Frequently Asked Questions – Practice Inspection Program

CBV Institute has published this document to help Members and Registered Students comply with the  Mandatory Practice Inspection Policy and the various aspects of the Practice Inspection Program.

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What is the Practice Inspection Program?

The Practice Inspection Program (the “Program”) is a mandatory program of CBV Institute which applies to all Members and Registered Students. Its objective is to ensure that the work of Members and Registered Students (“Practitioners”) has been done in accordance with CBV Institute Practice Standards and Code of Ethics. The overall goal of the program is to enhance the confidence that the public and regulatory bodies have in the business valuation profession, and to assist in maintaining or improving the quality of services provided.

The Program involves CBV Institute inspection of Practitioners’ completed work (including final work products and engagement-related working files) to determine if the applicable Practice Standards and the Code of Ethics have been complied with and if the technical aspects of the analysis in support of a conclusion is consistent with the nature of the engagement and the expected practice of a competent practitioner.

The primary purpose of the Program is to highlight areas where a Practitioner’s practices may be below the standard of that expected, so that feedback that is constructive or educational in nature can be provided to the Practitioner. The emphasis is on highlighting areas for improvement so that corrective actions can be taken by the Practitioner.

Am I subject to it?

This depends on whether your work or practice includes providing services which are covered by Practice Standards (“Work Product”) and whether you sign or otherwise take responsibility for such Work Product. See more below in “Who is deemed responsible for a Work Product?”

If you are a Member or Registered Student who does not issue any Work Products, you will have the opportunity to self-declare this as part of CBV Institute’s annual Practice Inspection Declaration, and will not be subject to practice inspections. This declaration must be completed annually by all Members and Registered Students for the preceding inspection period.

If you are a Member or Registered Student who has been involved with a Work Product as part of the engagement team (performing the analysis, writing the report or communication, etc.), but you are not the Practitioner who signs or otherwise takes responsibility for that Work Product, you will not be subject to practice inspection for that Work Product. The Program inspects only those Practitioners who sign or approve a Work Product, thereby authorizing the release of such Work Product to a client.

In situations where more than one Practitioner has signed a Work Product (also known as a “joint report”), every Practitioner who has signed a Work Product will be considered a report issuer and any one of them may be subject to practice inspection.

What is the Practice Inspection Declaration and when must I complete it?

The Practice Inspection Declaration (PID) is the process by which each Member and Registered Student makes either a positive or negative self-declaration on CBV Institute’s website, annually, in order to self-identify whether they are potentially subject to practice inspection. The annual declaration process will be made available to all Members and Registered Students in early January, and declarations must be completed and submitted by March 1. You will have the ability to modify your response to the PID until the March 1 deadline.

Failure to complete the PID or failure to provide lists of Work Products and related documents may result in Member or Registered Student suspension and/or termination under the Institute’s By-laws.

What is a “Work Product”? Does it mean a “report”?

Any Work Product issued on or after January 1, 2018 that is subject to CBV Institute Practice Standards is subject to the Program. This may include valuation reports (or other written conclusions of value), VFR valuation reports, expert reports, advisory reports, limited critique reports, fairness opinions, investment entity review reports, etc. Only Work Products issued during the four previous calendar years are subject to inspection (the “Inspection Period”). Practice inspections completed in 2019 will relate to Work Products issued during 2018, practice inspections completed in 2020 will related to Work Products issued during 2018 and 2019, and so on.

It is important to understand that a Work Product is not limited to a report, but may encompass a broader range of valuation or damage quantification work. The Practice Inspection Program applies to all Work Products which are subject to the Practice Standards.

Work Product is not necessarily limited to a valuation report, and is broadly defined to include:

  • written communications as to a Practitioner’s conclusion of value, including schedules containing valuations where a valuation conclusion is expressed for which a Practitioner took responsibility by virtue of providing them to an external user;
  • written communications as to a Practitioner’s conclusion of financial gain/loss or of a financial nature;
  • comments on conclusions of value, of financial gain/loss, or of a financial nature.

Note that the Practice Standards contain requirements for any written communication containing a conclusion as to the value of shares, assets or an interest in a business, a conclusion as to the quantum of financial gain/loss or any conclusion of a financial nature in the context of litigation or a dispute, or comments on a report containing a conclusion on such matters.

Please also refer to Practice Bulletin No. 5 for guidance as to when communications are not valuation, advisory, expert of limited critique reports, and when the reporting standards are not intended to apply. Practice Bulletin No. 5 specifically addresses when a communication does not express a conclusion and when a communication is intended solely for internal use.

