16 (25%) who are Certified Financial

Analysts (CFAs), 14 (22%) who are Certified Public Accountants (CPAs)/Association of

Chartered Accountants (ACAs), and 10 (16%) who hold the American Society of Appraisers

(ASA) credential. While 114 (94%) survey respondents have at least a Bachelor’s degree, 74 (61%)

also have a graduate degree (Table 1, Panel E). Eighty-nine (75%) participants have at least six

8 Note that primary analyses focus on specialists employed by accounting and independent valuation firms.

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years of valuation experience (Table 1, Panel F), and 62 (51%) serve in leadership roles within

their organization with functional titles such as Director, President and Partner (untabulated).

Surveyed specialists either prepare or assess an average of 1,217 FVMs each year (including

Levels 2 and 3) for a range of industries (untabulated).

Participants – Firm Census

We invited responses from 60 total firms (50 accounting firms and 10 independent

valuation firms). Thirty-six (60%) provided at least a partial response.9 Of the 36 respondents, 9

(25%) were accounting firms annually inspected by the PCAOB, 18 (50%) were accounting firms

triennially inspected by the PCAOB basis, and 9 (25%) were independent firms. In Section 4, we

discuss firms’ profiles, geographic organization, and preferred professional credentials.

Insert Table 2 about here

Participants – Semi-Structured Interviews

Our interview participants include global/national valuation practice leaders. The 23

include 17 (74%) employed by accounting firms, 5 (22%) employed by independent valuation

firms and one (4%) representative of a prominent valuation-related credentialing body. All have

current or prior experience valuing a range of financial instruments including derivatives and

marketable securities (See Table 2 Panel A). Similar to field-survey respondents, participants hold

professional credentials such as CFA, CPA, and ASA, and 13 (57%) have an MBA. Nearly all

have greater than 15 year’s valuation experience.

9 Twelve accounting and two independent firms provided incomplete responses to the number of professionals they

employ in each geographic region but provided mostly complete responses elsewhere. We used the firms’ websites to

supplement this information but could not reliably determine the actual number of professionals by valuation category

or region. Consequently, we use a dichotomous variable indicating whether the firm has (1) or does not have (0)

representation in these areas and treat all other fields as missing where means are calculated.

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4. RESULTS

We use the richness of our data to address our research questions. First, we discuss the

demographics of the firms and the professionals that comprise the market for valuation services.

Following, we discuss challenges specialists identified for the valuation profession. We report both

aggregated and disaggregated results that highlight differences across providers.

Providers and Demographics of Valuation Service Providers

Providers – Accounting Firm Profiles

Similar to the reports by the PCAOB (2014, 2017), we find considerable variation in

specialist use by accounting firm size, particularly for the valuation of financial instruments. Firms

annually inspected by the PCAOB unvaryingly prepare and review FVMs across all five valuation

categories (i.e., business entities, financial instruments, tangible assets, intangible assets, and real

estate). On average, the Big4 firms employ 800 specialists in the valuation practice but

approximately 45 (6%) of these specialists provide FVMs specifically for financial instruments.

Comparatively, annually inspected firms other than the Big4 employ an average of 275 specialists

with approximately 20 (7%) specialists who value financial instruments. Firms triennially

inspected by the PCAOB employ on average 30 specialists with approximately three (10%)

providing FVMs for financial instruments (see comparisons in Table 3 Panel A).

While annually inspected firms provide FVMs for all five categories, triennially inspected

firms provide more nuanced services. Whereas all accounting firms we surveyed in the census

provide business valuation and almost 90% provide FVMs for financial instruments, very few (less

than 50%) value the most complex FIs such as structured products. Executive stock option plans

(92%) and debt (92%) are the most frequent FIs valued (untabulated). As presented in Figure 3A,

annually inspected firms have wide geographic dispersion with all firms reporting a number of

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professionals in the United States (U.S.), Canada, the United Kingdom (UK), other European

Union (EU) countries, Australia, Japan, and other Asian countries. Professionals also operate from

many major US cities such as New York and San Francisco, but typically only in one city in the

other countries (untabulated). No annually inspected firms reported having specialists in Africa or

Latin America. Alternatively, specialists in triennially inspected firms are primarily based in the

U.S. and often in a single city (see Figure 3A). Our semi-structured interview participants suggest

that a similar tier of firms operate in the large developed markets for valuation (e.g., Canada,

Australia, and Japan). However, the annually inspected accounting firms and the global

independent firms also dominate those markets. One interview participant from a Big4 firm

described the maturity of the profession across the globe:

You might argue that some of these emerging markets and large markets have a lot of fair

value measurements, it's just they don't necessarily match up with having a big valuation

profession… where's the valuation profession most developed?...Clearly it's most

developed in the US… next to the US [is] the UK, Canada, and Australia. In Hong Kong,

Singapore, Vietnam and some Southeast Asian countries, they bring in guys from Australia

…Then you get into some other countries like France, Germany, Italy, the Netherlands,

you know, a reasonably well developed valuation profession. You start dropping off after

that. I mean, you start getting into countries where you really only have a handful of

valuation professionals relative to the size of their economy.

P12 – Partner – Big4 – US

As noted in Table 3 Panel B, specialists employed by annually inspected accounting firms

spend about 41 percent of their time preparing FVMs for non-audit clients (Channel 2) and 40

percent evaluating the reasonableness of FVMs as a part of audit engagements (Channel 1).

However, specialists employed by Big4 (Non-Big4 or Second Tier) firms within the annually

inspected group of firms spend about 50 percent (30 percent) of their time on Channel 1. Time

allocation essentially reverses comparing time allocated to Channel 2 between Big4 and Non-Big4

firms (30 and 53 percent, respectively). In contrast to the annually inspected firms overall but

consistent with Non-Big4 firms in the second tier, triennially inspected firms spend a greater

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proportion of time preparing rather than evaluating FVMs, likely due to the relatively smaller size

and lower complexity of their clients and their limited personnel (Table 3 Panel B). For valuation

of FIs, specialists employed by accounting firms spend a greater proportion of time on Channel 1

relative to Channel 2 services across all firm types (Table 3 Panel C).

Panel D of Table 3 show that across all accounting firm sizes, revenue from valuation

services accounts for approximately 3 percent of total firm revenues and hours for the responding

accounting firms. Of these fees (hours), valuation of FIs accounts for 13 (15) percent, business

valuation accounts for 27 (23) percent, tangible property accounts for 7 (8) percent, intangible

asset valuation accounts for 20 (19) percent, and real estate accounts for another 10 (10) percent.

Providers – Independent Valuation Firm Profiles

On average, the global independent valuation firms resemble the profile of the annually

inspected accounting firms. Most prepare and evaluate FVMs across all five categories, and they

employ approximately 160 specialists with 39 (24%) focused primarily on financial instruments

(see Table 3 Panel A). These firms reported the widest geographic dispersion. Like the accounting

firms, independent firms report professionals located in the U.S., Canada, the UK, the EU,

Australia, Japan, and Asia (see Figure 3B). Two firms reported professionals located in Latin

America, but those specialists do not value financial instruments. The services provided and the

professionals employed by the smaller (boutique) independent firms has wide variation and are

largely dependent on the product and geographic focus of the firm. Specifically, these firms are

single or multi-product focused, operate in one or several locations (but typically within one

country) (see Figure 3B), and employ approximately 45 specialists of which 30 (67%) value

financial instruments (see Table 3 Panel A). Specialists in these firms allocate the majority of their

17

time to preparing FVMs and a varied amount of time reviewing FVMs as an engaged specialist for

an accounting firm (Table 3 Panel B).10

Professional Profiles – Education and Certifications

Our census results suggest that a significant number of specialists employed by annually

inspected accounting firms and independent valuation firms who value FIs have educational

backgrounds in math, science, and or engineering (untabulated). Specialists employed by

triennially inspected firms are more homogenous and have educational backgrounds largely in

accounting and finance. Across all valuation categories, specialists with skill sets that combine

accounting and technical backgrounds are highly sought after.

We definitely like to see that [accounting] skillset but if you look at our group as a whole,

you're going to have a lot of people with an economics, math, or finance backgrounds…

those three areas I'd say…we're most interested in.

P7 – Partner – Other Annually Inspected Accounting Firm – US

I did a degree at [redacted] college in [redacted city]. That was two years’ worth of core

chemistry science, so absolutely nothing to do with valuation whatsoever.

P6 – Managing Director – Independent Firm – INTL

Our surveyed specialists are highly educated and reflect the preferences of their firms. In

Table 1 Panel E, 63 and 69 percent of specialists employed by non-Big4 and independents hold

graduate degrees, respectively. However, we find that specialists employed by Big4 firms have a

lower proportion of specialists with graduate degrees (44%), with 50% reporting a bachelor’s

degree as the highest degree attained. Interviewed specialists have similar education.

Regarding certifications, accounting and independent valuation firms commonly suggested

in the census that they recognize a wide array of credentials when they hire and promote specialists.

As noted in Figure 4, these firms expressed significant preferences for the CFA (95%), the ASA

10Revenue (hours) as a percentage of firm revenues (hours) were inconsistently reported by independents. Results

appear in Panel D of Table but inferences for all intendents should be interpreted considering this cautionary note.

