A threat to business valuation practices; new laws at the state and federal levels could prevent CPAs from offering some services.

CPA's ability to provide services in a growing practice area may be hampered by rules and regulations in the making. The performance of business valuations--a service many firms have long offered alone or as part of a variety of engagements--could be affected by fallout from the crises at savings and loans and banks. CPA firms providing these services should be aware of legislative changes that could restrict them in the future. Whether a firm prepares business valuations for matrimonial dissolutions, employee stock ownership plans, estate tax returns or mergers and acquisitions, it could face losing this part of its practice because of new laws and regulations.

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) was enacted in response to significant economic problems suffered by banks and thrifts. Many of these problems were found to be the result of questionable loans collateralized with overvalued real estate.

Title XI of FIRREA was enacted "to promote the safety and soundness of insured institutions by requiring that real estate appraisals utilized in connection with federally related transactions be performed in writing in accordance with the uniform standards by individuals whose competency has been demonstrated and whose professional conduct is subject to effective supervision." Federally related transactions are any real-estate-related financial transactions that a federal financial institution, regulatory agency or the Resolution Trust Company engages in, contracts for or regulates and that require an appraiser's services.

FIRREA requires each state to create a licensing or certification procedure for appraisers by July 1, 1991, but the deadline was extended to January 1, 1992, by the Federal Financial Institutions' Examination Counsel (FFIEC). The extension was granted because many states needed extra time to pass their own legislation and to create rules and regulations to govern this legislation.

MORE THAN REAL ESTATE

Although many smaller firms aren't involved in real estate appraisal, they and many larger CPA firms could still be affected by this legislation. There has been much controversy throughout the country over the interpretation of the federal mandate, and many inconsistencies among the states may place business valuators under the guidelines for real estate appraisers. Section 1122 of Title XI also requires the FFIEC appraisal subcommittee to study whether Title XI's provisions should be extended to personal property appraisers in connection with federal, financial and public policy interests.

Personal property is defined in the Uniform Standards of Professional Appraisal Practice, published by the Appraisal Foundation, as "identifiable, portable and tangible objects which are considered by the general public as being 'personal,' e.g., furnishings, artwork, antiques, gems and jewelry, collectibles, machinery and equipment." Under this definition, most business assets clearly are considered personal property and therefore are included in the new rules for appraiser certification and licensing.

On this front, there's good news and bad news for CPAs. The good news is that in March 1991, the FFIEC appraisal subcommittee report to Congress advised against requiring a regulatory framework for personal property appraisal similar to that mandated by Title XI for real estate. The bad news is that each state is still required to design and implement a certification and licensing procedure that may include business appraisers in its provisions.

Title XI guidelines define a state-certified general appraiser as someone who meets at least the Appraisal Qualifications Board's (AQB) minimum criteria to be considered a "certified general real property appraiser" and who passes a state-administered examination issued or endorsed by the AQB. The AQB criteria include 165 classroom hours in courses related to real estate appraisal matters, 2,000 hours of appraisal experience and 10 hours of continuing education each year during the period before certification renewal.

In the past, CPAs generally were grandfathered under various types of laws in many states, but in this instance, Title XI specifically prohibits a state from exempting or grandfathering any individual or group from meeting its certification or licensing criteria. Obviously, this can have a devastating effect on CPAs working in the field of appraisal.

IMPACT ON CPAs

CPAs must realize the new legislation has the potential, through state interpretations, to cover much more than real estate. Here's a sampling of the variety of services these interpretations may affect and some of the more pressing issues that are currently being considered:

* States are considering appraiser legislation that doesn't distinguish between real estate, personal property or business appraisers. The term "appraiser" will incorporate all types of appraisal.

* Certain states are considering legislation to apply to all real estate appraisals, not just federally related transactions.

* In Utah, according to Shelley K. Wismer, staff legal counsel for the Division of Real Estate, "There is nothing in the law that requires individuals who appraise any and all types of business to be registered or certified as real estate appraisers. It is the valuation of an interest in real estate or real property that requires registration or certification. If part of your function is to set the value for the real estate interest to use in valuing the business, Utah law requires you to become registered or certified by this office as a real estate appraiser."

In Nevada, a real estate appraisal performed without a license after July 1, 1991, could be a gross misdemeanor with a fine of $10,000 plus one to six years in prison. The state hasn't clarified what constitutes such an appraisal, but the initial discussions included businesses dependent on real estate, such as ski resorts, restaurants, casinos, manufacturing companies, bowling alleys, outdoor advertising companies and professional practices. If a lease is involved, it may be considered a real estate appraisal.

* Other states are requiring a real estate license for those who appraise businesses. They will no longer exempt CPAs who do appraisals.

* Most states have passed legislation on the certification and licensing of appraisers, but all are substantially different. Many are still trying to clarify resulting new rules and regulations.

For those who perform business appraisals, several other concerns must be addressed. Not only are there various state laws requiring the licensing or certification of appraisers, but legislation also has been drafted in Congress to require the Securities and Exchange Commission to become involved in establishing appraisal standards when public partnership reorganizations are involved. Although this could prove to be a worthwhile safeguard for the investor, SEC intervention could easily add an additional cost of compliance to the standards established by the Appraisal Foundation and the standards of the CPA profession.

Multistate firms face another problem, because CPA--appraisers may have to be licensed in each state where they perform services. A CPA working for a national firm serving many states in a single appraisal will conceivably have to be a licensed appraiser in all such states.

CPAs interested in learning about the licensing and certification in their jurisdictions should consult the exhibit above for where to call for help.

ADDRESSING THE ISSUES

For those who perform valuations or would like to do so in the future, it's important to understand the impact of this new legislation. The American Institute of CPAs has created a business valuations and appraisal task force to address many of the issues FIRREA raises. In addition, all CPAs who perform appraisals may want to contact their state CPA societies to find out about local efforts to influence or change legislation that may prohibit CPAs from offering these services in the future.

GARY R. TRUGMAN, CPA, is managing partner of Trugman & Company, Morris Plains, New Jersey, and a member of the American Institute of CPAs business valuations and appraisal task force. A certified business appraiser and a senior member of the American Society of Appraisers, he is chairman of the ethics and discipline committee of the Institute of Business Appraisers and a member of the New Jersey and New York State societies of CPAs.