Valuation Specialists Research Articles

Variation in the values of the beta coefficient for systematic risk depending on the approach applied on the example of companies from the WIG20 index

Purpose of the study: The beta coefficient for systematic risk can be obtained with various methods. Each of these methods may be methodologically correct and justified in the scientific literature, but the results obtained may differ. The aim of the article is to indicate differences in the estimated values of the beta coefficient for systematic risk caused by different methods of their calculation or different sources of data acquisition. Methodology: The article presents methods of calculating the beta coefficient for systematic risk and the most popular sources of obtaining this coefficient. Then, the beta ratio was calculated using the historical method for the period of 1, 2, 5 and 10 years for companies from the WIG20 index and beta indicators were obtained from the publications by A. Damodaran. On the basis of the obtained data, maximum divergences in beta coefficient values were determined and their mean value was calculated. Main findings: The results of the work indicate the average difference in beta values for companies from the WIG 20 index at the level of 0.51 and the maximum value of 1.12. Moreover, it was determined that statistically the lowest beta values as of December 31, 2023 for companies from the WIG20 index were provided by the historical method for a period of 2 years, and the highest values were provided by A. Damodaran. Application of the study: The conducted research indicates the range in which stock market analysts and valuation specialists can model the valuation value from the level of the beta coefficient. Market practitioners can choose both the highest and the lowest value and thus influence the value of the discount rate and the value of the company's valuation in the discounted cash flow method. Originality/Novelty of the study: The article presents original results of empirical research on the beta coefficient. This paper presents volatility in the values of the beta coefficient for systematic risk resulting from different methods of estimating it on the example of companies from the WIG20 index.

Valuation Specialists and Value Relevance of Fair Value Measurements: Evidence from International Banks

ABSTRACT This study examines the impact of engaging valuation specialists on the value relevance of Level 3 fair value measurements (FVMs) within the auditing process. Through an analysis of a sample of international commercial banks over the period from 2016 to 2019, this study reveals that both Level 1 and Level 2 FVMs are generally value relevant, regardless of the involvement of valuation specialists in the auditing process. However, the value relevance of Level 3 FVMs appears to be contingent upon the auditor’s utilization of valuation specialists during the audit of these measurements. The findings of this study indicate that, notwithstanding the concerns highlighted in prior research, investors tend to hold the conviction that valuation specialists can make a substantive and positive impact on the auditing process, thereby enhancing the value relevance of Level 3 FVMs. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G21; M41; M42.

The Role of Valuation Specialists in Audits of Fair Values and Potential for Change under Amended Public Company Accounting Oversight Board Standards

SUMMARY The PCAOB recently implemented amended standards on the use of valuation specialists. We report interviews with 42 auditors and valuation specialists in which we describe the role of valuation specialists and problems during fair value audits under the original guidance. We evaluate whether the amended guidance will change practice and mitigate these problems. We find that specialists are more involved in fieldwork relative to planning and completion. Despite changes to communication and review requirements, specialists’ limited role in making conclusions relative to auditors will continue. Our analysis suggests the changes in standards are unlikely to meaningfully change practice. We expect little change because the amended standards will not increase specialists’ responsibility for outcomes or provide them additional guidance, they will not require auditors to acquire valuation knowledge, and they cannot reduce the inherent uncertainty in fair value settings. These issues underlie many of the problems in this area. JEL Classifications: M40; M41; M42.