18

(84%), CPA (84%), and the ABV (53%). The CFA was often cited as the gold standard especially

for specialists who value FIs. Consistent with firm expectations reported in the census, we find

that one of the most commonly held certifications among survey respondents was indeed the CFA

for specialists employed by Big4 (33%) and non-Big4 (22%) firms (see Table 1 Panel D).

However, the ASA certification is the most commonly certification held by specialists employed

by independent valuation firms (48%). The CPA certification is also commonly held among the

specialist groups with 27 percent of specialists carrying this designation. These findings

corroborate the sentiment that no single certification distinguishes qualified valuation specialists

but indicates there may be wide variation in valuation skills.

Professional Profiles – Background and Career Paths

Accounting standards promulgated by the PCAOB and IAASB similarly define a specialist

as “a person (or firm) possessing special skill or knowledge in a particular field other than

accounting or auditing” (PCAOB 2015; IFAC 2009) clarifies that while an individual with

expertise in complex modelling used to value financial instruments skills would be considered as

a specialist in the auditing context, auditors are charged with applying professional judgment to

evaluate the associated professional rules and standards of the engaged expert to make this

determination (ISA 620 ¶A2, IFAC 2009).

We use survey and interview data to examine the career trajectory of specialists. In our

surveys, we inquire about specialists’ valuation and professional experience, including factors

related to their prior employers, and job functions. We find that the valuation profession is a male-

dominated enterprise. Of the specialists we surveyed, approximately 72 percent are male (Table 1

Panel C). These results are consistent across firm types as 66 percent of Big4, 73 percent of non-

Big4, 72 percent of independents, and 84 percent of in-house specialists were male (Table 1 Panel

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C). We encountered a similar trend when we interviewed valuation practice leaders in the US and

international markets as 89 percent of the 23 interviewees are male (untabulated).

While we find that specialists follow no specific career path, in general, they seek new

employment opportunities within similar firm types. The highest proportion of surveyed specialists

within each firm type reported having prior experience in a firm similar to their current employer.

For example, 10 (55%) specialists currently employed by Big4 firms reported that they had prior

work experience in another Big4 firm as a valuation specialist (Table 1 Panel I). Specialists

employed by non-Big4 firms (54%), independents (78%), and in-house specialists (76%) also

report having prior experience in firms similar to their current employer. While we find this

employment trend to be pervasive among specialists we surveyed, we found more nuanced career

paths among the valuation practice leaders we interviewed.

Of our interviewed specialists employed by Big4 firms, 80 percent had prior experience in

other Big4 firms as specialists. Among valuation practice leaders employed by non-Big4 firms, 67

percent had prior experience in other non-Big4 firms. Similarly, 40 percent of valuation practice

leaders interviewed from independents had prior valuation experience in a similar type of firm.

Interestingly, approximately 40 percent of independent firm practice leaders had prior experience

in Big4 firms (see Table 2 Panel B). Across all interviewees, Panel B of Table 2 also reports that

significant prior work experience in Big4 firms (57%), non-Big4 firms (35%), independent

valuation firms (35%) and financial institutions (30%). These findings suggest that while cross-

firm employment shifts are not pervasive, accounting firm experience, especially from Big4 firms,

is highly valued in the profession.

I left [Big4 one] to join [Big4 two]. I spent six years at [Big4 two] as a director. I lead

their portfolio valuation group. [Firm Names Redacted]


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[I] went on to Arthur Andersen…the accounting firm to assist companies implement an

accounting standard FAS 133, which is the derivative accounting standard.

P2 – Managing Director – Independent Firm – US

We also observe that a considerable proportion of specialists have prior experience as

accountants and or auditors across the sources of valuation expertise. For example, Table 1 Panel

J indicates that 11 (33%) specialists employed by independents, 38 and 25 percent of specialists

employed by Big4 and non-Big4 firms, respectively, reported having prior experience in auditing

and or accounting. Whereas prior experience in auditing/accounting represented the second highest

proportion for in-house specialists we surveyed (34%), most in-house specialists have prior

experience in risk management related job functions (42%) (Table 1 Panel J).

These results support findings by Barr-Pulliam, Mason, and Sanderson (2018) which

suggest that specialists in business valuation practices of the accounting firms include many former

auditors because their experience is amenable to transition into these roles. This trend is less

common for valuation of CFI because the auditors’ technical expertise is insufficient and because

most rely on specialists for this work. Consequently, the smallest accounting firms have capacity

to compete for talent and work for some types of CFI but more so in the business valuation space.

Professional Profiles – Experience with Complex Financial Instruments

Our survey results suggest insignificant variation in specialists’ experience with various

types of CFI (Table 1 Panel H). Of 121 specialists surveyed, 49 percent (50 percent) have

experience with complex derivatives (marketable securities). However, compared to independents,

Big4 firms have relatively higher proportions of specialists with a breadth of experience valuing

CFI such as collateralized debt obligations (12% vs. 22%, respectively), mortgage backed

securities (9% vs. 33%, respectively), and asset backed securities (9% vs. 22%, respectively).

Specialists noted the least amount of experience with non-marketable securities (4%) relative to

21

other types of instruments. These findings suggest that while firms likely engage in different

staffing background strategies, their expertise is less nuanced.

What are the Challenges Facing the Valuation Profession?

According to our survey, census, and interview findings, numerous challenges face the

valuation profession. These challenges include 1) a constrained supply of qualified valuation

professionals; 2) a perceived commoditization of the valuation work product in conjunction with

increased competition for business; 3) a perceived expectations and communications gap between

specialists and their two primary clients and with regulators; 4) the auditability of FVMs; and 5)

evolving regulatory guidelines. Some challenges emanate from our survey participants, however,

census and interview participants helped to contextualize the challenges and underlying themes.

Supply and Organization of Valuation Service Providers

Providers recognize, and thus they advise both management and auditors that quality

differs among valuation service providers related to firm type, products valued, and qualifications,

credentials, and experience of the firm and its professionals. These factors contribute to pricing

pressure and risk that could affect the quality, efficiency, and effectiveness of the production of

FVMs, financial statements, and audits (PwC 2013). Currently, few observable indicators of

knowledge and expertise exist to guide management and auditors as they select specialists (Barr-

Pulliam, Mason and Sanderson 2018). We identified two categories of factors with a significant

impact on the supply of high quality valuation service providers. The first factor relates to the

shortage of skilled professionals who are qualified to provide valuation services. The second factor

pertains to insufficient resource allocation and the significant cost constraints that limit the number

of firms, and affect the organization of firms that provide valuations for financial instruments.

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Skilled Professionals Qualified to Provide Valuation Services

Twelve (52%) of 23 specialists interviewed made at least one comment on specialist quality

indicators. Among these perspectives, we identified several themes that specialists suggest

contribute to these quality differences. Themes that overlap with the discussion of the perceived

expectations gap include the balance of Channel 1 and Channel 2 work and the imbalance of supply

and demand for specialists who can produce high quality FVMs.

In both the surveys and the interviews, participants noted that there is a shortage of skilled

professionals. In the census, we asked respondents to assess the number of qualified professionals

in the overall markets that are available to prepare and/or evaluate FVMs for financial instruments

on a 10-point Likert-type scale anchored on 1 (significantly fewer than needed) and 10

(significantly more than needed). As illustrated in Table 3 Panel E, the overall mean response was

4.25. The mean response ranged from 3.25 for second tier accounting firms to 5.25 for boutique

independent valuation firms participating in the census. All means, however, are significantly

lower than the scale mid-point with the exception of Big4 and boutique firms.11

Common reasons cited by firms for their assessment include: most professionals are hybrid

business valuation/intangible asset professionals rather than pure play financial instrument

professionals, valuation is not a commonly recognized career path, and the mix of skills necessary

to value FIs is unique. Interviewees provided comments that contextualize these challenges:

Finding professionals that “get” audit and can do complex quantitative modeling is

beyond difficult…People like that rarely exist.


We have more "professionals" who claim valuation expertise but lack the appropriate

qualification and experience.

P20 – Partner – Triennially Inspected Accounting Firm – US

11 All t-tests reported in Table 3 Panel C are one-tailed and significance measured at the .05 level or lower.

23

Sentiments from interviewees and the census reference fierce competition to recruit and

retain the limited number of qualified professionals, especially in the large financial centers.

The market is tight and competition is fierce in the markets such as Chicago, New York

City, Boston, Los Angeles, San Francisco, and London.


Our survey findings support this assertion as a greater proportion of specialists employed in

independent firms have more than 15 years of valuation and overall professional experience

compared to specialists employed in the accounting firms (Table 1 Panels F and G).

Estimates by our interviewees suggest there are approximately 100 competent specialists

who value FIs in the U. S. talent pool alone (see also the census findings in Table 3 Panel A).

Outside the U.S., the supply of high quality specialists is more constrained such that high quality

providers tend to cluster in global financial centers such as London and Hong Kong.

You've got a small number of qualified people and a lot of firms chasing them. You've got

the regulator driving and then you've got the accounting firms staffing out to make sure

that they can deal with any enhanced requirements…So where are they? London would be

easier than probably any other market, then New York.

