ESOPs & Valuation - Willamette Management Associates

1 7/10/20121 ESOPs & ValuationAmerican Institute of CPAs Robert Reilly Robert Reilly has been a managing director of Willamette Management Associates for over 20 years. Willamette Management Associates provides business Valuation , forensic analysis, and financial opinion services for transaction, financing, taxation, bankruptcy, litigation, and planning purposes. Robert has provided ESOP sponsor company stock purchase/sale financial advisor opinions and ESOP sponsor company annual stock valuations for over 30 years. Robert has testified in federal court on numerous occasions with regard to ESOP transaction ERISA compliance matters.

2 Robert recently testified before the DOL (on behalf of the AICPA) with regard to ESOP Valuation analyst fiduciary holds a BA in economics and an MBA in finance, both from Columbia University. He is a certified public accountant, accredited in business Valuation , and certified in financial forensics. He is also a chartered financial analyst, chartered global financial accountant, certified Management accountant, and certified business is a member of the AICPA forensic and Valuation services executive committee (FVSEC).Robert can be reached at (773) 399-4318 or at Institute of CPAs Marilee LauMarilee provides consulting services and teaches various educational programs on accounting and auditing for employee benefit plans.

3 Before retiring in 2009, Marilee was the National Partner in Charge of KPMG s Employee Benefit Plan Audit Practice. Marilee Lau is a founding member and former Chair of the AICPA Employee Benefit Plan Audit Quality Center s Executive Committee which was established in 2004. Marilee is currently the AICPA s representative to the DOL s ERISA Advisory Council. She has served on the AICPA s Employee Benefits Plans Experts Panel and is the current chair of the EBP Audit Guide Overhaul Task is also on the Advisory Board for the Bureau of National Affairs Pension & Benefits Reporter which provides input on various pension issues and is currently serving on the Accountants Committee for the International Foundation of Employee Benefit is a member of the AICPA, California Society of CPA s, and the International Foundation of Employee Benefit Plans and a frequent speaker for numerous professional conferences and programs.

4 She is a graduate of Santa Clara University with a BS in economics and an MBA in Institute of CPAs Marcus AronMr. Aron has over twenty years of experience in working with audits of ERISA-covered plans. He is responsible for the day-to-day implementation of EBSA s CPA Firm Inspection Program, providing technical assistance to plan filers and plan professionals, and providing ERISA-related accounting and auditing expertise within EBSA. Mr. Aron is a certified public accountant and holds a degree with a major in accounting from the College of William and Mary in Institute of CPAs ESOP ValuationsWhat the DOL has foundAuditor s responsibilities and related auditing standardsESOP Valuation Considerations from the Appraiser s point of viewQ&AAmerican Institute of CPAs ESOP Valuation Issues59 ESOP audits reviewed by the DOL13 full-scope audits, the CPA failed to review the appraisal of the employer stock7 limited-scope audits, - failure to obtain a certification from a qualifying entity.

5 Or- Failure to obtain a certification that was consistent with the plan s reporting period34-37/10/20124 American Institute of CPAs ESOP Valuation IssuesAuditors have not adequately audited the fair value Reviewing qualifications of the appraisal firm Reviewing the appropriateness of the assumptions used Only work performed was to obtain the Valuation report from Management and agree to the financial statementsInadequate documentation No review indicated or no documentation that the Valuation report was reviewed with Management No review of the assumptions for reasonableness (business growth, discount rates, profitability)

6 American Institute of CPAs Auditor ResponsibilitiesUsing the work of an expert SAS 73 addresses the auditor s responsibility relating to the use of an expert Does the expert have the necessary competence, capabilities, and objectivity- Personal experience- Discussions with the specialist- Knowledge of the specialist s qualifications, memberships in a professional body or industry association34-47/10/20125 American Institute of CPAs Evaluation of the Work of the SpecialistMaking inquiries of the specialistReviewing working papers and reports of the specialistPerforming corroborative procedures, such as Examining published data from reputable, authoritative sources Confirming relevant matters with third parties.

7 If applicable Performing detailed analytical procedures Performing calculationsEngaging in discussions with another specialist with relevant experienceDiscussing the report with managementAmerican Institute of CPAs Reasonableness of the Work of the SpecialistPresented in a manner consistent with any standards of the profession or industry of the specialistClearly expressed the scope of the work performed and the standards appliedBased on an appropriate period and taking into account subsequent events when relevantBased on appropriate consideration of errors or deviations encountered by the specialist34-57/10/20126 American Institute of CPAs Other ResponsibilitiesAuditor has sole responsibility for the opinion Can t delegate to specialistAuditor concludes that the work of the specialist is adequate for the auditor s purposesAdequate audit evidenceVerifying the source data that is significant to the work of the specialist Reasonableness of the procedures performed and assumptions usedAmerican Institute of CPAs ESOP Employer Stock Valuation types of ESOP-related financial advisory employer stock Valuation and fair market of the employer stock Valuation of the employer stock

8 Business accepted Valuation approaches and Valuation the employer stock Valuation Valuation professional credentials and professional standards34-67/10/20127 American Institute of CPAs Different Types of ESOP-relatedFinancial Advisory fairness opinion issued by an independent financial advisor to the ESOP trustee related to a pending purchase or sale of the sponsor company stock Valuation issued by an independent business appraiser to the ESOP trustee related to regulatory compliance and plan administration Institute of CPAs ESOP Transaction Fairness opinions are typically prepared when the ESOP makes an initial purchase of sponsor company stock the ESOP makes a subsequent purchase of sponsor company stock the ESOP receives an offer to purchase its sponsor company stock there is a tender offer to purchase all of the sponsor company stock34-77/10/20128 American Institute of CPAs ESOP Transaction Fairness Opinions (cont.)

9 Fairness opinion opines that the proposed transaction is fair to the ESOP participants the ESOP will not pay more than adequate consideration the ESOP will not receive less than adequate consideration the deal structure is fair to the ESOP in absolute terms the deal structure is fair to the ESOP in relative terms the deal structure is not more beneficial to other transaction participants than it is to the ESOP trustee will consider the fairness opinion in deciding whether to accept or not accept the proposed Institute of CPAs ESOP Employer Stock closely held ESOP sponsor company must have an employer stock Valuation performed at least business appraiser will estimate the fair market value of the sponsor company stock.

10 The business appraiser will recommend the fair market value to the ESOP Institute of CPAs ESOP Employer Stock Valuations (cont.) ESOP trustee will conclude the adequate consideration for the employer stock. Adequate consideration is defined by ERISA as the fair market value of the asset as determined in good faith by the trustee or named fiduciary.. pursuant to the terms of the plan and in accordance with regulations promulgated by the Secretary of Labor. American Institute of CPAs ESOP Employer Stock Valuations (cont.) , the business appraiser estimates fair market trustee considers the terms of the plan and applies good faith and judgment to conclude adequate ESOP uses the employer stock Valuation to allocate shares to plan participant accounts, to redeem stock that is put back to the sponsor company when the participant retires, and for other administrative Institute of CPAs ESOP Employer Stock Fair Market ValueConsistent with IRS Revenue Ruling 59-60, the 1988 DOL proposed regulation relating to the definition of adequate consideration define the term fair market value as follows.