For example, under the Practice Standards, a valuation report that is marked as “draft” and is in the process of being completed is not considered to be subject to the Practice Standards (Standard No. 110) so long as each of the four conditions outlined in Standard No. 110 are met.

Conversely, a conclusion of value that has been provided to a client (possibly with attached calculations), is subject to the Practice Standards even when the communication does not follow the reporting standards of the Practice Standards, and would constitute Work Product that must be included if a Practitioner is selected for practice inspection.

Only Work Products issued on or after January 1, 2018 are subject to practice inspection. The Program becomes operational in 2019 but, eventually, a Practitioner will be subject to inspection for Work Products issued during the four previous calendar years.

Who is deemed responsible for a Work Product?

The person who is deemed responsible for a Work Product is the person who signed it or reviewed, approved or authorized its release to the third-party client. This will differ by firm based on each firm’s policies and procedures, which govern whether it is a Partner or other senior level Practitioner who is authorized to sign or approve the release of a Work Product.

For greater clarity, a Practitioner(s) who signs the Work Product is(are) subject to inspection on it. In cases where multiple practitioners sign a Work Product, all such practitioners are subject to inspection on it, and all should self-declare “Yes” for their annual PID in respect of that Work Product.

If a Work Product is not signed, or is issued under the signature of a firm, it will be the Practitioner who took responsibility for the Work Product who will be subject to practice inspection. This may include the Practitioner who was responsible for final review and approval of the conclusion within the Work Product or who was responsible for the release of the conclusion to the client (this can also be referred to as the Practitioner who “signed-off” on the Work Product). If responsibility for a Work Product is shared between multiple Practitioners, then all would be deemed responsible, and potentially subject to inspection for that Work Product. Where there are multiple responsible Practitioners, all Practitioners should self-declare “Yes” for their annual PID in respect of that Work Product.

What types of Work Products are not subject to practice inspection?

The following are not subject to the Program:

  • Non-written communications, such as verbal valuation advice.
  • Work prepared solely for internal use by the Practitioner’s employer or firm (such as Work Product utilized in audit support or investment decisions).
  • Communications constituting general advice.

Please refer to Practice Bulletin No. 5 for guidance as to when communications are not valuation, advisory, expert or limited critique reports, and whether a particular communication is of a nature such that the reporting standards are not intended to apply.

What about Work Products where access is restricted, such as a Court order that does not permit disclosure?

The Practitioner, if selected, must provide CBV Institute with a complete list of Work Products issued during the Inspection Period, including Work Products where access is restricted. Where access to the Work Product and supporting files is restricted by law, government, administrative or regulatory restrictions or order of a Court of competent jurisdiction, the Practitioner will have the opportunity to identify these Work Products as such, and these will not be subject to practice inspection. Additional documentation to support the restriction may be requested by CBV Institute.

Are purchase price allocation (PPA) engagements considered Work Products subject to the Program? What about valuations for purposes of impairment testing?

It depends on whether the valuation is for internal or external use. Valuations prepared by a Member or Registered Student for a third-party client, such as the management of a reporting entity in determining the fair value of assets, liabilities and/or equity for financial reporting requirements (and addressed by Appendix B to Standard No. 110), known as VFR Valuation Reports, are Work Products that fall within the scope of the Program. This includes PPAs and VFR Valuation Reports prepared in the context of impairment testing (which provide a conclusion of fair value of reporting units and/or intangible assets).

However, the review and/or testing of a PPA as part of an assurance engagement by a Practitioner whose employer or firm is the auditor and sole user, is considered to be outside the scope of the Program.

What are the requirements of the Program?

The Program requires the following:

All Members and Registered Students:

  • to make an annual PID on CBV Institute website by March 1.

Members and Registered Students selected for practice inspection:

  • to provide a listing of Work Products issued during the Inspection Period (generally, this will be the four previous calendar years, but will be a shorter time period in the 2019, 2020, and 2021 inspection years).
  • to provide the Work Products selected by CBV Institute to the Practice Inspection Inspector/Director, along with all supporting working files.
  • to cooperate with the Inspector, Director and Practice Inspection Committee.
  • to take remedial action if and as required by CBV Institute (based on decisions of the Practice Inspection Committee).

How are Practitioners selected for inspection?

CBV Institute will randomly select Practitioners for practice inspection each year. Practitioners who have been inspected within the past four years will not be subject to re-inspection unless re-inspection has been identified as a remedial action required by the Practice Inspection Committee as a result of a previous practice inspection with identified deficiencies.

What happens if I’m selected for a practice inspection?