P11 – Partner – Big4 – INTL

Specialists also suggest there is a mismatch between actual and perceived knowledge and

ability among practitioners who value complex FIs. This mismatch manifests in a variety of ways,

but interviewed specialists attribute it to overconfidence bias (e.g., Kahneman and Tversky 1973).

For example, specialists demonstrating this bias may primarily produce FVMs for businesses or

intangible assets but improperly conflate that expertise with their ability to value FIs. Arguably,

many of the fundamental skills required for the production of FVMs for any purpose are

transferrable; however, the inputs, assumptions, and structural complexity of FIs in a financial

reporting setting requires a more nuanced skillset.

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…one of the things that you always struggle with is there are a number of providers out

there that are doing things that are really not financial reporting oriented valuations.

They're doing them as the result of things that they do for estate planning, they’re not very

compliant with ASC 805, and it's a trouble from the audit standpoint. You have to

differentiate what you do differently and why the differences exist out there.


Firms Offering Valuation Services

Our interviews characterize the overall supply chain for valuation services as broad and

consisting of a range of providers. However, the supply is narrower for financial instrument

valuation. Mostly accounting and independent firms prepare FVMs (Channel 2 services), while a

smaller subset within these categories of firms evaluate FVMs for auditors (Channel 1 services).

A segment of smaller firms is a significant player in the overall market because they specialize in

a single product and or focus on a sole purpose (e.g., financial reporting) but these firms have

either local or regional scope commensurate with their focus. The dominant firms in the overall,

non-FI preparation (Channel 2) market seems to be the mid-size accounting firms, rather than the

large global players, and this seems to be driven in large measure by client price sensitivity and

the tendency of accounting firms to refer down market for Channel 2 work to prevent potential

competition from their direct competitors for their audit clients. 12 One specialist employed by an

independent valuation described this challenge:

We think the market is the market. What happens is, the firms that have the kind of non-

Big4, or non-Big6 [auditors]… generally, they're not bigger firms, and they don't have the

bandwidth to spend on valuation or the audit.

For those types of companies, we will either not do the work, or will do it at a lower price.

Usually, we find that's not always a competitive situation. If their [management] comes to

us it's because their auditor said you need to use someone better than some valuation firm

that's maybe not done enough work.


12 While the census findings only represent a sample of the market, results are consistent with interview findings.

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We also learn from our interviews, supplemented by the census, that accounting firms not

only provide the lion share of financial reporting-related valuation services for public companies

but also that annually inspected firms in particular have a breadth of expertise that spans multiple

instruments, a variety of purposes, and multiple jurisdictions.

I think the Big4 accounting firms pick up the lion's share of valuation work. They would

pick up typically the bigger ticket transactions in terms of financial reporting. They

obviously have a huge client base that they service both on an audit and a non-audit side.

The rest of the market is made up of let's say the second tier accounting firms. So over here

(in the UK) that would be BDO, Grant Thornton, and others, as well as boutique firms

including Duff & Phelps, Houlihan, and a few much smaller sort of boutiques and or the

likes of specialists where they might pick up specific specialisms.


While firms that hold significant positions in financial instruments engage a range of

auditors, annually inspected accounting firms and the global independents typically employ the

most specialists capable of providing the highest quality FVMs for the more complex FIs (BJMS

2018). The following quotes from interviewees provide context for these findings:

I would say that once you get past Grant Thornton and BDO, there's rarely anyone at those

accounting firms that have a whole lot of capability in [CFI]. [Emphasis added]


There's a couple of big boutiques who do this work too. There's Duff & Phelps, Alvarez &

Marsal, and Houlihan Lokey to a certain extent. I don't think [Houlihan] does a lot of fair

value work. They do valuation work but a lot of it is related to [fairness] opinions they

provide on M&A and other business transactions.


A small group of independent valuation firms provide the breadth and depth of valuation

services similar to that of the large accounting firms. One global leader of an independent valuation

firm characterized the supply constraint suggesting the competent market is small and that there is

variation within the market:

It's a pretty small space in CFI. I would say that the Big4, and in some cases not everyone's

equal amongst the Big4 either in certain areas…Grant Thornton, and BDO, Duff, and

Houlihan have CFI practices that if I were in the situation where I had to review from an

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audit perspective, I would believe that they at least have the people that know how to do

most CFI work. Now, what I'll find is that with the Big4, BDO, and Grant…not all of them

will have the best or the right people reviewing or performing. I do think there's a big drop-

off when you get past those firms to some extent….


Other interviewees also regard a group of smaller, niche firms in the United States (but that

service clients globally) with sufficient competence to provide high quality FVMs. These firms

include Harvest Investments (for complex FIs), Chatham Financial (for derivatives), Equity

Methods (for stock option valuation) and Mercer Capital (for business valuation).

One of the things that even the Big4 and us in the second tier contend with is that we don't

select the valuation firm that you use from that standpoint…If you're not up to snuff, you

shouldn't be doing the work.


While the largest companies rely on their in-house specialists, some rely on engaged

specialists in niche areas (PCAOB 2015; Figure 1). Indicative of the high level of resources

associated with maintaining a valuation practice, outside the largest accounting firms, very few

other accounting firms employ specialists, and those that do, typically do not employ specialists

that value complex FIs (see Table 3 Panel A). The latter group of firms rely on specialists employed

by larger accounting firms or independents to assist their auditors in the evaluation of FVMs. One

valuation practice leader quantified the costs of maintaining a valuation practice as follows:

To be break-even, a Managing Director needs about a 2.5 million dollar book…Probably

like five to seven as a Partner… If you take just three million ... and I divide it by the number

of work hours in a year, divide it by fifty two weeks a year, and that means you need to be

doing sixty thousand dollars a week in chargeable time. If I have to do sixty thousand

dollars a week in chargeable time I can't have that done with one person... and if my

average rate is a thousand bucks, I'm tying up two people full time just to hit my number.

Quants are costly, plus we probably pay about a third of a million dollars to have access

to Bloomberg, Thompson Reuters and CapIQ. This is an expensive hobby for a firm.

P15 – Senior Manager – Triennially Inspected Accounting Firm – US

Accounting and independent valuation firm specialists note similarities and differences in

how valuation practices organize within their institutions. The variance is indicative of lack of a

27

sufficient supply of competent specialists to prepare and assess the reasonableness of complex FIs

and the demands placed on the valuation function by auditors and managements, which may at

times be at odds (BJMS 2018). The primary similarity is in how the two types of firms staff their

Channel 1 and Channel 2 engagements. Firms either cluster groups of specialists or strategically

place one specialist throughout the U.S. and or internationally to ensure presence in the primary

regions that need this expertise (see Figures 3A and 3B). One Principal from an accounting firm

described organization as follows:

…the way our firm goes to market is on a regional basis. I am the leader for the Southeast

region based in DC, but for other specialized areas, like complex financial instruments, we

work as a national team.


Similarly, a managing director from an independent valuation firm noted:

From a technical standpoint we're staffed nationally, so if a managing director in New

York has a specific type of project that is best met by the capabilities of staff in Seattle, they

might use Seattle staff. Really, for complex financial instruments it's most common that

you'll see managing directors kind of go outside of their offices to get the best skillset for

handling that specific valuation need. Really pricing, staffing, and quality control are kind

of what I'm tasked with.


Differences between and within the accounting and independent firms relate to hierarchical

structure and specialization within the firm. Unique to accounting firms, placement of the valuation

practice varies and often reflects the nature of the work specialists perform, such as more Channel

1 work, and the pricing structure for work performed. For example, an interviewee noted:

I'm certain, to an extent, within all the firms there's separation, but ours is distinctly

separate. Some firms depending on where the business line rolls up into, it could be tax,

consulting…. For us it matters more because valuation rolls up under the consulting

practice, under a consulting bonus pool whereas assurance has their own bonus pool.


Salient differences also exist in how specialists market their services. Practitioners within

annually inspected accounting firms typically acquire a depth of knowledge in an area such as

28

derivatives, which results in industry- or instrument-level specialists. Alternatively, practitioners

within the triennially inspected accounting and the independent firms have a breadth of knowledge

such that they become generalists. This difference is in part due to the size of the firm. For

specialists in larger accounting firms, differences exist likely because of 1) their integration into a

firm with an established culture and stronger interdependence on the audit function within the

accounting firms or 2) hiring specialists with significant prior expertise. Many independent

valuation firms depend on referrals from accounting firms to gain clients needing FVM services.

Independent firms work with a range of accounting firms or directly with management, which

allows them to spread their costs over many valuation clients. This approach permits independent

firms to offer niche valuation services but may result in poor valuation quality.

I would have no problem, for example, referring business to the likes of the Big4, GT, BDO,

BKD, and RSM and a variety of firms that I think have the requisite skill sets and have

worked with me around their process, such to where I'm happy- I wouldn't have any

problem with them having a valuation of that. Then you can have a firm, as we refer to

them around the industry, you can have the firm of Dewey, Cheatum & Howe that does

three banks and probably one valuation every three years. I don't want them doing

valuations.


The challenge, for some people, is that the Houlihan's of the world, are very sales oriented,

"Eat what you kill," so that's how they get paid is by selling work, which hey, there's nothing

wrong with that…but whether the independent firms are good or not—there's a lot of good

ones out there—they tend to be on the trailing end of quality as they tend to get educated

through the audit review process.


