Valuations are crucial 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, including investment decision-making, mergers and acquisitions, financial reporting, capital raising, investor relations, and legal and regulatory compliance. Hence, the importance of discussing the governance of valuations.
Valuation governance refers to the processes, regulations, and standards governing how assets, securities, or other items are valued. Valuation is the process of determining an asset’s worth or fair value, 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 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 that falls under the 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 February 1, 2006.
Professional Standards: Professional organisations and associations set standards and codes of conduct for valuation professionals. For example, the International Valuation Standards (IVS) provide globally recognised principles and guidelines for the valuation of assets. In Zimbabwe, The Real Estate Institute of Zimbabwe (REIZ) is the valuations professional body accredited by the International Valuations Standards Council (IVSC). The Valuers Act prescribes that all valuations undertaken in Zimbabwe should comply 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, the Valuers Council and REIZ, respectively, are available to provide independent oversight in Zimbabwe.
A valuation professional must meet educational and post-qualification experiential requirements and be 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 disclosed. This allows stakeholders to understand how valuations are conducted and assess the reliability of the results. The valuation report should ordinarily contain disclosures.
Peer review processes, where independent experts review valuation reports, 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 harmonise valuation standards and practices globally to facilitate cross-border transactions and enhance consistency in valuation methodologies. 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, equipment, financial instruments, or other required items.
The next step is to define the valuation criteria: Establish the 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 on the respective entity’s procurement policy, it may be direct or 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 specialise in the specific asset class or industry relevant to your valuation needs. The Valuers Council can 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 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 analyse 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, and the estimated timeline. Compare the proposals to evaluate the valuers’ responsiveness, clarity, and alignment with your requirements.
Feel free to request 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, 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, valuation fees are prescribed under the Act, and the scale of fees guides accordingly. Decisions should be based on expertise and competence in undertaking the task at hand.
Remember, selecting 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 valuation governance 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.
By Dr Mike Eric Juru: CEO Integrated Properties