If you are selected for a practice inspection, you will be notified in writing, and asked to provide a complete list of all of the Work Products you signed or took responsibility for during the particular inspection period, using a CBV Institute form. You will also have the opportunity to indicate whether your firm had a documented internal compliance review process that covered substantially all aspects of the Program. If you wish to make your firm’s internal compliance review process available to the Inspector, the extent of Work Products to be inspected may be reduced.

You will have 30 calendar days to provide this information to CBV Institute. The template form will require the date the Work Product was issued, the nature/type of Work Product, the purpose of the Work Product, the applicable Practice Standards, and the industry of the client/subject assets. You will not necessarily need to identify the client or subject of the work by name. You will be asked to submit the completed form electronically via a password-protected transmission.

Following this, CBV Institute will select a sample of Work Products for inspection, and will communicate these to you in writing. You will then have 30 calendar days to provide or make available the Work Products and all supporting files.

There are three options for how these documents can be provided to CBV Institute:

  1. In-person– an in-person review may be done at your offices by the Inspector.
  2. Electronically via a secure key.
  3. Electronically via a leading, secure cloud-based platform.

If I am selected for a practice inspection, how many of my files will you review?

The number of files selected is at the discretion of CBV Institute, and will depend on whether Inspectors choose to rely on your firm’s internal compliance review process, but will generally consist of up to four Work Products during an Inspection Period.

If I am selected for a practice inspection, how much time will I have to provide the information requested?

You will have 30 calendar days to provide the requested listing of Work Products, and an additional 30 calendar days to provide the selected Work Products and supporting files.

If I am selected for a practice inspection, what type of documentation will be requested of me?

If you are selected for an inspection, you will be asked to provide a complete list of all of the Work Products you signed or took responsibility for during the particular Inspection Period, using a template form, within 30 calendar days of the request.

CBV Institute will then select a sample of Work Products from that list for an inspection, and you will be asked to provide or make available the Work Products themselves and the supporting files. You will receive clear instructions as to what “supporting files” you should include. This will generally include engagement letter(s) or similar documents, engagement team information and engagement fee structure, documentation concerning independence and conflict of interest, representation letter(s) and draft report(s), and all working papers supporting the conclusion (such as calculations, client information, analysis, etc.). Note that “supporting files” will include documents that may be paper-based or electronic, and include electronically stored data that is connected and traceable to the client or client engagement, such as email correspondence.

What is meant in the Mandatory Practice Inspection Policy by “the expected practice of a competent Practitioner”?

In addition to the intent to assess whether the Practice Standards have been followed, a second intent of the Program is whether the technical aspects of the analysis in support of a conclusion is consistent with the nature of the engagement and the expected practice of a competent Practitioner. For example, inspections will take into account whether the technical application of a valuation approach was property applied, and will not aim to second-guess areas of professional judgment, such as the selection of the “right” cost of capital or the “best” valuation approach, so long as a reasonable approach was used for the specific circumstance of the engagement.

While this is an area that is inherently subject to some professional judgment, the process around this assessment is robust. That process and determination includes an independent assessment by an Inspector, discussion with the Practitioner, and a review by a committee of senior and experienced CBV practitioners (the Practice Inspection Committee). The Inspector’s review of the Work Product and related supporting working files is ultimately intended to provide a holistic picture of the process undertaken by the Practitioner in reaching the conclusion.

What if some of the documentation contains confidential or sensitive information? Do I need to disclose my clients’ names?

You will not be required to disclose the name of the client, and you may redact this information when submitting the documentation to CBV Institute. You may wish to redact names of other parties when submitting the Work Product and supporting files; however, any redactions made should still enable the Inspector to logically follow and understand the work performed and conclusions reached.

How long am I required to keep my working papers for a Work Product?

For purposes of the Program, Practitioners should maintain detailed records in support of their Work Products for five calendar years following the date of issuance of the Work Product. However, this may also depend on your firm or employer’s policies as well as other factors.

What if I have changed firms, and by virtue of no longer being employed at a particular firm, I do not have access to a particular Work Product I signed or took responsibility for?

It is a Practitioner’s responsibility to ensure access to work files that is necessary for the completion of the practice inspection. However, CBV Institute acknowledges that a Practitioner can only be inspected on a Work Product to which they have access and, therefore, a Practitioner will not be subject to practice inspection for a Work Product and supporting files for which they no longer have access by virtue of having changed firms.

Will Inspectors visit my office in person?

In-person inspections may be performed; however, in order to complete the practice inspections as efficiently as possible and with minimal disruption, the Inspector will generally aim to perform inspections without visiting the Practitioner’s office with electronic documents delivered through the use of either a secure key or a leading secure cloud-based platform.

How is CBV Institute addressing privacy and data security issues during a practice inspection?