Specifically related to the level of expertise required and what currently exists, Panel F of

Table 1 indicates that the independent firms had a higher proportion of specialists with more than

15 years of valuation experience (66%). In contrast, proportionately fewer specialists in Big4

(29%), non-Big4 (23%), and in-house (19%) have more than 15 years valuation experience. While

independent firms appear to employ a strategy of hiring more experienced specialists, Big4 (35%)

29

and firms hiring in-house specialists (38%) appear to adopt a more moderate strategy of employing

specialists with six to ten years valuation experience, whereas non-Big4 firms (35%) hire less-

experienced specialists. These proportional differences suggest there are organizational

differences in valuation staffing strategies among the sources of valuation providers.

I think from our perspective we've got a slightly different key selling point in that we have

a lot of industry experience. So that's how we go to market, which is something that the

Big4 can't really do because they've got a lot of client service and advisory clients and

capabilities but they actually haven't been on the client side virtually ever.


These differences do not, however, describe the unique balance of quantitative and

communication skills necessary especially for FVMs of complex FIs. Several of our interviews

describe this need and the current challenges associated with the need as an imbalance of

knowledge of the other party’s role. Communication is key in bridging these gaps (BJMS 2018).

This is a communication problem. It's a lack of education and understanding problem, and

in the valuation profession, they need to understand audit, and in the audit profession they

need to understand valuation.

P1 – Head of Policy – Professional Society

Specialists especially note quality differentials among providers and suggest that having

experience in both accounting (including auditing) and valuation is a preferred but rare skillset.

Having been an auditor in the Big4 for four business seasons, I'm usually the only person

in the room that's been on both sides, so I see that as an advantage and a skillset I can

leverage, because I can talk their language, but they can't necessarily talk mine. Rather

than take advantage of it, I try to give them value added advice in terms they understand.

P4 – Director – Other Annually Inspected Accounting Firm – INTL

Because accounting firm specialists can provide both Channel 1 and Channel 2 services, some

interviewees note this as a firm-level rather than an individual-level competitive advantage.

Having worked for an accounting firm, I know that the people that do the audit work in the

audit reviews are quite often not the same people who are delivering or selling on the [non-

audit] client valuation side.


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While there are various efforts to develop a credential that signals quality valuation

providers for FIs, specialists suggest that experience is a better predictor of valuation competence,

ceteris paribus, and that “the knowledge is in the doing” (Barr-Pulliam, Mason and Sanderson

2018). Conversely, they note that having a credential sponsored by a central authority is beneficial,

though it may differentially affect smaller providers. A consistent concern for valuation quality

and, thus, audit and financial reporting quality, is competition from the “garage” providers who

will perform valuations at a lower cost. Barr-Pulliam, Mason, and Sanderson (2018) examine the

effects of efforts such as credentialing on the development of a profession identity among

specialists and find that credentialing is necessary but insufficient to address quality. The following

quotes from participants exemplify both of these points.

The ones [accounting firms] who will probably complain the most will be small firms who

don't have the experience and who are selling letterhead…. They will find it [obtaining

valuation work] more difficult, which is exactly the intention of the credentialing process.


What I don't think we need is such a fine delineation where because there are some

differences of views as to how you do things…there's not one set of consistent standards.

We have to have a way of making sure that we're not swinging the balance so heavily one

way that effectively we're eliminating the number of qualified people.


Commoditization of Valuation Work Product and Increased Competition

Many reporting entities engage an outside specialist to perform FVMs either because they

do not have employees who can produce high-quality estimates or because they prefer the

objectivity and expertise of an outside specialist (Hux 2017; and see Figure 1). Even though

management and auditors increasingly rely on specialists, revenues specialists earn are inversely

proportional to this reliance. One explanation for the fee pressure is a perceived commoditization

of the FVM process by key stakeholders (Coyle 2015). This weakened pricing power could also

have negative implications for the quality of FVMs used by auditors and management.

31

It's almost 100% [of the time] that we don't get the fees to support the amount of effort,

and then you can't do it for less, because everything here is reputation based. I can't do

less work for one client than another… It's my reputation, and I can't afford that something

I do for this company now and then… a Big4 firm looks at it and says really that's how you

valued that?


Key reasons for this trend in price sensitivity cited in our interviews are advances in

technology, sole proprietor valuation providers, and increasingly more freely available market

data. Specifically, computerized models now perform many of the steps in the valuation process

such as data aggregation, data analysis, and data formatting (Grover 2016). Clients increasingly

view these “automated valuations” that lack the objective judgments that specialists can provide

as acceptable (Gilbertson and Preston 2005).

Valuation reports are being commoditized by garage shops and automated software

programs. Quality and information in reports are going down as fee pressure [from

clients] holds down fees charged.

P22 – Managing Partner – Independent Valuation Firm – US

Specialists also argue that the use of advanced technologies will likely affect current and future

prospects for employment. The concern is that technology could eliminate the need for entry-level

professionals. This concern is exacerbated by an overall trend of fewer entrants into the labor

market themes by young professionals.

The professional is maturing and there are just not enough young people entering the

profession. The older practitioners, such as myself, are coming up on retirement and there

is no one to replace us.

P23 – Partner – Triennially Inspected Accounting Firm – US

Technological advances have also lowered the barrier to entry for new firms into the

market. This lower barrier is the catalyst for increased competition based on price rather than on

quality. Further, standardization and globalization of professional services allows other types of

organizations such as financial institutions, technology firms, and consultants to make major

inroads into the valuation profession (e.g., Wilkinson, Halvitigala and Antoniades 2017). Due to

32

their economies of scale and their recognized domain-specific expertise, these firms often provide

more cost effective services that meet clients’ needs and allow them to be more aggressive the

values they report for FIs in the financial statements.

Specialists note a particular concern for regulators, investors and other users of financial

statements is the potential management bias in FVMs, particularly in Level 3 of the fair value

hierarchy. This concern relates to the demand for valuation services because management may

seek valuation providers that corroborate their estimates by opinion-shopping (Salzsieder 2016).

The intersection of the audit process with the valuation process is particularly salient as some

reporting entities may seek low cost providers or poor quality providers to prepare their FMVs

with the upfront intention to then “make the auditor fix it” for a fixed price audit.

The audit-team valuation friction is around the things that you would expect, timing, fees,

client happiness, and auditors don't like to get in a situation where we're telling the [audit]

client that they have to have the valuer [manager’s specialist] redo it. Sometimes it’s just

completely wrong. I refer to it as sometimes valuers [manager’s specialists] without much

experience, and sometimes with experience just make stuff up. And you ask them, "What

book did you take this from?" or "What's the article that supports this?" Or "what's the

empiric line that supports it?" There's nothing to support it.


This strategy, however, is less effective when the company has a Big4 auditor.

If you do anything with the Big4 as the auditor and you don't involve them in the beginning,

they're going to make your life hell afterward."

P18 – Managing Director – Other Annually Inspected Accounting Firm – US

These factors are of particular concern in developing markets where auditors face extensive

pressure from clients to accept aggressive FVMs in an environment where audit fees and the

demand for audit quality is low. In these markets, it is rare for a client to use an independent

valuation specialist, and in many cases, clients use a specialist is a related-party or lacks

independence on some level. That often leads to auditors foregoing the costly choice to use a

specialist to evaluate the asset values or facing major client pushback when making the choice

33

(Abdullatif 2016). The inactivity of markets, high cost of applying complex valuation techniques,

shortage of skilled valuation specialists, and weak regulatory environment are also factor that may

impact the demand for high quality valuation in some markets (Pacter, 2007).

Last, accounting firm economics also likely play a role in whether or not the auditor

chooses to involve a specialist. While the studies conducted on the auditor’s use of specialists

using auditor participants consistently show that valuation fees are not a determinant in their

choice, valuation specialists interviewed in our study universally disagree.

The economics of the firm concerns me…Unless partners are able to charge [specialist]

hours out to the client, it becomes the cost that they have to absorb. That effects the

profitability of their engagements, hence the profitability of their practice and bonuses.

P12 – Partner – Big4 - US

What happens is unless it's {valuation} mandated within the audit manual that they have

to use us, they're going to think of every reason to not use us and try to do it themselves...

They have us look at it the next year and they did it completely wrong and “you’re like...It

costs to do it right.” So when they balk, I say, "Go ahead. Have fun with that."

P15 – Senior Manager – Triennially Inspected Accounting Firm – US

Expectations Gap between Specialists and Their Clients

In either their preparation or their evaluation role, specialists face challenges that could

have an impact on the production of a FVM due to misaligned incentives and differences in

understanding of valuation between specialists and their clients. Fourteen (61%) of our 23

interview participants suggested that complexity of both the valuation process and the underlying

instruments being valued creates a perceived expectations gap.

Valuation Complexity

The production of FVMs has been in practice for decades; however, efforts by regulators

to converge US GAAP (ASC 820) and IFRS (IFRS 13) require or allow reporting more assets and

liabilities at fair value. In response, management has begun reporting increasingly more accounts

at fair value as a means of enhancing financial statement quality, transparency, and relevance.