Residential property evaluation and climate change modelling

Climate change poses a first-order threat to human civilisation and governments across the world, their agencies and big and small corporations have announced climate emergencies and made commitments towards net zero emissions across a range of target dates. Regulators have tasked financial institutions in the insurance and banking sectors to expose their existing portfolios and lending practices to scrutiny as to resilience levels, preparedness and knowledge base relating to property risk level impacts from existing and emerging climate-driven property perils. The scope of these investigations has mobilised a range of consultancies and emerging climate service providers (CSPs) to support regulatory oversight and provide modelling input relative to expertise in a range of environmental issues driven by climate change. The combination of global emission scenarios and general circulation models (GCMs) with existing expertise in modelling real-world problems such as flooding, coastal erosion, storm and subsidence has produced forward-facing forecasts across the natural physical and societal risks. The regulatory results at portfolio levels have necessitated financial institutions scenario planning down to property address levels to assess overall scale of impacts and the possible provisioning requirements against multiple probabilities over decadal horizons out to 2100. These high-level assessments will in the next few years feed directly into valuation and property investigation for origination loans and the cash buyer. CSPs will inevitably seek to monetise a return on their investment in modelling for financial institutions and their unique exposure to portfolio-level provisioning as consultants to these organisations reporting to the regulator. How this data at a property level is interpreted spatially and temporally will be a unique new challenge for chartered surveyors and other property professionals within lending institutions and within the conveyancing sector. This paper looks at the development of portfolio-level climate change reporting, the scientific basis for decisioning and the real risks of assuming that scenario precision produces accurate climate outcomes at the property level. A range of evolving rule sets are proposed for lenders, valuation specialists and conveyancers to ensure reporting is fit for intended purpose.

An Examination of the Impact of Control Risk, Negotiation, and Pricing Specialists in the Audit of Fair Value Measurements

Academics, businesspeople, regulators, and investors continue to vigorously argue for and against the practice of using fair value accounting. Management is responsible for developing fair value measures and disclosures that are included in the financial statements. The auditor is tasked with obtaining sufficient evidence to provide reasonable assurance the organization’s fair value measures are following generally accepted accounting principles. Affecting the auditor’s responsibility is the increased use of valuation specialists, the impact of negotiation during the audit, and the control risk assessment. Examining the existing research, this review provides the audit practitioner with critical insights from the existing literature and serves as a practical guide for regulators (Martin et al., 2006).

The homogeneity of BIG4 audit reports after the implementation of key audit matters in the context of fair value accounting

This study examines the homogeneity of BIG4 audit reports after implementing key audit matters (KAMs) in the context of fair value accounting. We focus on reported KAMs and the procedures related to the fair values of investment properties, particularly those related to challenging management's estimations and valuation specialists' use. Our data consist of 235 individual audit reports from the real estate sector from 2017 to 2018 and cover 60% of the listed real estate companies in the EU, Switzerland, and Norway. We found that the BIG4 audit firms are not homogenous in their audit reports. There is a statistically significant difference among the BIG4 audit firms in reporting the challenge of management estimates and in the number of audit procedures. We also found that a country's legal origin plays a significant role when auditors report KAMs. Our findings contribute to the current audit quality and reporting literature.

Система ESG-координат в методологии оценки стоимости активов

In recent years, there has been a clear increase in the attention of both market participants and valuation specialists to the issues of accounting for environmental friendliness, social orientation, as well as the level of corporate governance, that is, ESG factors, in the value of assets. Since these factors are recognized at the highest level - by the governments of states, the largest business, as well as by analysts, it can be concluded that their nature is price-forming. In this article, an attempt is made to investigate the vector of the development of standardization and methodology of evaluation and expert activity in the field of accounting for ESG factors. The paper answers the questions: What aspects of the methodology in the field of asset valuation are subject to ESG transformation in the near future? What changes in the Russian Federal evaluation standards and standards of self-regulatory organizations of appraisers should be proposed in this direction? How can the influence of ESG factors be taken into account in assessment reports and expert opinions already today? This article is of an overview nature; it attempts a scientific understanding of the concept of ESG in valuation practice and metology and draws conclusions about the directions of development of the domestic methodology in the field of valuation activities.