Any information provided to CBV Institute during the course of a practice inspection, including client information, will be provided in a secure manner, stored securely during the practice inspection, and will be destroyed in a secure manner immediately after the results of the practice inspection have been finalized.

If the practice inspection is an in-person inspection, the Work Products and related files will, unless there is a need to temporarily retain copies, remain at the premises of the Practitioner, and their security will remain the responsibility of the Practitioner.

For remote inspections using electronic copies, there are two possible options:

  1. Secure key: the Practitioner will be provided a secure USB key by CBV Institute with pre-set folders where the Practitioner will electronically upload the Work Products and supporting files. This key will be encrypted and password-protected. Once all Work Products and related files are uploaded, the Practitioner will send the key to CBV Institute by registered courier. Once received, CBV Institute will be responsible for the safe storage of the information on a CBV Institute server located in Canada.
  2. Cloud-based platform: the Practitioner will be provided a secure link to an account in the cloud hosted by a leading secure could-based platform. The Practitioner will open the account and create a secret password. The Practitioner will then be able to view the pre-created folder structure, and securely upload the Work Product(s) and related files in an organized manner.

In all cases, access to practice inspection information will be limited to individuals who need access to the information, namely the Director and the Inspector. In all cases, the information provided will reside on Canadian servers until it is securely destroyed, once the outcome of the practice inspection has been finalized.

CBV Institute will comply with Canadian data privacy rules (i.e., PIPEDA and provincial regulations) at all times, such that all information will remain in Canada at all times, including any personal information. However, it is important to note that business information (such as a client’s financial information) is not subject to PIPEDA.

How is CBV Institute addressing confidentiality and confidential client information during a practice inspection?

CBV Institute’s Code of Conduct, which covers confidentiality and the obligation not to disclose confidential information applies to all of its volunteers, officers, employees and directors, including the Director, Inspector(s), and Practice Inspection Committee members.

Section 501.3 of the CBV Institute’s Code of Ethics provides that disclosures in connection with a peer review that is required is not a breach of confidentiality of client information.

Will I need to notify my clients or obtain their approval before providing access to reports and files to a CBV Institute Inspector for a practice inspection?

The provision of confidential client information to an Inspector will not be considered to be a breach of confidentiality as per CBV Institute’s Code of Ethics. Work Products and related files are required to be provided to CBV Institute according to section 22 of the By-laws.

Practitioners who are subject to practice inspection should inform their clients about the possibility of practice inspections at the start of an engagement, including that information may be made available to a representative of CBV Institute in order for them to fulfill their obligations to their professional body. This requirement to disclose should be a precondition of the engagement.

What if my firm has an internal compliance review process?

You will have the opportunity to inform CBV Institute if your firm has a documented internal compliance review process in place that covers substantially all aspects of the Program once you are selected for a practice inspection. You will have the opportunity to provide documentation related to this process for the Inspector to review. In order to determine whether an internal compliance review process can be relied upon, it will be necessary for the Inspector to review a limited sample of Work Products to test whether the internal compliance review process is operative. To warrant reliance, the process must include evidence as to the nature of the review (such as checklists) and its completion by a CBV who was not part of the engagement team.

Where the Inspector determines that reliance is warranted, based on the limited sample of Work Products tested, no further Work Products will be selected for practice inspection.

If the firm’s internal compliance review process is deemed effective for a particular Inspection Period, CBV Institute may rely on that conclusion to reduce the extent of inspection of other Practitioners at the same firm, if other such Practitioners are selected during the same Inspection Period.

What is required for CBV Institute to rely on a firm’s internal compliance review process?

To warrant reliance as part of a practice inspection of a Practitioner, a firm’s internal compliance review process must be:

  • documented;
  • have been operational during the Inspection Period;
  • cover off all of the required (bolded) elements of the Practice Standards as well as the Code of Ethics; and
  • completed by a CBV not involved with the engagement.

CBV Institute will test any internal compliance review process that a firm uses, if the Practitioner so chooses, but may not rely on such process. If CBV Institute determines it is able to rely on the internal compliance review process (as all the above conditions are met), this will reduce the extent of Work Products to be inspected for a Practitioner, from approximately four files down to one or two.

Who is bearing the cost of this Program?

No separate fees or costs will be charged unless a practice inspection is being completed as a result of identified deficiencies which result in the need for a re-inspection within a particular period of time. This determination is at the discretion of the Practice Inspection Committee. Costs associated with any such re-inspection, including CBV Institute staff time, will be subject to reimbursement by the Practitioner to CBV Institute (direct costs plus an hourly rate of $250 for staff time).

If I am selected for a practice inspection, who will my Inspector be?