34

Specialists indicate that fair value is a complex phenomenon that eludes both auditors and

management and, thus, places the specialist in a precarious position. Improper focus on the needs

of either type of client (auditors versus management) in the production of a FVM could have a

negative impact on the quality of the valuation, the financial statements, and audits. Specialists

across firm-type observe that clients underappreciate the value added when they rely on a high-

quality specialist because their clients, for the most part, have more experience with historical cost

accounting. The following demonstrative quotes reflect specialists’ perceptions of how clients’

(whether auditors or management) contribute to these challenges:

I've been doing it [fair value] for 13 years so I'm way ahead of the curve than are a lot of

our audit teams and clients, but on the other hand it's difficult because they're very

frustrated, and they take out their frustration on the valuation expert.


Because they [auditors] don't start by appropriately sectoring the valuation complexities

of what they're reviewing, they then have this fallout of items. So now it's been with the

valuation desk for two weeks. Now, let's be honest, everybody is hot. Now no field auditor

is calling the client back with a problem that's gonna hold up closing.

P8 – Chief Markets Officer – Independent Firm – US

I've seen the dynamic all the way through my career, which is at first the client and the

audit practices really struggling to come to grips with the fair value financial reporting

requirements. Expectations, and also just how to do it. But then over time, like anything,

my experience ... it eventually beds down, but there is always an initial shock to the system.


One interviewee further noted that experience and expertise are critical to equipping specialists

with the confidence to close expectations gaps, especially between specialists and auditors.

The audit teams that have come [up] with historical cost accounting, it's a real shock to

their system, so you've got a real mix of those that try to ignore it and pretend it doesn't

exist...and that obviously doesn't work because in the end they've got to sign the account

saying it’s compliant with the standard, or the ones that do engage, and decide they've got

to get up the learning curve. It's a learning process. It makes it interesting and I do spend

a lot of my time at the director level liaising with our head of audit, and the head the

national technical to try to keep the channels of communication open.


35

Understanding Each Other’s Perspective

Prior research in auditing finds that when auditors are able to adopt specialists’ perspective,

they are better able to process the highly technical jargon in specialists’ reports. This relationship

intensifies when the presentation of the evidentiary support in the specialist’s report is more

complex (Joe, Wu and Zimmerman 2017). Specialists suggest that perspective taking could

specifically improve the expectations gap when both auditors and management make an effort to

understand valuation and show an appreciation for the value that specialists’ expertise adds to both

audit and financial reporting quality. Further, specialists acknowledge that they must also do a

better job of understanding auditors’ and management’s positions.

This [challenge within the profession] is a communication problem. It's a lack of education

and understanding problem, and in the valuation profession, they need to understand audit,

and in the audit profession they need to understand valuation.

P1 – Head of Policy – Professional Society

The expectation gap is driven by the lack of knowledge [especially for auditors more

familiar with historical cost], or the lack of wanting to engage, so they will just say, "You

can't take longer than five minutes because I think it's a waste of time anyway."


…whether you teach an accountant the technical skills or you teach them[specialists] the

accounting standards, ultimately, you're still not going to solve the problem if either one

of the outcome does not enable auditors to see the commercial realities.

P3 – Executive Director – Big4 – INTL

Auditor and Management Valuation Knowledge

Valuation specialists suggest that while management may be well-versed in the accounting

treatment of FVMs, they generally lack understanding of the underlying instruments being valued

and/or the techniques used to value them. Further, as the complexity of instruments increases,

auditors in particular may lack sufficient exposure to a particular instrument and thus fail to

understand whether the instrument and/or all its features needs to be valued (BJMS 2018). For

these reasons, both management and auditors must continue to rely on specialists.

36

BJMS (2018) note that management in the financial service industry generally has a higher

level of expertise valuing complex FIs because of greater exposure to the valuation process. When

specialists are at a resource disadvantage to such managers, it has negative implications for the

perceived quality of the specialist’s work. However, this mismatch in expertise is the exception

not the rule. Specialists note particular challenges related to disagreements about leveling, costs of

valuation services, and lack of interest in or willingness to gain a better understanding of the

valuation approach—irrespective of the fact that management must take ownership of the FVMs

reported in the financial statements.

Specialists interviewed in this study also note variations in auditors’ knowledge and

expertise related to valuation where financial service industry specialists are typically better at

evaluating FVMs, for reasons similar to management in financial services firms (Barr-Pulliam,

Joe, Mason and Sanderson 2018). For auditors, participants suggest lack of sufficient knowledge

or the willingness to learn could create confirmation bias (e.g., Jonas, Schulz-Hardt, Frey, and

Thelen 2001) and inappropriate reliance on specialists’ work. Confirmation bias is problematic for

auditors because auditors may seek to please their clients such that auditors’ preferred position is

essentially management’s (potentially aggressive) preferred position (e.g., Kadous, Magro and

Spilker 2008). The following highlight specific comments about the potential challenges that arise

when auditors and or management lack sufficient valuation knowledge and expertise.

Auditors – Minimum Level of Knowledge

I don't think there's anything wrong with [auditors] downloading appropriate models. You

can get them. The problem you've usually got is not so much around the use of the model,

it's about support for the inputs. You can’t download that stuff!

P9 – Partner – Other Annually Inspected Accounting Firm – INTL

Management – Leveling

The manager ... can value investments at whatever level he or she wants…it's their job. But

when it comes to illiquid investments like private equity or private debt, it's very judgmental

37

because there's no objective, observable data points. But of course, because he's working

for the firm, he's obviously conflicted and biased.


Management – Background and Expertise

They [management] don't see the value. They don't understand why you need to do a

CVA/DVA adjustment. They just do not get it. I think it's a conversation they don’t need to

have, they think it's a complete waste of time, means nothing.

P9 – Partner – Other Annually Inspected Accounting Firm – INTL

Auditability of Fair Value Measurements

Valuation practice leaders recognize the need for FVMs they prepare to be verifiable. They

understand that this is an important facet of the service they provide to auditors and financial

statement users, and that this is an area of opportunity. For this reason, several leaders espoused

the value that specialists having accounting and or auditing experience brings to the valuation

practice and to overall client relationships. These practice leaders acknowledge, however, the

difficulty in balancing the technical and auditing/accounting skills necessary with providing high

quality FVMs especially for FIs. The following from our interviews highlight these sentiments:

…accountancy designation definitely helps, but having audit background helps even more,

but it's fewer and fewer coming out of audits straight into valuations because we're able to

hire people directly in as graduates… You don't have to be [an accountant]. But it really

does help, because obviously for all the financial reporting work that we do [for audit

support], but also just for numerical literacy and dealing with balance sheets all the time…


I would say that it's definitely a plus if somebody that we're looking at has an accounting

background, it's because of the amount of the financial reporting work that we do. We've

found that individuals with an understanding of accounting, while it's not something that

we necessarily need in to do our work, it helps from a client relationship standpoint.


While we previously discussed that many specialists have prior accounting firm

experience, practice leaders suggest that there is a greater emphasis on hiring specialists with very

technical skill sets and who have experience with the production of FVMs for FIs. Specialists

38

meeting these criteria are less likely to have accounting firm experience. When they do have the

experience, they are highly sought after for their combined accounting and quantitative skills.

[Early on] individuals [in valuation] came from an accounting background and a lot of

them internal. As we've evolved over time, our external hires are [mostly] valuation-

specific individuals or have worked in the valuation area. They come as experienced hires.


…if we were really putting ourselves out there and selling ourselves as valuing really

complex derivatives then we would be looking more for quants, and hiring someone in from

investment banks or something like that…


Evolving Global Regulatory Initiatives

As the use of fair value in accounting has increased, many regulators such as the SEC,

PCAOB, the Prudential Authority in the UK, and the Basel Committee on Banking Supervision

have launched efforts to improve accounting, auditing, and valuation processes related to FVMs.

These efforts are in concert with financial reporting standard setters’ such as the FASB and the

IASB. The evolving global regulatory initiatives create both complementary and competing

incentives for specialists that can be problematic for the large multi-national reporting entities that

consume the services of valuation specialists to prepare FVMs, as well as for the global networks

of accounting firms that consume the services of valuation specialists to evaluate FVMs.

Our business outside of US, particularly in the UK is slightly different. In the US, we are

probably 80% financial reporting. We very much have a regulatory focus. Within the UK,

ourselves, and I suspect you'd hear the same things from the other Big4, we tend to have a

much more balanced practice. I would say you got regulatory, you've got transactional,

and then you kind of got dispute litigation.


“The reality is jurisdictional-wise, I think every country must serve the market’s needs. As

far as the U.S. is concerned it's driven by regulators, which sets what I call the minimum

threshold of what a valuer needs to possess in terms of knowledge, the skillset.”


39

5. CONCLUSION AND IMPLICATIONS

This paper investigates the organizational and professional profiles of valuation specialists

and provides insights into the challenges they face when they produce FVMs reported in the

financial statements. Whereas, prior studies examine how auditors use the work of specialists (e.g.,

Hux 2017), the challenges auditors face during these interactions (e.g., Glover et al. 2018), and

auditors’ integration of the specialists’ work when evaluating FVMs (e.g., Jenkins et al. 2017;

Barr-Pulliam et al. 2017; Griffith 2017; Joe et al. 2017), this study directly gathers specialists’

perspectives on the nature and characteristics of the valuation profession and provides unique

insights into the challenges specialists face.

