International standards with teeth build public confidence
The business world is shrinking as businesses in every sector make the shift from regional market participants to international companies.
1 FEB 2019
Prominent members of the business valuation community met in Hong Kong late last year at a roundtable organized by IVSC and RICS to discuss challenges the sector is facing. The discussion raised issues that are all too familiar to the North American valuation industry. Regulators are pointing out shortfalls in both performance and ethics, particularly on the lack of independence between valuers and clients.
Leaders from the accounting, valuation, audit and business advisory sector, and regulators, professional bodies and business chambers were invited to discuss the state of business valuation practice in Hong Kong and the creation of an action plan for a ‘framework’ to support professionalism and standards for the sector.
Globally, the increasing volume and complexity of business valuations and intangibles has left the sector with a gap in qualified valuation practitioners and a gap in service standards among certain segments of the market. The increasing demand is led by increases in corporate transactions including mergers and acquisitions and divestitures compounded with the rise in fair value measurements used in financial reporting.
RICS are working with several organizations in the United States to finalize a solution through the use of a Mandatory Performance Framework as well as the specialized training and recognition for those who have the knowledge and experience to perform business valuation. Valuation professionals who have demonstrated their proficiency in performing valuations for financial reporting purposes are now distinguished from their peers as Certified in Entity and Intangible Valuations (CEIV). The uniqueness of this credential is its ongoing proactive risk-based quality assurance program to guide and enforce mandatory performance requirements and strengthen regulator confidence and public trust.
In Hong Kong, the lack of professional identity and oversight of business valuers has created an image of the sector that is hostage to the reputation of its lowest performers.
A climate of mixed performance requires duplication of efforts by company directors, financial advisors, auditors and regulators to screen questionable work product, spreading the costs and responsibilities for businesses across a variety of advisors, each struggling to take adequate responsibility for their own performance.
Auditors are heavily relied upon to identify issues, yet they lack the proper valuation training to employ effective professional scepticism. Company directors, sometimes lacking proper understanding of their duties and knowledge of intangible valuation, do not effectively question reports.
Lack of consequences for poor performance across all responsible parties, including limited regulation and a non-litigious environment, fails to foster high performance in Hong Kong. More alarmingly, this creates a false sense of assurance in the minds of valuers that their performance is satisfactory. This contrasts with other competing countries in the region who have either taken action in relation to Business Valuation or have begun to develop an approach to provide confidence to investors and attract foreign direct investment.
There was consensus that the professional bodies should take responsibility for creating a solution that would have the credibility and balance of independence that will be accepted by the market and can be recognized by regulators, thereby creating the right value proposition.
The valuation sector in Hong Kong, in general, should have robust entry qualification requirements, professional, technical and performance standards for valuation professionals to follow, on-going education for experienced professionals, and a robust quality assurance program to ensure professionals are complying with the standards.
RICS and IVSC are collaborating with other professional bodies and subject matter experts to create a recognized ‘business valuation profession’ in Hong Kong. The CEIV credential offers a potential blueprint for professionalism. Although the credential is specific to business valuation professionals performing fair value measurements for SEC-registered companies, other markets may be able to use or adjust this ‘framework’ to ensure quality valuations in their market.
This course is fully iPad accessible
When the 2008 global financial crisis shook the collective confidence in the financial banking system, regulators turned to valuation professional organizations to bring more clarity and regulation to financial reporting of valuations of businesses and intangible assets.