The Role of Valuation Specialists in Audits of Fair Values and Potential for Change under Amended PCAOB Standards

The PCAOB recently implemented amended auditing standards on the use of valuation specialists on fair value audits. Using data from interviews with 42 audit and valuation partners and managers, we describe the role of valuation specialists in audits of fair values and the problems that arise in these audits under the original guidance, and we evaluate whether the amended guidance will lead to changes in practice that mitigate the problems. We find that specialists are more involved in fieldwork relative to planning and completion, in which they play a more limited role. While the amended standards change certain requirements around communication with specialists and reviewing their work, specialists’ limited role in making overall conclusions relative to auditors will continue. Our analysis suggests that the changes in the amended standards are unlikely to meaningfully change practice. We expect little change because the amended standards will not increase specialists’ responsibility for outcomes or provide additional guidance to specialists, they will not require auditors of fair values to acquire valuation knowledge, and they cannot reduce the inherent uncertainty in the audit setting surrounding fair values. These issues underlie many of the problems in this area.

The Auditor-Valuation Specialist Coopetitive Alliance in the Fair Value Audit of Complex Financial Instruments

We analyze interviews with valuation specialists (specialists) employed by audit firms (in the Asia-Pacific region, Europe, and the U.S.) to understand how they work with auditors to evaluate the reasonableness of fair value measurements (FVMs) for financial instruments. The rapid growth of FVMs and complex estimates reported on financial statements requires that auditors increasingly rely on specialists to perform these evaluations. Informed by coopetition theory from management and organizational science, we develop a framework to examine the tensions in the auditor-specialist alliance (the coopetitive alliance) and how those tensions can impact FVM audit quality. Our framework considers five factors that contribute to tensions in the coopetitive alliance – organizational structure, economic independence and stressors, project goals, group identity, and knowledge sharing. We find that tensions around the economic independence of the specialist unit, auditor delays in engaging the specialist, and specialists’ perceptions that auditors do not respect their expertise and contribution to the FVM audit, lead specialists to distrust auditors and respond in ways that threaten audit quality. Further, we show that firm-level choices in the organizational structure and policy governing the use of specialists can impact the perceived quality of the specialist unit and the quality of audited FVMs. Our research complements recent studies examining the role of specialists in audit engagements with significant complex estimates and provides new insights to academics, regulators, and professionals.

The Characteristics, Valuation Methods, and Information Use of Valuation Specialists

SYNOPSISWe provide insights into the inputs and valuation models used by valuation specialists. We survey 172 valuation specialists and conduct several follow-up interviews covering various topics, including the valuation inputs, models, and industry information that they use, as well as how they estimate long-term growth and the cost of capital. We find that valuation specialists rely on their professional judgment to select a valuation model but prefer the discounted cash flow (DCF) model. They primarily rely on the firm's historical performance when forecasting the financial statements, but communication with management is particularly relevant for forecasting future earnings or cash flows. When estimating the cost of capital, they most commonly use the risk-free rate with subjective adjustments. The results of our study provide insights on the information use of valuation specialists that are relevant to other valuation specialists, managers, academic researchers, and regulators.JEL classification: M41; G12; G17; G32.

Use of independent valuation specialists in valuing employee stock options: evidence from IPOs

We investigate the impact of independent valuation specialists on the downward bias of pre-initial public offering employee stock option valuations. Undervalued stock price estimates underlying firms’ option grants produce option valuations that overstate earnings and provide employees with deep in the money options. We find independent stock price valuations are more likely for firms with a Big Four auditor and an audit committee accounting expert. Furthermore, valuations prepared by independent valuation specialists are less downward biased than those prepared internally. Cross-sectional results suggest the following. First, independent valuations have a stronger effect on reducing downward bias when the board is more independent, suggesting independent boards facilitate independent valuations. Second, independent valuations have a weaker effect on reducing downward bias when an accounting expert sits on the audit committee and when CEO equity ownership is greater, suggesting these factors offset the need for an independent valuation to reduce downward valuation bias.

