Valuations play a crucial role in various aspects of business, finance, and investing. They provide an estimation of the economic value of an asset, company, or investment opportunity, and are important for several reasons which include investment decision-making, mergers and acquisitions, financial reporting, capital raising, investor relations and legal and regulatory compliance amongst other things hence the importance of discussing the governance of valuations.
The governance of valuation refers to the processes, regulations, and standards that govern how assets, securities, or other items are valued. Valuation is the process of determining the worth or fair value of an asset, and it plays a crucial role in various domains such as finance, accounting, investment, capital markets and insurance.
Governance in valuation is important to ensure transparency, fairness, and accuracy in determining the value of assets. It helps maintain investor confidence, facilitates informed decision-making, and above everything, promotes market efficiency. Here are some aspects of governance in valuation:
Regulatory Framework: Governments and regulatory bodies establish rules, guidelines, and frameworks that govern valuation practices. It is worthwhile mentioning at this point that in Zimbabwe, valuation is a regulated profession which falls under Valuers Act Chapter 27:18. The Act establishes a “Valuers Council to provide for the registration of Valuers and the regulation of the practice of valuers in Zimbabwe and also provides for matters incidental to or connected with the foregoing”. The operation of the Act commenced on the 1st of February 2006.
Professional Standards: Professional organizations and associations set standards and codes of conduct for valuation professionals. For example, the International Valuation Standards (IVS) provide globally recognized principles and guidelines for the valuation of assets. In Zimbabwe, The Real Estate Institute of Zimbabwe (REIZ) is the valuations professional body accredited to the International Valuations Standards Council (IVSC). The Valuers Act prescribes that all valuations undertaken in Zimbabwe should be in compliance with the IVS.
Independent oversight bodies may be established to monitor and regulate valuation practices. These bodies typically enforce compliance with regulations and professional standards, conduct audits, and investigate potential violations. The regulator and professional body in our case Valuers Council and REIZ respectively are available to provide the independent oversight in Zimbabwe.
A Valuation professional is required to meet specific educational and post qualification experiential requirements and get registered accordingly. This helps ensure that individuals performing valuations have the necessary expertise and adhere to professional standards.
Valuation processes should be transparent, and the methodologies used should be clearly disclosed. This allows stakeholders to understand how valuations are conducted and assess the reliability of the results. The valuation report ordinarily should contain the disclosures.
Peer review processes, where valuation reports are reviewed by independent experts, can help maintain quality and consistency in valuation practices. Quality assurance mechanisms may also be in place to ensure the accuracy and reliability of valuations. The process may be internal where a firm has more than one registered valuer or an external party can be engaged.
International Harmonization: Efforts are made to harmonize valuation standards and practices globally to facilitate cross-border transactions and enhance consistency in valuation methodologies and for this reason, the adoption of IVS is justified enabling local valuations to be acceptable internationally.
Having covered the processes around, the most important aspect to cover is the selection process of the valuer, this typically involves a careful evaluation process to ensure the valuer’s expertise and independence. The process ordinarily should cover the following;
Determine the specific purpose of the valuation and the assets or liabilities to be valued. This could include valuing intangible assets, property, plant, and equipment, financial instruments, or other items required.
Next step is to define the valuation criteria: Clearly establish the valuation criteria and standards that need to be followed. This may include international financial reporting standards (IFRS), generally accepted accounting principles (GAAP), or other applicable regulations or guidelines.
Depending with the procurement policy of the respective entity, it may be direct of depend on recommendations after reaching out to industry professionals, accounting firms, or other trusted sources for recommendations on qualified experienced valuers. They may suggest reputable valuation firms or individual valuers who specialize in the specific asset class or industry relevant to your valuation needs. The Valuers Council is available to provide a list of registered valuers in good standing.
Assess the valuers’ qualifications, expertise, and experience in performing valuations for financial reporting purposes. Consider their track record, reputation, and any relevant industry or sector-specific knowledge.
It is important to ensure that the valuer is independent and objective. They should have no conflicts of interest that could compromise the integrity or impartiality of the valuation. Determine if the valuer has any relationships or affiliations with the company or its stakeholders that could influence their judgment.
Understand the valuer’s methodologies, approaches, and processes for conducting valuations. They should have a systematic and well-documented methodology that aligns with the required valuation criteria. Assess their ability to gather and analyze relevant data, perform appropriate market research, and apply valuation techniques accurately.
The shortlisted valuers should provide detailed proposals outlining their understanding of the assignment, the scope of work, the estimated timeline. Compare the proposals to evaluate the valuers’ responsiveness, clarity, and alignment with your requirements.
Feel free to request for references from the valuers and reach out to their past clients to gather feedback on their performance. Inquire about their professionalism, responsiveness, adherence to deadlines, and the quality of their valuation reports.
Document the selection process: Maintain a record of the selection process, including the evaluation criteria, shortlisted candidates, their proposals, and the rationale for the final selection. This documentation will serve as evidence of a diligent and well-informed selection process.
While cost is a key issue, the valuation fees are prescribed under the Act and the scale of fees guides accordingly, decisions should be based on expertise and competence on undertaking the task at hand.
Remember, the selection of a valuer especially for financial reporting is a critical decision that can significantly impact the accuracy and reliability of your financial statements. It is advisable to involve relevant stakeholders, such as the company’s management, board of directors, or audit committee, in the selection process to ensure transparency and accountability.
It’s important to note that the governance of valuation can vary depending on the asset class being valued. For example, the valuation of financial instruments may be subject to specific regulations and standards set by financial regulatory authorities.
Overall, governance in valuation aims to establish a framework that promotes integrity, reliability, and trust in the valuation process, benefiting investors, businesses, and the overall functioning of financial markets.