The end of face value

Nicky Burridge
Ester Zirilli

Hong Kong currently lacks technical standards for business valuations. To address this, the Hong Kong Business Valuation Quality Initiative Task Force, led by the International Valuation Standards Council, recently released a consultation paper. Nicky Burridge finds out how the proposals will improve the industry, and how effective the initiative will be in helping the city remain a leading global capital market

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Nicky Burridge
Ester Zirilli


Imagine performing a valuation on a company at the centre of an acquisition and basing it on little more than the vendor’s forecasts for its likely future profits.

Without conducting any due diligence or carrying out work to assess whether the vendor’s forecasts are likely to materialize, the valuer simply uses the numbers provided to calculate how much the company might be worth.

It may sound like an unlikely way for a professional business valuer to conduct their work, but this approach is not uncommon, which has caused growing concern in Hong Kong.

Indeed, Hong Kong’s Securities and Futures Commission (SFC) has expressed disquiet about the way valuations have been carried out for some time. It issued a guidance note in 2017, calling on directors to use professional valuers who were independent, suitably qualified and had relevant expertise and adequate resources.

In July this year, it published a Statement on the Conduct and Duties of Directors when Considering Corporate Acquisitions or Disposals, warning that some independent professional valuations conducted for listed companies appeared to be baseless, with valuers completely disclaiming their liabilities for the reliability of the projections. It said: “In essence, these valuers merely carried out mathematical computations on the vendors’ forecasts and failed to exercise any independent judgement.


“In most of these cases, the calculations performed by the valuers merely involved applying a profit forecast or guarantee to a multiple derived from a set of allegedly comparable companies ‘cherry-picked’ to justify a predetermined estimate of the target business.”

These concerns, as well as issues raised by other stakeholders, the Hong Kong Business Valuation Quality Initiative Task Force, led by the International Valuation Standards Council (IVSC) and of which the Hong Kong Institute of CPAs is a member, launched the Hong Kong Business Valuation Quality Initiative (BVQI). As well as the Institute, the task force includes representatives from a range of industry bodies, including the Royal Institution of Chartered Surveyors (RICS), Hong Kong Institute of Surveyors (HKIS) and the Chamber of Hong Kong Listed Companies (CHKLC), as well as a number of accounting and valuation firms. The initiative has recently issued a consultation paper, available on the Institute’s website, setting out proposed standards and a professionalism framework for the industry. Responses are sought by 15 November.

Valuers for hire ​

In its consultation paper, the task force warns that too many valuers in Hong Kong lack sufficient business valuation training, as well as experience and knowledge of the businesses they are valuing. It also points out that there are no entry requirements or continuing professional development (CPD) requirements for the sector. ​

In addition, it says the lack of common technical and performance standards, against which valuers, company directors, auditors and regulators can measure valuations, creates an uneven playing field.

At the same time, the task force found there was a lack of independence among valuers due to a system of businesses obtaining services through existing relationships.

It points out that valuation clients were often companies owned by Hong Kong or Mainland families whose leaders were sometimes “more speculative and overly optimistic” in their outlook, which, combined with a lack of standards for valuers, created risks for shareholders.

The lack of professional scepticism in some quarters also created instances of so-called “valuers for hire,” under which valuers agree to give a company an advantageous valuation or do not questions any of the financial information provided by the company. Ricky Lee, Managing Director, Valuation Advisory Services at consultancy firm Duff & Phelps, agrees this is an issue. “We are a global firm and we have uniform and mandatory best practice work procedures for corporate transactions, such as having a second reviewer and a senior excecutive to concur with the conclusion we put in the valuation for public disclosure,” he explains.

“But some boutique firms are more aggressive on pricing. Their fee may not allow them to go into all the details, or they assume all the information the client provides is reasonable, complete and correct, so they just crunch numbers in the model without the concept of scepticism. It is sometimes questionable whether all necessary valuation procedures are fully performed, and the valuation workings are adequately disclosed in the valuation report.

“There is definitely an issue of ‘valuers for hire.’ We can’t accept a fee that is contingent on an outcome, but we have seen some smaller firms willing to issue a firm’s letter to indicate a preliminary valuation number to a potential client before they are actually engaged and have gone into the details.” he says.

