CVA common mistakes
CVA · Understand the traps and how to avoid them.
Computing a capitalization rate by adding the growth rate to the discount rate instead of subtracting it (or applying the Gordon growth model with the wrong sign), producing a cap rate that is too high and a value that is too low.
Candidates memorize 'cap rate = discount rate minus growth' as a phrase but reconstruct it from memory under time pressure, and the single-step arithmetic error is invisible because the resulting value still looks plausible.
What to do instead
Before finalizing, re-derive the relationship from first principles: value grows with the growth rate, so the cap rate must fall as growth rises. Sanity-check with a two-year example-grow next year's cash flow, discount it, add a terminal value-and confirm the implied multiple matches the cap rate you used.
Mixing pre-tax and after-tax inputs within one valuation, for example applying a pretax discount rate to after-tax cash flows or adding back depreciation without the related tax shield.
The income statement presents pretax figures prominently, and candidates pull the first cash-flow number they see without tracing whether the discount rate was built on a pretax or after-tax basis.
What to do instead
State the tax convention explicitly at the top of every calculation and label each input as pretax or after-tax. Build the discount rate and the cash flows in the same column of the worksheet so a mismatch is visually obvious, and reconcile to a known after-tax figure before finalizing.
Selecting guideline companies or transactions on the basis of industry label alone, without testing size, growth, margin, capital structure, and marketability comparability, then applying the resulting multiples without adjustment.
Database screening tools return a list quickly, and candidates treat the screen output as the finished comparable set rather than a starting point requiring judgment.
What to do instead
For each selected company, document at least three quantitative comparability criteria and one qualitative rationale, and either adjust or exclude outliers. Show the multiple range, the median, and the reason for the chosen point within the range.
Applying a discount for lack of marketability and a discount for lack of control as if they were additive and independent, or applying a control premium to a minority interest value.
Each adjustment has a familiar name and a familiar percentage, so candidates stack them mechanically without asking whether the base value already reflects the factor being adjusted.
What to do instead
Map each adjustment to the valuation base it modifies: control premium and DLOM operate on different bases and should not be compounded blindly. Test the direction-if the subject interest is already a minority interest, a control premium is inapplicable-and document the order of application with a short rationale.
Computing a damages figure as the difference between actual results and a projection without establishing a reliable but-for baseline or addressing mitigation, causation, and the time value of money.
The arithmetic of 'expected minus actual' is simple and satisfying, and candidates stop there because the litigation framing invites a single number rather than a defensible model.
What to do instead
Build the but-for scenario from contemporaneous evidence rather than a single optimistic forecast, present a range, and explicitly address mitigation offsets, causation, and present value to the date of loss. State the assumptions in a short exhibit so the opposing expert's attack surface is visible to you first.
Offering expert opinions on ultimate legal conclusions-whether a party breached a contract, committed fraud, or is liable-rather than on the financial and accounting questions within the expert's competence.
The engagement letter and the attorney's questions are framed in legal terms, and candidates answer the question as asked instead of translating it into an admissible opinion.
What to do instead
Restate each assignment as a financial question before drafting: 'what is the amount of the loss' rather than 'did the defendant cause the loss'. Keep conclusions tied to methodology and data, and let counsel draw the legal inference.
Relying on a damages or valuation model in litigation without testing it against the underlying records, so the expert report is internally consistent but unsupported by source documents.
Spreadsheet models look authoritative, and candidates spend their time on model construction rather than on tracing inputs to invoices, ledgers, and bank statements.
What to do instead
Maintain an input-to-source tie-out schedule for every material figure, cite the document and page for each, and flag any input that cannot be traced. Treat untraceable inputs as excluded or as a sensitivity case rather than as base-case fact.
Concluding that fraud occurred on the basis of anomalies alone-round-number payments, a missing approval, a lifestyle inconsistent with salary-without eliminating alternative explanations or establishing intent and concealment.
Forensic tools surface outliers, and outliers are memorable; the leap from anomaly to intent is emotionally easy and analytically unjustified.
What to do instead
For each indicator, write the benign alternative explanation and the test that would distinguish it, then run the test. Present findings as indicators or as established facts depending on the evidence, and reserve the word fraud for cases where intent and concealment are supported.
Performing a bank reconciliation or tracing exercise that stops at the bank statement, without following items to the general ledger, subsequent-period clearance, or the source documents behind the entries.
The bank statement is the most trusted-looking document in the file, and candidates treat agreement to it as the end of the procedure rather than the middle.
What to do instead
Trace each reconciling item in both directions: from bank to books and books to bank, and through to subsequent-period clearance. Document the source document for every adjustment and quantify any item that remains unexplained after the search.
Presenting a financial consulting deliverable-a forecast, a capital structure recommendation, or a transaction opinion-without stating the scope, the basis of assumptions, and the limitations, so the client reads more certainty into the work than it supports.
The analytical work is the visible effort, and the engagement letter's scope language feels like boilerplate to reproduce rather than a substantive part of the deliverable.
What to do instead
Draft the scope, key assumptions, and limitations section before the analysis, then revisit it at the end to confirm the assumptions actually used. Distinguish clearly between what was tested, what was assumed, and what was outside scope.