Before I get started on discussing the subject at hand, I acknowledge that “verbal” is not the correct word to use in this context. However, given the connotations surrounding the correct word, which shall remain nameless in this blog, please note that I chose “verbal” knowing full well that my high school grammar teacher would be rolling in his grave…
So on to the topic for today’s blog, which is the use and non-use of “verbal” reports. It is not uncommon in collaborative files involving the use of business/asset valuators (CBVs) on the team to discuss the possibility of engaging the CBV to prepare a “verbal” report rather than a written report. The primary objective of such a discussion is usually to reduce costs, which, of course, is an important objective. However, in my experience, it is not as simple of an equation as “verbal” equals cheap. While “verbal” reporting can be effective in certain limited situations, the selection of a “verbal” report may, in fact, increase team costs and affect the timeliness of a collaborative file completion. Before going further along the pro/con analysis, let’s review what the CBV Institute has to say about the use of “verbal” reporting.
The Practice Standards of the CICBV dictate what must be included in a valuation, expert, limited critique or other type of report. For example, Practice Standard No. 110 defines a valuation report as “any written communication containing a conclusion as to the valuation of shares, assets or an interest in a business, prepared by a Valuator acting independently”. Practice Standard No. 310 defines an expert report, which is typically used for income analyses in family law matters, as “any written communication other than a Valuation Report, containing a conclusion as to the quantum of financial gain/loss, or any conclusion of a financial nature in the context of litigation or a dispute, prepared by an Expert acting independently.” These practice standards state that valuation and experts report “do not include work product that is in the process of being completed that is provided to a client or knowledgeable third party in circumstances where each of the following conditions are met: (i) the work product is clearly marked as being in draft form and subject to change; (ii) the work product is issued for the purpose of obtaining comment, instruction, confirmation or other information required to complete the [Valuation or Expert] Report; (iii) the [Valuator or Expert] knows, or reasonably out to know, that the intended reader(s) does not intend to rely on the work product or distribute the work product to a third party who may in turn rely on the work product; and (iv) the [Valuator or Expert] has a reasonable expectation at the time the work product is provided that a [Valuation or Expert] Report will be completed and issued in due course.” As further guidance on the issue, Practice Bulletin No. 5 clarifies that the reporting standards contained in Practice Standard No. 110, 310, etc. do not apply when conclusions are not written or are used internally.
So how to translate those standards? In brief, there are only three situations when a full report complying with the CICBV’s Practice Standards does not have to be issued when a conclusion (value, income, etc.) is provided:
When the conclusion is not in writing
When the conclusion is issued internally and not to third parties
When a draft report is issued, and the mandate is terminated prior to issuance of the final report.
Point #1 above is what has given rise to the use of “verbal” reports in collaborative files. The CBV Institute is live to concerns relating to the use of “verbal” reports and recently issued guidance in a member e-blast on April 8, 2021 including a reminder that Zoom and other meetings can easily be recorded. The e-blast specifically referred to collaborative situations and stated that “[v]erbal conclusions are not prohibited, however Members are reminded that a verbal communication containing a conclusion should be approached with care and caution. If a client is asked for a “number” verbally, the Member should act as if the conclusion will be relied upon, and as such, that conclusion needs to be supported and the work underpinning the conclusion must adhere to the standards”. In other words, regardless of whether or not a valuator or expert is engaged to provide a “verbal” or written report, that valuator is subject to the same due care requirements of the Code of Ethics of the CBV Institute. The e-blast stated “[f]or Members’ own protection, any verbal conclusions communicated to clients should be supported by the same level of diligence, analysis and scope of work as would otherwise be the case if the conclusion was transmitted in written format. It would also be prudent to follow up any verbal conclusions with the appropriate Valuation Report or Expert Report, in writing, to prevent miscommunications or misunderstandings”
So the first question is are there any circumstances when the use of “verbal” reports would be appropriate? In my view, the answer is yes but in very limited circumstances. I have found them helpful when communicating and illustrating the basics of valuation and income analyses, particularly when one or both of the parties are not financially sophisticated, and when the valuation issues in a file are relatively insignificant and low risk (e.g., independent contractor situation when no intangible assets exist and no latent/contingent tax issues).
And the second, and often most important, question is this: How much of a cost savings will there be on a file if a valuator must complete the same level of research and analysis regardless of whether a “verbal” or written conclusion/opinion is provided? The only savings, in theory, will be the drafting of a written report. While there is certainly a cost to prepare a report, depending upon the situation, that cost may not be significant, particularly when one considers the cost of the other team members’ time to scrupulously copy down what a valuator says during their “verbal” presentations, the number of times that team members may need to go back for clarification on points raised during a “verbal” presentation, etc. In my experience, those costs can far outweigh the cost of a valuator compiling a basic report, even a calculation level report, that provides explanations of their calculations for all parties to review and re-review as needed. And, of course, parties often have one or more “advisors” in the background (sometimes they may be more appropriately called the “Greek Chorus”), whether they are professionals, family members or friends. Without value or income conclusions in writing, it can be challenging for the parties to consult with these background advisors.
I welcome your thoughts and experience on the issue. Feel free to reach me at melanie@kalexvaluations.com or 416-488-9590x225.