CVA (Mile2 Cybersecurity Certifications) common mistakes
CVA · Understand the traps and how to avoid them.
Applying a control premium or discount for lack of marketability to a minority interest without first testing whether the valuation premise is controlling or minority, and then stacking the two adjustments on the same base value.
Candidates memorize adjustment lists (DLOM, DLOC, control premium) as a checklist and apply them mechanically instead of deriving them from the standard of value, the subject interest's rights, and the valuation premise. The exam deliberately supplies facts that make one adjustment redundant or double-counted.
What to do instead
Before any adjustment, write down the standard of value, the interest level, and the premise (controlling vs. minority, marketable vs. non-marketable). Then ask whether each adjustment is already embedded in the base (e.g., guideline public company multiples are minority/marketable; M&A transaction multiples are controlling). Only apply adjustments that move the base value to the subject's actual rights and marketability, and state the direction and magnitude rationale in one sentence each.
Selecting the capitalization or discount rate by averaging whatever rates appear in the fact pattern, or using a build-up model rate for a controlling interest while also applying a size premium and a company-specific premium that duplicate the same risk.
Candidates treat the discount rate as a plug to reach a 'reasonable' value rather than a build-up from a defined model. They also forget that the build-up method is for minority interests and that the size premium and company-specific risk premium must be justified by distinct, non-overlapping evidence.
What to do instead
Pick the model first (CAPM, modified CAPM, or build-up), then list each component and the source of its input. Tie the choice to the interest being valued: build-up for minority/non-marketable, CAPM-based for larger marketable interests. Reconcile the rate to the implied multiple and to any guideline-company-implied rate; if the implied multiple is far off, revisit the inputs rather than averaging.
Normalizing earnings by adjusting for one-time items but failing to adjust owner compensation to market, related-party rent, or non-operating assets and liabilities before capitalizing.
Candidates focus on obvious non-recurring items (lawsuit settlement, gain on sale) and stop there. The exam includes owner-compensation and related-party lease facts that require a two-step normalization: adjust the expense to a market rate, then remove the non-operating asset from the operating base and add it back separately.
What to do instead
Build a normalization worksheet with columns for reported, adjustment, and normalized. Run through a fixed checklist: owner/officer compensation to market, related-party transactions to arm's-length, non-recurring revenue and expense, non-operating assets/liabilities, inventory accounting, and taxes. Add non-operating assets at fair value after the operating value is determined, and document each adjustment's basis.
Treating the income, market, and asset approaches as interchangeable and reconciling by simple average, rather than weighting by relevance to the subject company and explaining why a method was excluded.
Candidates believe a valuation must use all three approaches and that equal weighting looks balanced. In practice, for an operating company with reliable projections, the asset approach may be a floor check only; for a holding company, it may dominate. The exam rewards reasoned exclusion and weighting.
What to do instead
State for each approach whether it was applied, and if not, why (e.g., no comparable transactions, asset approach not relevant to an operating enterprise). When reconciling, assign weights based on data quality and relevance, and support the weights with the reliability of inputs (e.g., management projections vs. guideline transactions). Show the weighted result and a sanity check against a market-derived multiple.
Confusing the valuation date with the report date and using post-valuation-date information (a later sale, a subsequent financing round, hindsight litigation outcome) in the analysis.
Candidates read the whole fact pattern as a single block and incorporate every fact, not noticing that some facts are dated after the valuation date. The exam plants a subsequent event to test whether the candidate anchors to what was known or knowable at the valuation date.
What to do instead
On the first read, highlight every date in the prompt and build a timeline with the valuation date marked. Classify each fact as known at the valuation date, knowable, or hindsight. Exclude hindsight facts from the value conclusion; if you mention them, label them as a reasonableness check only, not as an input.
Computing a damages figure as the difference between 'but-for' and 'actual' values without specifying the measurement period, discounting to present value at the correct date, and avoiding double recovery with other claimed damages.
Candidates jump to the arithmetic (but-for minus actual) and treat the result as the answer. The exam tests whether the candidate identifies the loss period, the discount rate and date, mitigation, and whether the damages overlap with a separate claim (e.g., lost profits plus diminished business value for the same harm).
What to do instead
Lay out four elements explicitly: the but-for scenario, the actual scenario, the loss period, and the discounting convention (rate and date). Then test for overlap: lost profits during the period and a terminal value reduction cannot both capture the same lost cash flow. State mitigation assumptions and any tax effects. Present the calculation as a schedule so the examiner can follow each line.
Using a discount rate in a lost-profits or damages model that is inconsistent with the risk already embedded in the projected cash flows, or discounting a risk-adjusted 'but-for' projection at the entity's WACC.
Candidates apply the same WACC they used in the valuation to every damages scenario. But a but-for projection that is already probability-weighted or that assumes a specific outcome is less risky than the entity as a whole, so using WACC double-counts risk and understates damages. Conversely, an unadjusted projection discounted at a risk-free rate overstates them.
What to do instead
Decide first whether the projection is expected-value (risk-adjusted) or a single deterministic scenario. If risk-adjusted, discount at a rate reflecting only time value and perhaps counterparty credit; if deterministic, use a rate reflecting the specific project risk. Document the choice and show a sensitivity table so the examiner sees the effect of the rate assumption.
Accepting a financial statement figure or a management representation at face value in a forensic engagement without testing for the fraud risk factors and without tracing to source documents.
Candidates treat the forensic portion like a valuation exercise where the statements are the starting point. In forensics, the statements are the subject of inquiry; the exam includes red flags (round-number journal entries, unusual related-party activity, revenue recognized at period end) that require the candidate to identify the anomaly and the corroborating procedure.
What to do instead
For every material figure, name the assertion at risk and the procedure that addresses it: trace to bank statements, confirm with third parties, examine journal entries around period end, and analyze related-party transactions. When a red flag appears, state the specific fraud scheme it suggests (e.g., premature revenue recognition, asset misappropriation) and the test that would detect it.
Conflating the roles of the forensic accountant and the valuation analyst, and opining on legal conclusions (e.g., 'the defendant committed fraud') rather than on financial matters within the expert's scope.
Candidates blur the engagement: they think being an expert means answering the ultimate legal question. Courts and examiners distinguish the financial expert's opinion (e.g., 'the accounting records are inconsistent with the reported revenue') from the legal conclusion, which belongs to the trier of fact.
What to do instead
Before writing the opinion, restate the engagement scope and the specific questions the expert was asked. Frame conclusions in financial terms and stop short of legal conclusions; where the law supplies a definition (e.g., 'intent to deceive'), explain the financial evidence that bears on it without declaring the legal result. Note any assumptions or limiting conditions.
Ignoring the standard of value and the applicable definitional authority (fair market value, fair value, investment value) and using the wrong premise or the wrong tax treatment for the engagement.
Candidates treat all 'value' as the same and default to fair market value. The exam varies the standard (e.g., fair value for financial reporting, fair market value for tax, investment value for a specific buyer) and the answer changes with the standard, the premise, and whether the valuation is on a controlling or minority basis.
What to do instead
At the top of every answer, quote or paraphrase the applicable standard of value and its source (e.g., IRS Revenue Ruling 59-60 for fair market value, ASC 820 for fair value). Then state the premise and interest level that follow from it, and confirm that the selected methods and adjustments are consistent with that standard. If the standard is ambiguous in the prompt, state the assumption you are making and why.