Wiley Pun, Director at Savills Business and Financial Instrument Valuation, and a member of the Institute and its’ Professional Development Committee, agrees that there is also an issue with some valuers winning projects by pitching unreasonably low fees that do not reflect the amount of time a more thorough business valuer would put into performing the professional work. “Comparing the business valuation regulatory environment with our auditing environment, we as CPAs are required to evaluate our competence before taking on a client. In the business valuation context, there is no such mandatory requirement as there is no central regulator,” he says.

Eugene Liu, Managing Partner at RSM Hong Kong, and an Institute member, agrees: “There is keen competition for winning valuation business in Hong Kong and some valuers adopt a low pricing strategy to obtain projects. Valuers who use a low pricing strategy have to push up the business volume to maintain a desired profit margin, and thus it directly impacts the time and budget of each valuation, and in turn the valuation quality.” He adds that ethics are also an issue. “There are no uniform rules and regulations to govern the valuer’s ethics, such as independence, and thus the objectivity of performing valuations are sometimes being doubted, even though the valuer’s independence is mentioned in many valuation reports.”

Proposed improvements

In a bid to address these problems, the task force has set out a range of proposals for the sector covering ethics, competency and CPD, as well as providing technical standards and a performance framework, and suggestions for mechanisms for investigations and complaints.

At the heart of its proposals are measures to increase the professionalism and competency of valuers. It suggests that in order to become qualified in Hong Kong, business valuers must demonstrate they meet a range of competencies taken from the IVSC’s Professional Membership Obligations.

They would also have to agree to abide by a set of core ethical principles, including integrity, confidentiality and disclosure of any conflicts of interest, usually through belonging to a professional body with a code of conduct, and attend 20 hours of relevant continuing professional development each year.

In addition, the consultation proposes using the International ​Valuation Standards to help ensure quality and consistency for valuations in Hong Kong, as well as adopting the Mandatory Performance Framework, which was created by accounting bodies and surveyors in the United States. “We are trying to make sure we get cowboys out of the profession,” Sir David Tweedie, Chairman of the Board of Trustees of the IVSC, says. “We feel that to be a valuer, you have got to have a certain level for entry, such as exams, ethics, and continuing professional development. All the things we, as accountants, know.” (Read more about Tweedie here.)

Steve Choi, International Director of Business Valuation, Professional Standards at the RICS, says: “Hong Kong possesses one of the largest stock exchanges in the world and is a key financial centre, and thus should be a leader in serving and protecting the public interest.

“The business valuation profession has an opportunity to set a path for the future of the profession by developing an infrastructure and placing quality as its primary objective – very much like the audit profession.”

Mike Wong, Chief Executive Officer of the CHKLC, also welcomes the initiative. “The chamber supports the creation of such a framework because it tells people in the industry what they need to do and how to do it, which would be useful to everyone to ensure there is a certain degree of professionalism in the work,” he says.

He adds that from the point of view of listed companies, many directors lack the experience or professional knowledge of valuations to be able to make a judgement on the reports they receive. “With a framework, directors can be assured of the level of the quality of these reports and that gives them a better sense of the accuracy and reasonableness of the figures.”

The concept of ethical standards has also been welcomed. “The introduction of ethical and quality standards as part of the framework will provide additional confidence to the users of valuations, such as companies, analysts and investors; and would allow professional bodies to hold their members involved in valuations to account,” says Chris Joy, Executive Director, Standards and Regulation, of the Institute. ​


Only a start

Some stakeholders think more still needs to be done. “The initiative as outlined in the consultation paper is very comprehensive and is definitely a good start. I think we will let it run for a while before we can say if it is sufficient or not,” says Wong.

Lee agrees: “I think it is a good start, but it is just a start. Right now, the task force is focused on a self-regulated organization. The consultation also did not touch much on the quality assurance programme. Everyone can tell you they follow the technical standard but how do you ensure that? You need a monitoring system and regular or risk-based sampling to check the framework is being followed.”

