The Report That Said Too Much
You deliver a valuation report for a lender considering a loan secured by a private company's shares. The engagement letter specified a calculated value (not a conclusion of value) for internal lending purposes, and stated the report would not be for third-party reliance. The final PDF, however, contains: a single point estimate presented as 'the value'; no statement of the standard of value; no disclosure that the analysis was limited and no site visit was performed; an unsigned certification page; and an appendix reproducing a competitor's published transaction multiples without citation. The lender's credit officer forwards the report to a regulator as part of an examination. The client is now upset that the report 'looks preliminary' and asks you to reissue it as a full appraisal with a higher value.
1. Identify each reporting deficiency and the standard or principle it violates.
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Deficiencies and the principles at stake:
- Calculated vs. conclusion of value mislabeled. The engagement specified a calculated value (limited scope, no conclusion of value), but the report presents a single point estimate as 'the value.' This misrepresents the level of service and misleads readers about reliability.
- No standard of value stated. Readers cannot tell whether the number is fair market value, fair value, investment value, or liquidation value. This is a fundamental disclosure failure.
- No scope/limitation disclosure. No site visit, limited procedures, and no statement that the analysis is restricted - readers may over-rely.
- Unsigned certification. The certification (assumptions, independence, no contingent fees) is a core element of a credible report; an unsigned page undermines it.
- Uncited third-party data. Reproducing a competitor's multiples without attribution raises both accuracy and plagiarism/IP concerns.
- Third-party reliance mismatch. The engagement barred third-party reliance, yet the report circulated to a regulator. The report should have stated the restriction prominently.
Each item should be corrected and the correction documented.
2. The client demands you reissue as a full appraisal with a higher value. How do you respond, and what would you require before any reissuance?
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Decline to raise the value to order. Value must be supported by evidence, not by the client's preference; adjusting the number to satisfy the client would compromise objectivity and independence and could constitute misrepresentation.
A defensible path:
- Explain the difference between a calculated value and a conclusion of value, and that upgrading the engagement requires additional procedures (site visit, management interviews, expanded market research, corroboration) and a new or amended engagement letter with revised scope and fee.
- If the client wants a full appraisal, perform the work; the resulting value may be higher, lower, or the same - and you will report whatever the evidence supports.
- Before reissuing, correct all deficiencies: state the standard of value, disclose scope and limitations, sign the certification, cite all third-party data, and state reliance restrictions.
- Notify the client in writing that the prior report circulated without the reliance restriction and recommend the regulator be informed of its limited scope.
Document the client's request and your refusal to adjust value to instruction.
3. What should you do about the report already in the regulator's hands?
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Take active steps rather than waiting:
- Notify the client in writing that the report was issued as a calculated value with limitations and that circulation to a third party (the regulator) was outside the stated reliance restriction.
- Prepare a supplement or corrected report that clearly states the level of service, standard of value, scope limitations, and reliance restrictions, and that the earlier document should be read together with it (or superseded).
- Do not alter the underlying value unless new evidence supports a change; a correction of disclosure is not a re-valuation.
- Cooperate with the regulator if contacted, providing the corrected document and explaining the engagement scope.
- Review internal QC - how did an unsigned, uncited, mislabeled report leave the firm? Fix the review process.
Maintain confidentiality obligations to the client while being truthful to the regulator. Document every communication.