RESOURCE ARTICLES BY CATEGORY Valuation Forensic Accounting Financial Reorganization Intellectual Property Economic Damages Lost Profit Damage Claims Newsletters		Quality In, Quality Out A high-quality analysis depends on high-quality financials Despite the new AICPA standards for business valuation engagements, the strength of a valuation conclusion is only as good as the accuracy of the data used by the analyst. "We approach every valuation engagement with a healthy degree of skepticism in order to deconstruct the financial data provided to us and arrive at a reasonable conclusion," says Matt Hughey, manager at Gleason & Associates. "No matter how technically sound your analysis, if the underlying financial data and assumptions are faulty, the conclusion will be faulty as well." This was the case in a recent engagement in which Gleason & Associates was asked to evaluate a business valuation determination that our client disputed. Given that the company in question went out of business within several months of the valuation date, the substantial value claimed by the plaintiff defied explanation. "Once we dug into the company's financial information and uncovered inaccurate billing and revenue collection issues, the problems with the valuation became apparent," explains Hughey. The plaintiff's financial statements included significantly past due accounts receivable, but no allowance for funds that would never be collected. Consequently, the analysis overstated not only the value of the accounts receivable but importantly, overstated the company's revenue and net income - all factors critical to a defensible valuation conclusion. "By questioning the reasonableness of the company's financial statements, we were able to prepare and defend an alternative analysis that indicated a value which was much lower than the plaintiff's original claim," notes Hughey. Accounting for Errors Incorrect data, such as in the situation described above, can stem from the inappropriate application of accounting standards, inconsistent financial reporting, and inadequate financial controls. Inconsistencies in financial data may also be present when comparing information year to year, company to company, or industry to industry, due to new, often complex, accounting pronouncements. "Our first step in a financial analysis is to understand the quality of the financial data we receive by reviewing the footnotes to financial statements, performing ratio analyses, evaluating the company's reported earnings and asking questions," notes Hughey. "Only after thoroughly understanding a company's financials can we feel confident in the quality of our valuation assessment." Excerpted from Briefly Speaking, a complimentary newsletter published by Gleason & Associates. . Why Gleason | Practice Areas | Meet Our Team | Case Studies | Continuing Education | Resources | Site Map | Contact Us | Home © 2010 Gleason & Associates One Gateway Center, Suite 525, 420 Ft. Duquesne Blvd., Pittsburgh, PA 15222, Phone: 412.391.9010,