Pun at Savills agrees: “No central regulator for the profession is proposed under the current recommendations. There are references to certification of competencies and an investigation and complaint mechanism, but there is no reference to who is to administer these.” He adds that these areas need further development in order to create a regulatory environment that really upholds the quality of business valuations. “Without consequences for wrongful behaviour, the downward spiral still exists,” he says.

Liu at RSM adds: “A solid regulatory agency is required to ensure all the initiatives are enforced as expected. A regulator like a ‘Valuation Institute’ empowered for licensing, supervision, enforcement and education functions should be established to promote the long-term welfare of the valuation profession and quality.”

Whatever standards are introduced for the valuation profession, it is clear the Institute is likely to have an important role to play. “I see the role of the Institute as critical. If this is going to work, we need the same ethics and background that we have as accountants in valuations,” says Tweedie.

“The Institute, being a very successful entity, can provide a lot of insights for the valuer framework to follow.”

For Wong, the Institute can show how things can be done in regulating a diverse industry made up of individual firms, “and how the regulator can impose standards and carry out enforcement action and provide more user education. The Institute, being a very successful entity, can provide a lot of insights for the valuer framework to follow.”

Pun points out that the Institute is already doing work to equip members with business valuation knowledge, such as hosting a valuation series and working with the International Institute of Business Valuers to offer courses on valuation, but he suggests it could collaborate further with other organizations to help set up the standards required. “CPAs are best placed among many different professions in practising business valuation due to our training in understanding and connecting business and numbers,” he says. “We should embrace business valuation as one of our potential offerings, much like the international accounting firms have done in establishing the advisory business.”

Liu would also like to see it work with other entities, such as the Hong Kong Stock Exchange and the SFC to promote an aligned regulatory regime for the valuation profession, including a single valuation designation.

The Institute recognizes the need for quality business valuations, notes Joy. “We are pleased to be a partner with all the other bodies that have come together to draft the framework. It will underline the importance and quality of the Hong Kong capital market. There will be opportunities for our members, and we want to equip them with the tools to deliver quality services – in either the provision or assurance of valuations.”

Behind the curve

Hong Kong is currently lagging behind other major financial centres in terms of its lack of a formal valuation framework. “In Hong Kong, although many valuers use IVSC standards, and RICS and HKIS have additional guidance and qualifications [primarily for real estate valuations], we have not gone as far as some other jurisdictions, including Singapore, in establishing a professional framework and ethics for valuers,” says Chris Joy, Executive Director, Standards and Regulation, of the Institute.

In the United States, the three major valuation professional bodies came together to create the Mandatory Performance Framework in 2017. In Singapore, a professional framework has been created with regulatory backing. Sir David Tweedie, Chairman of the Board of Trustees of the IVSC, also praises the work done in this area in the United Kingdom and Australia, which have both adopted International Valuation Standards.

By contrast, in Hong Kong the industry is currently not regulated. Past attempts by interested parties of business valuers in Hong Kong to have unified business valuation standards and a professional competency requirement, such as through the creation of the Hong Kong Business Valuation Forum, have not been entirely successful. Ricky Lee, Managing Director, Valuation Advisory Services at consultancy firm Duff & Phelps, says: “It does not have the resources to provide training, and it does not actively do quality assurance or self-regulation. I think it is hard to establish public trust and enhance quality through a forum-based model. It is a failure.”

The Institute has been highly involved in the BVQI, not least because CPAs, particularly auditors, have a significant stake in the issue. “From my position, I tend to see problems through the lens of audits that have not properly addressed valuations.” He adds that the Institute has also had to deal with complaints where an auditor has not adequately challenged the quality of valuation. “The obligations on auditors in terms of deciding whether a valuation has been properly done and relied on will be made easier if they have this framework within which valuers are performing. It is not doing away with the need for auditors to carry out an audit on valuations, that will always be there and remain a critical area, but this is one step that might make things a little bit easier,” he says.

The consultation, prepared by the BVQI Task Force, asks for responses to 14 questions on ethics, competencies and local body of knowledge, continuing professional development, technical standards, performance framework, and investigations and complaints mechanism. Deadline for comments is 15 November.

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