We conduct a field survey of highly experienced valuation professionals, a census survey

of the key firms that provide valuation services, and we interview global and national valuation

practice leaders. Valuation professionals indicate there are several challenges facing the profession

with regard to the preparation and evaluation of FVMs. Collectively, these challenges highlight

the need for concerted efforts to improve the quality of the services provided by valuation

specialists and specialists’ relationships with their clients. Addressing these challenges could not

only improve the quality of specialists’ work product but also the quality of financial reporting and

auditing as the FVMs specialists produce are key inputs to both.

Our findings indicate that while the market for valuation specialists consists of

professionals who perform valuations across a wide cross-section of categories (i.e., business

entities, financial instruments), only a small proportion value the most complex financial

instruments. The supply of specialists who value complex FIs is concentrated in PCAOB annually

inspected accounting firms and the larger independent valuation firms. Firm specialists are

predominantly located in the largest financial centers in the U.S. and international hubs like

40

London and Hong Kong. Further, these specialists spend the majority of their time evaluating

FVMs for auditors versus preparing FVMs for management. Together, these findings suggest there

are likely geographic coverage gaps where there is a shortage of specialist services and that

management may devote less resources towards retaining the services of qualified specialists to

prepare their FVMs thereby putting increased pressure on auditors to engage competent specialists

to detect FVM deficiencies and to ensure FVMs are appropriately reported in financial statements.

We also find that specialists are concerned about how managements’ and auditors’ lack of

valuation knowledge translates into fee and service commoditization pressures and how these

factors in turn affect the quality of FVMs reported in financial statements. Through survey and

interview findings we find that specialists suggest that auditors and management do not understand

the complexities involved in providing valuation services and are reluctant to expend the resources

necessary to obtain qualified specialists to perform these services. At the same time, specialists

recognize the limited supply and tight competition to recruit and retain specialists and the high

demand for specialists with the requisite technical knowledge and skillsets. Highly qualified

specialists help auditors and managers to understand and negotiate the complex nature of the

valuation task. This shortage also contributes to the cost of valuation services. In response to these

cost constraints, valuation service providers adopt different organizational models to meet service

needs. Specialists suggest that auditors and managers respond by seeking lower quality substitutes

which can have deleterious effects on audit and financial reporting quality.

Notwithstanding auditors’ and managements’ lack of valuation knowledge, specialists

concede deficiencies in their own knowledge of auditing and accounting inhibits the quality and

auditability of the work product they produce for auditors and management. Valuation specialists

have varied backgrounds in business fields such as accounting and finance as well as in social

41

science and quantitative scientific fields such as mathematics and economics. While the profession

values specialists with highly quantitative skill sets, having accounting and auditing skill sets are

viewed as significantly beneficial to the execution of the FVM task. In particular, combined

technical and auditing/accounting knowledge helps specialists communicate their findings in a

business context to auditors and management.

Lastly, specialists perceive that the current regulatory standards promulgated by

accounting and financial reporting standards setters are misaligned with current practices in

valuation. For example, some professional organizations have initiatives in place to standardize

credentials to help consumers of valuation services to better identify high quality professionals.

Specialists assert that the valuation process is highly subjective and nuanced. Accordingly,

experience plays a greater role in predicting valuation competence than obtaining a credential

because it may create a false sense of security for auditors, management, and other stakeholders.

Our findings enhance financial statement preparer and users’, auditors’, regulators’ and

researchers’ understanding of specialists who play a critical role in the preparation and evaluation

of FVMs. The findings also lay the groundwork to interpret and assimilate fair value practices. We

provide timely insights in response to the PCAOB’s call to better understand the valuation practice

and in concert with current and proposed regulatory pronouncements around the use of specialists

by auditors and management (e.g., PCAOB 2015). In addition, the findings offer regulators and

standard-setters a mechanism to facilitate a better understanding of the nature and composition of

the valuation profession and provides a context within which to interpret specialists’ perspectives

on the inter-relationships involved in the valuation process.

Specifically for accounting and auditing research, our study adds context to recent studies

which examine how auditors use the work of valuation specialists (e.g., Asare and Wright 2017;

42

Hux 2017) but through a specialist’s lens. We also shed light on the specialist market and provide

insights into the competitive forces in the supply of valuation services to companies. Future

research can investigate how specialists’ background, demographic characteristics, and

perspectives affect their decisions and approaches to the FVM process. Studies can also investigate

changes in the valuation profession and the effects on the FVMs reported in financial statements.

43

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_____________________________________________________________________________________________________________________

(excerpt from the PCAOB’s Staff Consultation Paper 2015-01)

Specialists #1 and #2 perform work to assist the auditor. The results of their work provide audit evidence; frequently about the

reasonableness of a company's fair value measurements (FVMs). Specialists #3 and #4 are engaged or employed by the company and

generally perform work that is used by the company in preparing its FVMs and that also may be used by the auditor as audit evidence.

48

TABLE 1: Survey Participant Demographics

Panel A: Employer Type Distribution

Type of Firm Frequency Percentage

Big4 Firm 18 14.88%

Non-Big4 Firm 44 36.36%

Independent Valuation Firm 33 27.27%

In-House at Public/Private Company 26 21.49%

Total 121 100%

Definitions: Big4 Firm: Four largest global accounting firms; Non-Big4 Firm: Accounting firms other than Big4; Independent Valuation Firm: Non-

accounting firms that provide valuation services; and In-House at Private/Public Company: Financial institutions and Public/Private companies.

Panel B: Participant Country Distribution

Region Frequency Percentage

United States and Canada 101 83.47%

Europe 14 11.57%

Asia Pacific 2 1.65%

Other 4 3.31%

Total 121 100%

Notes: Countries represented in the categories are: Europe - Denmark, Germany, Greece, Netherlands, Norway, and United Kingdom; Asia Pacific

– Singapore; and Other - Australia, Brazil, and Mexico

Panel C: Gender Distribution by Employer Type

Gender Big4 Firm Non-Big4 Firm

Independent

Valuation Firm

In-House

Public/Private

Companies Total

n % n % n % n % N %

Male 12 66.67 32 72.73 24 72.73 22 84.62 92 76.13

Female 5 27.78 8 18.18 9 27.27 3 11.54 26 21.27

Prefer Not to Say 1 5.56 4 9.09 0 0.00 1 3.85 6 5.08

Total 18 100.00% 44 100.00% 33 100.00% 26 100.00% 121 100.00%

Definitions: Employer type as defined in Panel A.

49

TABLE 1: Survey Participant Demographics (Continued)

Panel D: Certification Distribution by Employer Type

Certification Big4 Firm Non-Big4 Firm

Independent

Valuation Firm

In-House

Public/Private

Companies Total*

n % n % n % n % n % 6 33.33 10 22.73 10 30.30 8 30.77 34 28.10

CPA / ACA 6 33.33 8 18.18 12 36.36 6 23.08 32 26.45

ASA 2 11.11 8 18.18 16 48.48 3 11.54 29 23.97

ABV 1 5.56 4 9.09 7 21.21 0 0.00 12 9.92

CVA 0 0.00 1 2.27 5 15.15 1 3.85 7 5.79

FRM 3 16.67 0 0.00 0 0.00 3 11.54 6 4.96

Other 2 11.11 6 13.64 12 36.36 6 23.08 26 21.49

Definitions: CFA – Certified Financial Analyst; CPA – Certified Public Accountant; ACA – Association of Chartered Accountants; ASA –

American Society of Appraisers; ABV – Accredited in Business Valuation; CVA – Certified Valuation Analyst; FRM – Financial Risk Manager;

and Other includes: Certified in Financial Forensics, Certified Investment Management Analyst, Member Appraisal Institute, Certificate in

Quantitative Finance, etc.

*Employer type as defined in Panel A. **Some participants have more than one certification.

Panel E: Degree Distribution by Employer Type

Degree

Big4 Firm Non-Big4 Firm

Independent

Valuation Firm

In-House

Public/Private

Companies Total

n % n % n % N % n %

Bachelor 9 50.00 13 29.55 9 27.27 9 34.62 40 33.06

Master 5 27.78 11 25.00 6 18.18 9 34.62 31 25.62

MBA 3 16.67 16 36.36 17 51.52 4 15.38 40 33.06

PhD 0 0.00 1 2.27 0 0.00 2 7.69 3 2.48

Other 0 0.00 0 0.00 0 0.00 2 7.69 2 1.65

Declined to Answer 1 5.56 3 6.82 1 3.03 0 0.00 5 4.13

Total 18 100.00% 44 100.00% 33 100.00% 26 100.00% 121 100.00%

50


Panel F: Valuation Experience by Employer Type

Years


Independent

Valuation Firm

In-House

Public/Private

Companies Total*

n % n % n % n % n %

5 years or less 5 29.41 15 35.71 2 6.06 7 26.92 29 24.58

6 to 10 years 6 35.29 10 23.81 5 15.15 10 38.46 31 26.27

11 to 15 years 1 5.88 7 16.67 4 12.12 4 15.38 16 13.56

Over 15 years 5 29.41 10 23.81 22 66.67 5 19.23 42 35.59

Total 17 100% 42 100% 33 100% 26 100.00% 118 100%

Definitions: Big4 Firm: Four largest global accounting firms; Non-Big4 Firm: Accounting firms other than Big4; Independent Valuation Firm: Non-

accounting firms that provide valuation services; and In-House at Private/Public Company: Financial institutions and Public/Private companies.