The Characteristics, Valuation Methods, and Information Use of Valuation Specialists

We provide insights into the inputs and valuation models used by valuation specialists. We survey 172 valuation specialists and conduct several follow-up interviews covering various topics, including the valuation inputs, models, and industry information that they use, as well as how they estimate long-term growth and the cost of capital. We find that valuation specialists rely on their professional judgment to select a valuation model but prefer the discounted cash flow (DCF) model. They primarily rely on the firm’s historical performance when forecasting the financial statements, but communication with management is particularly relevant for forecasting future earnings or cash flows. When estimating the cost of capital, they most commonly use the risk-free rate with subjective adjustments. The results of our study provide insights on the information use of valuation specialists that are relevant to other valuation specialists, managers, academic researchers, and regulators.

Should I Stay or Should I Go?: The Joint Effects of Valuation Specialists’ Knowledge Domain and Employer Type on Perceptions of Organizational-Professional Conflict

Despite specialists’ role in producing fair value measurements, they often encounter tensions that give rise to conflict between the specialists and both their organizational and professional demands. This study surveyed 222 highly qualified specialists to examine how differences in specialists’ domain knowledge and their employer type influence perceptions of a particular type of conflict—organizational-professional conflict (OPC). First, we find that specialists who primarily value financial instruments and are employed by non-professional services firms (e.g., banks) report significantly higher OPC levels, lower job satisfaction, and higher turnover intentions. Next, we find that prior experience in an organization like one’s current employer mitigates your perceived OPC level. Lastly, we find that specialists who have a dual role in working with auditors and management report higher OPC levels when they spend more of their time assisting auditors in evaluating fair value measurements’ reasonableness.

PRACTITIONER SUMMARY When does utilizing valuation specialists reduce auditors' litigation risk?

This article summarizes "The effects of specialist type and estimate aggressiveness on juror judgments of auditor negligence" (Brown, Grenier, Pyzoha, and Reffett 2019), which examines two critical factors auditors consider when auditing complex estimates: the type of specialist to engage and the relative aggressiveness of the estimate. In an experiment involving an alleged audit failure, jurors were less likely to find auditors negligent when the auditors consulted with a valuation specialist, but only when managements' estimate was deemed to be more aggressive. The study does not find similar litigation benefits of using a specialist for a less aggressive estimate. A second experiment extended these results by demonstrating jurors were less likely to find auditors negligent when the auditors consulted with an external rather than an internal specialist, because jurors perceived external specialists as having greater independence from the client. Further, the litigation benefits of using an external specialist extended to circumstances when auditors who initially engaged an internal specialist also brought in an external specialist to review the internal specialist's work. The study concludes that utilizing external specialists, to either test management estimates or to review internal specialists' work, can limit auditors' litigation exposure, especially when auditing aggressive management estimates.

When Does Utilizing Valuation Specialists Reduce Auditors' Litigation Risk?

SUMMARY This article summarizes “The Effects of Specialist Type and Estimate Aggressiveness on Juror Judgments of Auditor Negligence” (Brown, Grenier, Pyzoha, and Reffett 2019), which examines two critical factors auditors consider when auditing complex estimates: type of specialist to engage and relative estimate aggressiveness. In an experiment involving an alleged audit failure, jurors were less likely to find auditors negligent when the auditors consulted with a valuation specialist, but only when managements' estimate was more aggressive. The study does not find similar litigation benefits of using a specialist for a less aggressive estimate. A second experiment extended these results by demonstrating that jurors were less likely to find auditors negligent when the auditors consulted with an external rather than an internal specialist. Further, the benefits of using an external specialist extended to auditors who initially engaged an internal specialist and brought in an external specialist to review the internal specialist's work.