Inspectors will be CBVs who have had a minimum of five years of post-qualification practice experience.

Inspectors will be employed by CBV Institute and work under the direction and supervision of CBV Institute. In all instances, Inspectors will be required to perform their duties with strict adherence to confidentiality with respect to the practice inspection process, including the materials and information that they may have access to and the results of a practice inspection.

Who oversees the Program?

CBV Institute Board of Directors, through the Practice Inspection Committee, oversees the Program. The Chair of the Practice Inspection Committee reports to the Board of Directors generally regarding its activities without identifying the identity of those inspected or any information that would be considered to be confidential.

Will I have the opportunity to discuss the Inspector’s findings?

Yes. A draft of the Inspector’s report is reviewed and discussed by the Inspector with the Practitioner. The Practitioner’s comments and explanations on any noted deficiency, along with specific documentation related thereto, will form part of the practice inspection report. If there are deficiencies identified, the Practitioner will be asked to comment as to the action that the Practitioner proposes to take to address any noted deficiencies. The final practice inspection report will be provided to the Practice Inspection Committee for a decision on such deficiencies.

If I am selected for a practice inspection, who decides the outcome of my inspection?

The Practice Inspection Committee will make a determination as to the significance of a deficiency and its effect. The Practice Inspection Committee is responsible for determining the appropriate actions including remedial actions, sanctions for settlement or referrals to CBV Institute’s Conduct and Discipline Committee.

The Practice Inspection Committee is currently composed of five experienced CBVs who have been CBVs in good standing for greater than 10 years and whose practice includes the issuance of Work Product which is subject to CBV Institute Practice Standards.

The Practice Inspection Committee’s decision concerning an inspection will be communicated securely, in writing to the Practitioner, by the Director.

If my inspection has deficiencies, what types of actions are possible?

The Practice Inspection Committee has broad authority on deciding the outcome of a practice inspection, ranging from no action, accepting the action proposed by the Practitioner, identifying a remedial action, requiring education or re-inspection within a reasonable period of time, or any other action that the Practice Inspection Committee determines in its discretion.

What type of information will be made public about the Program?

The public at large will be aware that CBV Institute has a Program and a Practice Inspection Committee to oversee the Program.

More details will be provided to Members and Registered Students through the Members & Students section of CBV Institute’s website, where the high level findings of each year’s practice inspections will be posted annually in a summary format. The summary will include the areas where it was found that adherence to Practice Standards might be improved. Such publication will not include any firm, individual, or file-specific details which would enable identification of the parties referred to. The goal of the publication of results is to enable self-assessment and to improve the quality of practice.

How often can I be selected for the practice inspection?

A Practitioner will not be potentially subject to a practice inspection more frequently than once during a four-year period, with only the Work Product finalized during the preceding four-year period being subject to practice inspection. Practitioner selection is through a random selection from those Practitioners that have identified in their PID that they have completed Work Product that is inspectable during the prior four-year period.

Who will get to view my “Work Product” and client files?

Only CBV Institute’s Inspector and Director, Professional Practice will have access and ability to inspect your Work Products, reports and client files. The Practice Inspection Committee will only be provided with the findings of a practice inspection through a practice inspection report, which will not identify the Practitioner’s name or office.

In the event a particular practice inspection identifies significant and substantial deficiencies which would require an additional disciplinary review, the Chair of the Practice Inspection Committee may review the Work Product and related files for purposes of making an official complaint to CBV Institute’s Conduct and Discipline Committee. For these purposes, the Work Product and supporting files would be unredacted, and the Chair of the Practice Inspection Committee would act as complainant in accordance with the By-laws. To ensure that there is no conflict of interest between the Chair of the Practice Inspection Committee and the Practitioner, the CBV Institute may request that another member of the Practice Inspection Committee act as Complainant.

How long is an inspection expected to take?

The length of an inspection depends on the number of Work Products selected for review, the completeness of information provided, whether the inspection is in-person or remote as well as the nature and complexity of the Work Products selected. It will also depend on whether any deficiencies are identified, and the extent thereof, including deliberations of the Practice Inspection Committee. While it is difficult to specify an exact duration, a practice inspection could last several months from initiation to completion.

Are there any exemptions from the Practice Inspection Program?

Yes. A retired Member who has retired status with CBV Institute during an entire calendar year forming part of the Inspection Period shall be exempt from practice inspection for any calendar year in which they had retired status. Other exemptions may be granted in extenuating circumstances.

Who should I contact for help or with questions about the Practice Inspection Program?

Questions about the Practice Inspection Program can be directed to the Director, Professional Practice, Catalina Miranda at 416-613-0300, or catalina.miranda@cbvinstitute.com.