*Three participants did not complete this question.

Panel G: Overall Professional Experience by Employer Type

Years


Independent

Valuation Firm

In-House Public/Private

Companies Total

n % n % n % N % n %

5 years or less 2 11.11 10 23.81 2 6.06 5 19.23 19 15.97

6 to 10 years 8 44.44 8 19.05 3 9.09 2 7.69 21 17.65

11 to 15 years 0 0.00 6 14.29 3 9.09 6 23.08 15 12.61

Over 15 years 8 44.44 18 42.86 25 75.76 13 50.00 64 53.78

Total 18 100% 42 100% 33 100% 26 100% 119 100%

Definitions: Employer Type as defined in Panel A.

51


Panel H: Experience Valuing Complex Financial Instruments by Employer Type

Financial Instrument Type

Big4 Firm

Non-Big4

Firm

Independent

Valuation

Firm

In-House

Public/Private

Companies

% of Total

Participants N

= 121

n % n % n % n % n (%)

Collateralized Debt Obligations 4 22.22 6 13.64 4 12.12 8 30.77 22 18.18

Mortgage Backed Securities 6 33.33 7 15.91 3 9.09 7 26.92 23 19.01

Asset Backed Securities 4 22.22 9 20.45 3 9.09 4 15.38 20 16.53

Collateralized Mortgage Obligations 0 0.00 5 11.36 1 3.03 5 19.23 11 9.09

Synthetic Collateralized Debt Obligations 2 11.11 6 13.64 3 9.09 4 15.38 15 12.40

Complex Derivatives 9 50.00 24 54.55 13 39.39 14 53.85 60 49.59

Marketable Securities 9 50.00 25 56.82 13 39.39 14 53.85 61 50.41

Non-Marketable Securities 1 5.56 5 11.36 0 0.00 0 0.00 6 4.96

Other 3 16.67 6 13.64 10 30.30 8 30.77 27 22.31

*Some participants have experience with more than one instrument type.

Panel I: Prior Experienced as a Valuation Specialist Employed by (by Employer Type)

Prior Experience as a Valuation

Specialist Employed by… Big4 Firm

Non-Big4

Firm

Independent

Valuation Firm

In-House

Public/Private

Companies Total*

% of Total

Participants

(n=121)

n % n % n % n % N %

Big4 Firm 10 55.56 12 27.27 20 60.61 5 19.23 47 38.84

Non- Big4 Firm 3 16.67 24 54.55 10 30.30 3 11.54 40 33.06

Independent Valuation Firm 1 5.56 16 36.36 26 78.79 3 11.54 46 38.02

Financial Institution 2 11.11 8 18.18 2 6.06 20 76.92 32 26.45

Publicly Listed Company 1 5.56 3 6.82 4 12.12 3 11.54 11 9.09

Privately Listed Company 1 5.56 6 13.64 6 18.18 4 15.38 17 14.05

Definitions: Employer Type as defined in Panel A.

*Some participants have experience in multiple types of firms.

52


Panel J: Prior Experience Beyond Being a Valuations Specialist by Employer Type

Prior Experience Beyond Being a

Valuations Specialist… Big4 Firm Non-Big4 Firm

Independent

Valuation Firm

In-House

Public/Private

Companies Total*

% of Total

Participants

(N=121)

n % n % n % n % N %

Academia 2 11.11 3 6.82 4 12.12 3 11.54 12 9.92

Audit/Accounting 7 38.89 11 25.00 11 33.33 9 34.62 38 31.40

Investment Banking/Structuring 1 5.56 4 9.09 4 12.12 4 15.38 13 10.74

Portfolio Management 0 0.00 3 6.82 0 0.00 3 11.54 6 4.96

Risk Management 5 27.78 4 9.09 0 0.00 11 42.31 20 16.53

Sales/Trading Credit/Analyst 3 16.67 8 18.18 2 6.06 8 30.77 21 17.36

*Some participants have experience in multiple roles.

Panel K: Prior Experience Beyond Being a Valuations Specialist – Line of Business of Previous Employer(s) by Employer Type

Prior Experience beyond

valuation - Line of business

of previous employer(s)… Big4 Firm Non-Big4 Firm

Independent

Valuation Firms

In-House

Public/Private

Companies Total*

% of Total

Participants

(N=121)

n % n % n % n % N %

Academia 1 12.50 2 6.67 1 3.70 1 4.17 5 4.13

Accounting Firm 4 50.00 13 43.33 10 37.04 6 25.00 33 27.27

Hedge Fund/Private Equity 0 0.00 2 6.67 1 3.70 1 4.17 4 3.31

Independent Valuation Firm 1 12.50 7 23.33 8 29.63 2 8.33 18 14.88

Insurance Company 0 0.00 0 0.00 1 3.70 3 12.50 4 3.31

Investment Banking 2 25.00 5 16.67 6 22.22 8 33.33 21 17.36

Mutual Fund 0 0.00 1 3.33 0 0.00 3 12.50 4 3.31

Ratings Agency 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00

Total* 8 100.00% 30 100.00% 27 100.00% 24 100.00%

*Some participants have experience in multiple categories.

53

TABLE 2: Interview Participant Demographics

Panel A: Firm Size and Years’ Experience

Interview ID Firm Size Location Professional Title

Years with

Employer

Years

Professional

Experience

Years Valuation

Experience

P1 Professional Society US Head of Policy 6 to 10 years 11 to 15 years 11 to 15 years

P2 Independent US Managing Director 6 to 10 years 11 to 15 years 11 to 15 years

P3 Big4 INTL (APAC) Executive Director 11 to 15 years 11 to 15 years 11 to 15 years

P4 Non-Big4 INTL (UK) Director 6 to 10 years Over 15 years Over 15 years

P5 Independent INTL (UK) Managing Director 5 years or less 6 to 10 years 6 to 10 years

P6 Independent INTL (UK) Managing Director 5 years or less 5 years or less 5 years or less

P7 Non-Big4 US Partner 6 to 10 years 6 to 10 years 6 to 10 years

P8 Independent US Chief Markets Officer 5 years or less Over 15 years 11 to 15 years

P9 Non-Big4 INTL (UK) Partner 11 to 15 years Over 15 years 6 to 10 years

P10 Non-Big4 US Principal 11 to 15 years Over 15 years 11 to 15 years

P11 Big4 INTL (UK) Partner Over 15 years Over 15 years 11 to 15 years

P12 Big4 US Principal Over 15 years Over 15 years Over 15 years

P13 Non-Big4 US Partner 11 to 15 years 11 to 15 years 11 to 15 years

P14 Non-Big4 US Principal 6 to 10 years 11 to 15 years 6 to 10 years

P15 Non-Big4 US Senior Manager 5 years or less 6 to 10 years 6 to 10 years

P16 Big4 US Partner Over 15 years Over 15 years Over 15 years

P17 Non-Big4 US Partner 6 to 10 years Over 15 years Over 15 years

P18 Non-Big4 US Managing Director Over 15 years Over 15 years Over 15 years

P19 Big4 US Partner 6 to 10 years Over 15 years Over 15 years

P20 Non-Big4 US Partner Over 15 years Over 15 years Over 15 years

P21 Non-Big4 US Partner Over 15 years Over 15 years Over 15 years

P22 Independent US Partner Over 15 years Over 15 years Over 15 years

P23 Non-Big4 US Managing Director 5 years or less Over 15 years Over 15 years

54

TABLE 2: Interview Participant Demographics (continued)

Panel B: Prior Experience

Interview ID Big4 NonBig4

Independent

Valuation Firm

Financial

Institution

Publicly Listed

Company Private Company

P1 Yes No No No Yes No

P2 Yes No Yes No No No

P3 Yes No No No No No

P4 Yes Yes No No No No

P5 No No No No No Yes


P7 No Yes No No No No

P8 No No No Yes No No

P9 No No No Yes No No

P10 Yes Yes No No No No


P12 No No Yes No No No

P13 No Yes No Yes No No

P14 Yes Yes Yes No No No

P15 Yes Yes Yes No No No


P17 Yes No Yes Yes No No


P19 Yes No No Yes No No

P20 No No Yes Yes Yes No

P21 No Yes No No No No

P22 No No Yes Yes No No

P23 Yes Yes Yes NO No No

55

TABLE 2: Interview Participant Demographics (continued)

Panel C: Credentials and Levels of Valuations Prepared or Reviewed

Interviewer ID Degree Certification(s) Gender

P1 Master's Degree (MBA) CPA, CFA Female

P2 Master's Degree (MBA) - Male

P3 Master's Degree (MBA) CPA Male

P4 Master's Degree (Non-MBA) ACA Male


P6 Bachelor's Degree - Male

P7 Bachelor's Degree CPA, ASA Male

P8 Bachelor's Degree - Female

P9 Bachelor's Degree - Male


P11 Bachelor's Degree CBV Male

P12 Master's Degree (MBA) CFA Male

P13 Master's Degree (Non-MBA) CPA, CFA Male

P14 Master's Degree (MBA) MCSI Male

P15 Master's Degree (Non-MBA). ABV,CPA Male

P16 Master's Degree (MBA) CPA,Other Male

P17 Master's Degree (MBA) ASA,CFA Male

P18 Master's Degree (MBA) CA, CPA Male

P19 Master's Degree (MBA) CPA, CFA Male

P20 Master's Degree (MBA) ASA,Other Male

P21 Bachelor's Degree ASA,ABV,CPA Male

P22 Master's Degree (MBA) ASA,CPA Male

P23 Master's Degree (Non-MBA) ABV,CPA Male *Level 3 and Level 2 refer to ASC 820 Fair Value Measurement hierarchy of financial instruments.