Auditors, Specialists, and Professional Jurisdiction in Audits of Fair Values

ABSTRACTAuditors frequently use valuation specialists to help them evaluate fair values, but researchers and regulators know little about how auditors use these specialists. Based on interviews with 28 auditors and 14 valuation specialists, I develop a theoretical framework informed by expert systems and professional competition theories. The interviews suggest that institutional pressures in the fair value environment unevenly impact auditors and specialists, causing tension between auditors' needs for ontological security and jurisdictional claims. This tension leads to one‐sided competition between auditors and specialists and incomplete acceptance of specialists' work. Auditors' competitive behaviors coupled with this incomplete acceptance result in a tendency to make specialists' work conform to auditors' views. Collectively, these findings suggest that auditors use specialists as an institutional mechanism to create comfort, but not insight. This study links expert systems and professional competition theories, and it provides critical insight into some assumptions underlying tenets of each theory. It also informs researchers, regulators, and practitioners interested in understanding and addressing problems related to the use of specialists.

Use of Independent Valuation Specialists in Valuing Employee Stock Options: Evidence from IPOs

We investigate the impact of independent valuation specialists on the downward bias of pre-initial public offering employee stock option valuations. Undervalued stock price estimates underlying firms’ option grants produce option valuations that overstate earnings and provide employees with deep in the money options. We find independent stock price valuations are more likely for firms with a Big Four auditor and an audit committee accounting expert. Furthermore, valuations prepared by independent valuation specialists are less downward biased than those prepared internally. Cross-sectional results suggest the following. First, independent valuations have a stronger effect on reducing downward bias when the board is more independent, suggesting independent boards facilitate independent valuations. Second, independent valuations have a weaker effect on reducing downward bias when an accounting expert sits on the audit committee and when CEO equity ownership is greater, suggesting these factors offset the need for an independent valuation to reduce downward valuation bias.

Company Valuation Specialists’ Interactions with Management and Auditors: A Field Study

Company specialists engaged by management may be delegated a monitoring role by auditors, creditors, or investors, and reduce information asymmetry present in fair value measurements (FVMs). Utilizing in-depth interviews with Norwegian company specialists and audit partners this study investigates factors potentially impacting company specialists’ effectiveness as monitors of the reliability of FVMs and how such factors challenge auditors’ reliance on their monitoring. The findings suggest that company specialists are not immune to management pressure and several influence tactics are documented. Furthermore, as company specialists strategically guard their private information (e.g., valuation models or non-client specific information) auditors are forced to rely on external, and potentially biased, information sources to evaluate the objectivity and reliability of the company specialists. While auditors often request that clients engage several specialists to alleviate concerns about conflicts-of-interest, management seems to anticipate this and strategically controls information flow between the specialists to create more persuasive evidence. The findings provide support for theoretical predictions from agency theory and financial economics and enhances our understanding of specialists’ delegated monitoring effectiveness.

Suggested Quality-Assurance Practices for Monte Carlo Analysis of a Geometric Brownian Motion Process

This article suggests certain procedures that a valuation specialist can perform to test the results of a Monte Carlo analysis of a geometric Brownian motion process. First, this paper describes the Monte Carlo technique and the geometric Brownian motion process. Next, several examples are provided to show simulation results using different assumptions. Finally, this paper recommends certain procedures, calculations, and analyses that will help test the veracity of the model.

Auditing Challenging Fair Value Measurements: Evidence from the Field

ABSTRACT Concern about effective auditing of fair value measurements (FVMs) has risen in recent decades. Building on prior interview-based and experimental research, we provide an engagement-level analysis of challenging FVMs, using quantitative and qualitative data on audit phases from risk assessment to booking adjustments. Challenging FVMs have high estimation uncertainty, high subjectivity, significant/complex assumptions, and multiple valuation techniques. Estimation uncertainty is associated with higher inherent risk assessments, which are, in turn, predictive of client problems identified during the engagement. The use of a valuation specialist by auditors, associated with higher inherent risk and client specialist use, is a key decision: procedures performed by specialists have the highest yield in identifying problems. Auditor-client discussion of an adjustment increases with problem identification and auditors' expressions of residual concern about uncertainty post-testing. However, booked audit adjustments are infrequent; the only factors explaining income-decreasing adjustments are better evidential support and breadth of problems identified.