Valuations: how does the quality of the information impact the process?

When preparing a valuation of a company there are certain key pieces of information that we will rely on. Top of the list is financial statements, being annual accounts and/or management accounts. But what happens if those accounts are frankly not worth the paper they are printed on?

Identifying the issues

While a valuation does not involve an audit of the financial information, we do need to have confidence over the figures we are relying on.

When we receive information, we will undertake an initial review. The focus of this should be to identify anything that stands out in the context of the performance of the company, but this will inevitably lead us to identify anything that just doesn’t stack up from an accounting basis.

Notably this will include if the balance sheets do not reconcile (the difference between net assets between one date and another should be equal to the profits (or losses) generated less any dividends declared) or even balance (as the name suggests, the net assets (the top of the balance sheet) should equal the capital and equity (the bottom)). Simple right? However, it is surprising how often, especially when using management information instead of statutory, this simple equation doesn’t work.

In preparing valuations and understanding the make-up of various key balances, we will further ‘prod’, requesting additional breakdowns for key balances. Again, it is surprising how often these breakdowns don’t add up to the previously reported total balance.

In a recent particularly ‘bad’ case, we received multiple versions of the management information, each time with issues or balances that didn’t reconcile.

Why does this happen? Internal bookkeepers often are unqualified and are often highly valued employees who have grown into the role. The company external accountants will often ‘tidy up’ internal management accounts at the year end. Issues can therefore arise when we are using interim financial information; the external accountants have taken a light touch approach (in any event the onus for accurate accounts is on the directors); or the accounting records have not been updated for adjustments made by the external accountants.

The implication

Inevitably, where information is of poor quality this will cause delays as we try to obtain information that can be relied upon. This will also increase the volume of work required as:

• each set of new information needs to be reviewed; and
• even once information that ‘makes sense’ has been provided, this, and any subsequent information, will be more closely scrutinised – once burnt…

Sometimes there are just too many issues with the information that cannot be resolved. Guidance is needed from the instructing solicitors but in such instances there is usually no alternative to proceeding with the information available, pointing out that we are relying on flawed information and heavily caveating conclusions. Sometimes we can set out the impact of adopting different assumptions with regard to the inadequate information but sometimes we can’t as it’s not possible to make any sensible assumptions.

Aside from drawing out the valuation process, poor quality information can have a significant impact on costs, both the cost of the report and additional costs resulting from delayed hearings. It can therefore be advantageous to press upon clients the importance of providing reliable information in a timely manner.