January 21, 2014 Articles

An Overview of the USPAP

Knowledge of these standards can assist counsel in working with a valuation expert—and avoiding a successful Daubert challenge.

By Boris Steffen

Whether they are asked to value a business, an interest or claim, or a security or intangible asset, valuation professionals are frequently retained to testify or consult across a wide variety of disputes relating to antitrust and competition policy, bankruptcy and restructuring, commercial contracts, damages, international arbitration, mergers and acquisitions, and securities, among other matters. To be effective and, in the worst case, to avoid the unpleasant consequences of a successful Daubert challenge, experts belonging to one or more of the organizations that have adopted professional standards of conduct and of how an appraisal is to be performed and reported must understand and comply with those standards, while experts not so affiliated are wise to follow the guidance provided by the standards as a model of best practices. Moreover, an awareness and understanding of valuation standards can be invaluable to counsel in selecting, working with, and supporting or opposing a valuation expert.

The development and formal codification of valuation standards used in practice today can be traced to the savings-and-loan (S&L) crisis of the 1980s. S&Ls had made loans based on property appraisals in which the appraised values greatly exceeded the values realizable against the property. When the loans defaulted, the S&Ls incurred significant losses, which, together with spiraling interest rates and the practice of financing long-term assets with short-term liabilities, contributed to the greatest failure of financial institutions since the 1930s, with 296 institutions holding $125 billion in assets being closed or resolved between 1986 and 1989, along with the insurer of the thrifts, the Federal Savings and Loan Insurance Corporation. An additional 747 thrifts holding $393 billion in assets were closed or resolved by the Resolution Trust Corporation between 1989 and 1995.

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