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CPAs Dabbling is Russian Roulette with 5 Bullets - Part 4


     By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness

PhoneCall Lance Wallach, Expert Witness Carl Lloyd Sheeler, PhD, ASA, CBA, CVA at (516) 938-5007


In Part 3: we addressed that having an advanced accounting degree is not the same suite of skills as full time practice in a niche, such as business valuation.
In Part 1, we covered the inadequacy of education and experience by the CPA is considered dabbling and an ethical breach or worse by the AICPA, IRS and the Courts which most E&O will not cover. In Part 2: we contrasted a prudent CPA firm that outsourced work when it conflicted and the consequences of a CPA who had “followed the steps” in applying a valuation discount, but was penalized for dabbling due to lack of support. In Part 3: we addressed that having an advanced accounting degree is not the same suite of skills as full time practice in a niche, such as business valuation.

But I have 42 years as an accountant. Often what is not done is as tragic as what is. Sadly, it is not uncommon for a CPA practitioner to make representation that blurs their niche experience. It may be I have 42 years of tax, compilation, audit and valuation experience. Lost is that the first two represent 36 years, the third represents five years and as an aggregate the last represents one year of experience.

So, how does this harm the client? It can be in a myriad of ways by inferring a level of skills that at best are insufficient and at worst are disastrous. So, Mr. /Ms. CPA, I have noted the client previously made an “S’ election a few years back and was previously a “C” corp. Can you provide the basis for the company’s value at the time of election? Book value you say?! So, there is no company goodwill? There is??? Okay, you’re saying that the value was book value plus 2x EBITDA. Can you send us a qualified appraisal report? Why am I asking? It sounds like you’re quoting a rule of thumb. Okay, I understand. You’re saying since you have had similar clients during the years the rule of thumb (“ROT”) holds true. What is the based upon? So, if I understand you, you’re saying that two identical companies with identical sales and profits in the same location would be valued the same in early 2009 as they would in early 2007?

So, you’re saying the fact that there was no capital for financing and no buyers in the latter period that this would have no impact? That’s not what you’re saying?! Maybe I can ask the question differently, since we seem to agree that the date of value matters. So you have two companies with the same profits and same book value in the same industry in the same market at the same time, but Company A has twice the sales as Company B. Are you saying their values are the same? So, clearly Company B must have less debt if it’s half the size and much more efficient use of capital, Correct? And buyers of Company A may be more interested in its revenues knowing they can curtail its expenses, so are willing to pay more than 2x EBITDA. So, maybe using ROT is not a qualified appraisal.

Since we’re discussing this, can you explain why you didn’t make an officer’s compensation adjustment because based upon the company size, the owner/shareholder should have been compensated 3x what they were based upon industry norms. So, why again is this not a disallowed distribution along with the $700,000 shareholder loans where there are no notes or repayment history? Come to think of it, can I transfer you to our C.I.D. unit? Your realize tax avoidance is your client’s right, but evasion is a crime?!

Dabbling in valuation is akin to performing surgery after watching E.R. reruns. Looks easy. It’s not.

ABOUT THE AUTHOR: Lance Wallach, Expert Witness Carl Lloyd Sheeler, PhD, ASA, CBA, CVA
Lance Wallach, National Society of Accountants Speaker of the Year and Member of the AICPA faculty of teaching professionals, is a frequent Speaker on retirement plans, abusive tax shelters, financial, international tax and estate planning.

Dr. Sheeler, National Managing Partner, Business Valuations, Ltd. has 20+ years of full-time BV expertise and is an industry thought-leader having trained thousands of valuation practitioners in complex matters involving discounting of equity interests and valuing larger midmarket companies.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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