Ethical Issues in

Business Valuations

- CA Avineesh Matta

Ethics

“Whether men understand it or not, they are impelled by that power behind to become unselfish. That is the foundation of morality. It is quintessence of all ethics, preached in any language or any religion, or by any prophet in the world. “Be thou unselfish”, “Not “I”, but “Thou” – that is the background of ethical codes.”

- Swami Vivekananda

Ethics….

Crucially important that our thoughts and actions be governed by ethical values and habits.

Basis of ethics is to become more and more self less.

Knowledge of the importance of virtue does not deter people from moving to the evil side of things. This is the inscrutable illusion covering the consciousness of man, says the Vedanta.

Ethics and Success

Value centered perfection, and not ‘material success’ as the ultimate goal of every human being.

Unnatural use of one’s capacities in pursuit of wealth for its own sake.

Success achieved without minding the prohibitions of moral law brings grief in the wake of achievement.

– Saint TiruvalluvarTry not to become a man of success but rather try to become a man of value.

Albert Einstein 1879-1955

Ethics in businesses and professions

Productive enterprises have an implied contract with society

Stockholders to stakeholders

Gandhi on Entrepreneurial Ethics

Truthfulness in conduct of business is reflective of image of the Nation.

Seven Social Sins:– Politics without Principles– Wealth without Work– Commerce without Morality– Knowledge without Character– Pleasure without Conscience– Science without Humanity– Worship without Sacrifice

Wealth without Work and Commerce without Morality

Inspired by Ruskin’s on idea of bread-labour. Concept of Trusteeship in Business Everything finally belongs to the Society Trusteeship provides a means of

transforming the present capitalist order of society into an egalitarian one

Need for Ethics

Social Contract Guidance to operate business, professions Business Ethics is the set of principles or

reasons to govern the conduct of business – at individual or collective level by the application of ‘ethical reasoning’ to specific business situations and activities

Being Ethical

Awareness of– Need to comply with rules, laws of the land,

customs and expectations of the society, the principles of morality, policies of organization or institution, general concerns for others and fairness

– How the products and services of an organization or institution and the actions of its members, can affect its employees, the community and society as a whole, either positively or negatively.

Morals and Ethics

Ethics derived from Greek ‘Ethos’, means character

Root word for Moral is Latin ‘mos’, meaning custom

Character as to individual v. customs as to group over time

People have character; Societies have custom.

Ethical Dilemmas

Many issues seems straight forward and easy to resolve but are not always true

Making choices amongst alternatives Questions between right and wrong Conflict between right and right

Benefits of Ethics

Improved society Maintain moral course in turbulent times Cultivate strong team work and productivity Supports employee growth Ensuring policies are legal Avoiding criminal acts of omission and lowering fines Managing values of quality, strategic planning and

diversity Strong public image

Business Valuation - Stakeholders

Client Third party Users placing reliance Researchers Society at large

Appraisal Practice

ASA defines the term as it applies to the following four operations, singly or in combination

– Determination of the value of property– Forecasting the earning power of property– Estimation of Cost of Production of a new property,

Replacement of existing property by purchase or production of equivalent property, Reproduction of an existing property (identical)

– Determination of non-monetary benefits or characteristics that contribute to value

Ethics in Business Valuation

Importance Judgmental Call Opinions Biases Public confidence Fiduciary relationship – Appraiser and those

rely on his findings

Ethics - Canadian Institute of Business Valuators

Preamble – – Assumption of highest level of responsibility for

maintaining the regards for profession, other professionals and public

– Commitment to a high standard of behaviour, honesty, prudence, competence, truthfulness and impartiality

– Institute and the public will refer to the Code of Ethics as a benchmark in the measurement of a member’s Professional Behaviour

Ethics - Institute of Business Appraisers

Member assumes an obligation beyond any imposed by law Independence Disinterestedness Member shall be responsible for all analysis tools used

including software Data non disclosure and confidentiality Fee, false or misleading advertising Not to commit an act discreditable to the profession Plagiarism an unethical practice, acknowledge source

American Society of Appraisers

Principles of Appraisal Practice– Primary duties, responsibilities and Obligations

Code of Ethics

Ethics – American Society of Appraisers

Appraisers Primary Duty, Obligations and Responsibility

– Determine and describe the Apposite kind of Value or Estimated Cost in terms of engagement

– Determine Numerical Results with high degree of Accuracy in terms of appraisal objectives

– Avoid giving false numerical figures– Attain Competency and to practice ethically– Professional Character of Appraisal Practice– Responsibility to third parties

ASA…

Appraiser’s Obligations to His Client– Reach to accurate conclusions without clients wishes– Confidential Character of an Appraisal Engagement– Give Competent Service– Relating to Giving Testimony – not to suppress or over

emphasize– To Document the Appraisal Testimony– Serving more than one Client in the same matter– Agreements and Contracts for Appraisal Services

ASA…

Appraiser’s obligations to other Appraisers and to the Society– Protection of Professional Reputation of other

appraisers– Relative to the Society's Disciplinary Actions

Obligation to report any violation of byelaws, code, etc. by any other member to the Society

Cooperate with Society and its Officers in proceedings

ASA…

Appraisal Methods and Practices– Various kinds of Value– Selection of Appraisal Method– Fractional Appraisals– Contingent and Limiting conditions affecting an Appraisal– Hypothetical Appraisals – only for legitimate purpose– Denial of pertinent Data– Range of Value– Value or Estimated Costs under varied Hypotheses– Inspection, Investigation, Analysis of Subject Property– Collaboration and Use of other professional’s services

ASA…

Unethical and Unprofessional Appraisal Practices– Contingent Fee– Percentage Fee– Disinterested Appraisals– Responsibility connected with Signatures on Report– Advocacy– Unconsidered Opinions and Preliminary Reports– Advertising and Solicitation– Misuse of Membership Designation– Disciplinary Action - causes

ASA…

Appraisal Reports– Description of subject property– Statement of Objectives of Appraisal Work– Statement to Contingent and Limiting Conditions– Explanation of Appraisal Method Used– Statement of Appraiser's Disinterestedness– Communicate each Analysis, Opinion and Conclusion – not

Misleading– Recertification Statement– Signatures and Dissenting Opinions

Ethics – Institute of Chartered Accountants of India

Similar basic premise– Credibility– Professionalism– Quality of Services – Confidence

Fundamental Principles– Integrity– Objectivity– Professional Competence and Due Care – Confidentiality – Professional Behaviour – Technical Standards

Need to take view in harmony with current regulatory framework of conduct as a member

Ethics – What to do?

Comply with Indian Valuation Standards when in place, in transition rely on International Standards

Subrogate in user’s shoe Listen to conscience

Be a man Superior

The mind of the superior man is conversant with righteousness; the mind of the mean

man is conversant with gain.- Confucius 551 B.C. - 479 B.C.

Thank you