ACA = Association of Chartered Accountants

ASA = American Society of Appraisers

CBV = Chartered Business Valuator

CFA = Certified Financial Analyst

MCSI = Competence w/MSCI research-based index

CPA = Certified Public Accountant

56

TABLE 3: Valuation Firm Survey (“Census”) Data Analyses

Panel A: Number of Valuation Professionals by Firm Type* and Valuation Category**

Firm Type and Size Total FI BVal TAN INT RE

Big4 800 45 300 75 250 150

Second Tier 275 20 90 85 40 45

Annually-Inspected 538 33 195 80 145 98

Triennially-Inspected 30 3 15 2 5 8

All Accounting Firms 368 23 135 54 98 68

Global Independent 160 39 68 26 22 15

Boutique Independent 45 30 16 0 11 0

All Independent Firms 103 35 42 13 17 8 *Firm types include accounting and independent valuation firms. Firm size follows the PCAOB Inspection frequency which includes annually inspected (at least

100 issuer clients) and triennially inspected (fewer than 100 issuer clients). Big4 and Second Tier firms comprise the annually inspected firms. Global and Boutique

independent valuation firms differ based on their presence across the globe where boutique firms a smaller and have a local or regional presence.

**Categories of valuations include financial instruments (FI), business valuation (BVal), tangible property (TAN), intangibles (INT), and real estate (RE). Because

specialists may value more than one category, totals across categories may not equal the firm total.

Panel B: Allocation of Time (Percentage) in the Preparation versus Evaluation Roles*

Firm Type and Size** Evaluation Role (Channel 1) Preparation Role (Channel 2) Other

Big4 50.00 30.00 20.00

Second Tier 30.00 52.50 17.50

Annually-Inspected 40.00 41.25 18.75

Triennially-Inspected 16.86 37.14 46.00

All Accounting Firms 29.20 39.33 31.47

Global Independent 12.00 80.00 8.00

Boutique Independent 33.75 46.25 20.00

All Independent Firms 21.67 65.00 13.33

OVERALL 26.38% 48.96% 24.67% *Specialists prepare fair value measurements (FVMs) for management (Channel 1) and evaluate FVMs for auditors (Channel 2). The “other” category includes

time spent in other consulting roles indirectly related to Channels 1 or 2.

**Firm types as previously described.

57

TABLE 3: Valuation Firm Survey (“Census”) Data Analyses (continued)

Panel C: Allocation of Time Across the Preparation versus Evaluation Roles by Category*,**

Evaluation Role (Channel 1) Preparation Role (Channel 2)

FI BVal TAN INT RE Other FI BVal TAN INT RE Other

Big4 15.00 8.50 7.00 40.00 15.00 15.00 8.00 15.00 7.00 40.00 15.00 15.00

Second Tier 29.17 28.17 6.75 11.42 4.75 - 20.09 33.58 8.00 19.08 3.50 -

Annually-Inspected 22.08 18.33 6.88 25.71 9.88 7.50 14.04 24.29 7.50 29.54 9.25 7.50

Triennially-Inspected 19.67 13.14 4.71 8.57 2.71 9.29 19.00 35.00 15.00 17.86 13.00 37.29

All Accounting Firms 21.05 15.91 5.87 17.71 6.53 8.33 16.36 29.29 11.00 24.09 11.00 21.40 *Specialists prepare fair value measurements (FVMs) for management (Channel 1) and evaluate FVMs for auditors (Channel 2). The “other” category includes

time spent in other consulting roles indirectly related to Channels 1 or 2.

** Categories of valuations include financial instruments (FI), business valuation (BVal), tangible property (TAN), intangibles (INT), real estate (RE) and Other.

***Firm types as previously described.

Panel D: Valuation Revenue and Hours at the Firm Level* and Within Categories** (Percentages)

Revenue Hours

Firm Types*** Firm FI BVal TAN INT RE Other Firm FI BVal TAN INT RE Other

Big4 2.00 8.00 15.00 7.00 40.00 15.00 15.00 2.00 8.00 15.00 7.00 40.00 15.00 15.00

Second Tier 1.68 21.59 44.08 8.00 19.08 7.25 - 1.70 21.42 43.92 9.83 16.42 8.43 -

Annually-Inspected 1.84 14.79 29.54 7.50 29.54 11.13 7.50 1.85 14.71 29.46 8.41 28.21 11.71 7.50

Triennially-Inspected 5.14 11.86 25.29 6.43 10.00 8.50 34.25 5.00 15.43 14.57 7.17 7.86 8.83 24.25

All Accounting Firms 3.38 13.42 27.56 7.00 20.42 10.00 16.42 3.32 15.04 22.51 7.88 18.71 10.48 13.08

Global Independent 58.00 - - - - - - 58.00 - - - - - -

Boutique Independent 100.00 54.25 26.50 0 15.00 1.25 3.00 100.00 25.00 13.75 0 10.00 0 1.25

All Independent Firms 76.67 54.25 26.50 - 15.00 1.25 3.00 76.67 25.00 13.75 - 10.00 - 1.25

OVERALL 30.86 22.02 27.33 5.53 19.28 8.06 13.06 30.83 17.14 20.67 6.13 16.88 8.15 10.13 *The “Firm” column reports the percentage of all valuation revenue (hours) as a percentage of all firm revenues (hours). Blanks (-) suggest that firms inconsistently

reported revenue or hours for this cell; consequently, totals exclude those firms as necessary.

** For each of the categories of valuations which include financial instruments (FI), business valuation (BVal), tangible property (TAN), intangibles (INT), real

estate (RE) and Other; the value reported describes the percentage of all valuation only revenue each represents.

***Firm types as previously described.

58

TABLE 3: Valuation Firm Survey (“Census”) Data Analyses (continued)

Panel E: Tests of Perceived Sufficiency of Specialists Who Value Financial Instruments

Firm Type and Size* Mean** t-Statistic p-Value***

Big4 4.75 -0.88 .222

Second Tier 3.25 -9.00 < .001

Annually-Inspected 4.00 -3.00 .010

Triennially-Inspected 4.29 -2.00 .045

All Accounting Firms 4.13 -3.63 < .001

Global Independent 3.80 -2.56 .031

Boutique Independent 5.25 -0.29 .395

All Independent Firms 4.44 -1.90 .045

OVERALL 4.25 -4.05 < .001 *Firm types include accounting and independent valuation firms. Firm size follows the PCAOB Inspection frequency

which includes annually inspected (accounting firms with at least 100 issuer clients) and triennially inspected (firms

with fewer than 100 issuer clients) accounting firms. Big4 and Second Tier firms comprise the annually inspected

firms. Global and Boutique independent valuation firms differ based on their presence across the globe where boutique

firms a smaller and have a local or regional presence.

**Firm-level response to the following prompt: “Please indicate your assessment of the number of qualified

professionals in the overall market available to prepare and/or review financial instruments.” Participants respond

using a 10-point Likert-type scale anchored on 1 (significantly fewer than needed) and 10 (significantly more than

needed).

***one-tailed p-values for the test of whether each mean is significantly lower than the scale midpoint.

59

FIGURE 2A: Allocation of Specialists’ Time across Types of Valuation (Preparation Role)*

FIGURE 2B: Allocation of Specialists’ Time across Types of Valuation (Evaluation Role)*

*Aggregate percentages for all firms. Specialists prepare fair value measurements (FVMs) for management

(Preparation) and evaluate FVMs for auditors (Evaluation). All firms provided complete data on this question.

Definitions: Examples in each category include Financial Instruments (e.g., Derivatives, Securities, Equity

Compensation); Business Valuation (e.g. Purchase Price Allocations); Tangible Property (e.g. Machinery, Equipment,

Computers); Intangible/Intellectual Property (e.g., Goodwill, Patents, Customer Lists); and Other includes expert

witness and divorce settlements.

60

FIGURE 3A: Global Presence of Specialists (Accounting Firms)*

FIGURE 3B: Global Presence of Specialists (Independent Valuation Firms)*

*This figure reports the percentage of firms (aggregated by types) that employ specialists in each region. Because

some firms provided incomplete data, we use a dichotomous variable to signal absence (coded as 0) versus presence

(coded as 1) in each region rather than the actual number of professionals. For missing totals, we hand collect the data

from each firms’ publicly available information on its website.

61

FIGURE 4: Certifications Considered for Hiring and Promotion*

*This figure reports the certifications that both accounting and independent valuation firms consistently regard as a

signal of competence during hiring and promotion decisions. The values are presented in relation to one another and

are not intended to equal 100%. The “Other” category includes certifications such as the Certified Fraud Examiner

(CFE), Certified Internal Auditor (CIA) and the Financial Risk Manager (FRM). All firms responded.

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