Date posted: 24/08/2021

Could automated tools see valuers fall foul of APES 225?

The emergence of automated valuation tools promises faster and more efficient valuation processes. But the nature of these tools means accountants who rely on them could find themselves in breach of APES 225.

In brief

  • The emergence of automated engines to perform business valuations presents both opportunities and risks for accounting firms
  • On the upside, these tools promise faster, more cost-effective valuation processes and automatic generation of consistent and professional valuation reports
  • However, automated third-party tools also come with a significant hidden risk – potential non-compliance with the mandatory professional standards

The digital revolution is transforming the accounting profession – and business valuation is not immune. In Australia and New Zealand, the emergence of automated engines to perform business valuations presents both opportunities and risks for accounting firms.

On the upside, these tools promise faster, more cost-effective valuation processes and automatic generation of consistent and professional valuation reports. For those without in-house valuation expertise, they also offer less reliance on outsourced specialists.

However, automated third-party tools also come with a significant hidden risk – potential non-compliance with the mandatory professional standards. 

How automated valuation tools work

Automated valuation engines aim to streamline valuations by combining real-time data, client-specific inputs and complex algorithms to generate valuations and client reports. 

Understandably, these algorithms are not generally available for close examination. After all, they form a critical part of the provider’s intellectual property and commercial advantage. Even if they were openly available, their high level of complexity would mean that few would be able to confidently untangle how they work.

This means that users of these tools are unlikely to have a full understanding of the calculations and assumptions being used to reach their valuation outcomes. Instead, they need to place their trust in the third-party provider getting it right. And herein lies the issue.

The complexity and limited transparency of automated tools means members cannot unquestioningly rely on them for valuations and also comply with the obligations of APES 225
Richard Stewart FCA

The issue with automation

Members of CA ANZ, CPA Australia and the Institute of Public Accountants (IPA) practicing in Australia are required to comply with the standards set out by the Australian Professional and Ethical Standards Board (APESB).  These standards also apply to members of these three bodies who practice outside of Australia, except where a local professional standard in the relevant jurisdiction provides conflicting guidance.

APES 225 Valuation Services, issued by APESB, sets the standard for providing business valuations – including the obligation to show competence and due care which is also a fundamental principle contained in the Code of Ethics for Professional Accountants (APES 110). This obligation extends to the use of any third party service or product, by assessing their professional competence and objectivity, as well as the appropriateness and reasonableness of the work performed. 

The complexity and limited transparency of automated tools means members cannot unquestioningly rely on them for valuations and also comply with the obligations of APES 225. Rather, the member should use their professional judgement to critically evaluate the outputs of automated tools and document how they have done this.

Our recommendation to members

Does this mean that accounting professionals should avoid automated valuation tools? Not at all – although the scope of their use will need to be clearly defined and critically evaluated. 

So take care if you are considering using an automated valuation tool, and ensure you have undertaken sufficient work to meet the ‘due care’ test in APES 225 and the Code.  Test the reliability and accuracy of the tools regularly to ensure that conclusions drawn are appropriate, and document the work you have done to satisfy yourself that reliance on the output of automated tools is appropriate in the circumstances.

Callout

APES 225: 3. Professional competence and due care

3.6 A Member providing a Valuation Service shall maintain professional competence and take due care in the performance of the Member’s work in accordance with Subsection 113 Professional Competence and Due Care of the Code. 

3.7 Where a Valuation Service or part thereof requires the consideration of matters that are outside a Member’s professional expertise, the Member shall seek expert assistance or advice from a suitably qualified third party on those matters outside of the Member’s professional expertise or decline the Valuation Service. The Member shall disclose in any Valuation Report or other relevant communications the extent of the reliance upon the advice of such a third party. 

3.8 When planning to use the work of a suitably qualified third party, a Member shall assess the professional competence and objectivity of the third party, the engagement terms of the third party, and on completion the appropriateness and reasonableness of the work performed. 

3.9 In undertaking a Valuation Service, a Member should consider the contents of any guidance in respect of Valuation matters issued by the Professional Bodies and appropriate regulatory authorities.

Ref: https://apesb.org.au/wp-content/uploads/2020/03/Revised_APES_225_July_2019.pdf

Subscribe to the Business Valuation News

Stay up to date with the latest in business valuation
The CA ANZ Business Valuation Community Newsletter is your go-to resource for the latest information on topical news items, technical updates and upcoming CPD events for Business Valuers.

Subscribe now

Search related topics