Fine Art Appraising #3:

The Personal Property Appraiser's Book of Rules, USPAP

Read the previous articles in the series: Fine Art Appraisals

Introduction

As the result of the Savings and Loan debacle in the late 1980s partially brought about by faulty and fraudulent appraising, the Uniform Standards of Professional Appraisal Practice (USPAP) was created by the Appraisal Foundation, a newly developed government sponsored agency overseeing appraisal activities. These activities consist of the valuation of real estate, personal property, businesses, and machinery. As time went on, USPAP appraisers and appraisal organizations began acting as professional entities rather than hand-me-down store operators which did object d'art appraisals on the side. Today, USPAP is the gold standard for any legitimate appraisal, to the point that in many states to appraise real property one must study for, and take the USPAP examination and be provided documentation that the exam was passed. More significantly, to provide an appraisal to the IRS for a donation or estate purposes one must, among various requirements, provide a qualified appraisal and be qualified by the IRS via USPAP and membership in an accepted appraisal organization. Appraisers who fail to follow the guidelines may be penalized monetarily or disbarred from providing appraisals to the IRS in the future. Thus, if your grandmother wanted to donate her 14 million dollar Warhol oil painting to the local church for a tax write-off it would be necessary to secure the services of an IRS qualified appraiser to provide an opinion of value of the work.

USPAP and its parts

USPAP consists of definitions, a preamble, rules, standards and standards' rules, and statements on appraisal standards, all compressed into a 350+ page book. The four rules grounding USPAP are:

• ethics,
• competency,
• scope of work, and
• jurisdictional exceptions.

Although there are ten standards, only two – 7 and 8 – deal with personal property as opposed to real, business, intangible, mass appraisals and appraisal reviews. Statements on appraisal standards are present to help the reader understand the rules and standards. Standards 7 and 8 provide the steps, process, structures, specifics and methodology involved to produce the opinion of value. Here instructions are provided in terms of what dates are to be used, how a client is to be identified, how the scope of work is to be developed, how to describe a given property, the differences between reports, and what elements must be present in any appraisal report. Although this practicum is significant, and appraisal organizations look for the reports to allow a potential member to enter the appraisal organization, it is the rules that ground the appraisal process, and the failure to follow them which causes significant appraisal problems. Failing to act ethically may result in a malpractice suit; not following jurisdiction exceptions from the IRS may cause financial penalties or being prohibited from serving as a qualified appraiser. There are advisory opinions and frequently asked questions present to illustrate and help appraisers apply the standards and rules.

The Rules: Ethics, Competency, Scope of Work, and Jurisdictional Exception

Ethics mandates that appraisers must not perform an assignment with bias, advocacy, predetermined opinions and conclusions, misrepresent appraisal role in outside services, must not defraud or mislead with intention, must not allow employees to mislead or defraud, must not engage in discrimination, criminal conduct, or be negligent. Appraisers must disclose past, present or future interests in the property being appraised, any kickbacks or referral fees, and provide confidentiality to clients using their services. Additionally, appraisers may not provide a predetermined result, a result favoring the client, the amount of value opinion, the attainment of a stipulated result – taxes reduced, or loan secured – or the occurrence of a stipulated result.

Competency requires that the appraiser must either be competent to perform an assignment or acquire such competency, or must decline or withdraw from an assignment when competency cannot be achieved.

Scope of work entails that the appraisal process identify the problem to be solved, determine and perform the scope of work necessary to develop credible assignment results, and disclose the scope of work in the report.

Jurisdictional exception notes that if laws void particular appraisal processes the appraiser will not engage those particular voided activities in carrying out an assignment.

A Composite Case Study

Mary, a well known expert in 18th century fine art, is an appraiser serving the NYC metropolitan area. She was called upon by her best friend Bea to appraise the works of Andy Warhol, and a collection of World War II pistols. The client informed Mary that she needed the appraisal quickly to secure a loan from her bank, and for some items as donations to her church. Mary explained to Bea that she could not get the report finished in the time frame. Bea told her to just throw something together so that she could secure her loan. Bea also noted that she wanted Mary to authenticate the pieces and ultimately broker the sales in the future. Bea was especially adamant about using a Retail Replacement Cost methodology since it brought higher values to the properties. The higher value donations would help reduce her upcoming tax bill. Mary's payment for her opinion would be based on how much the properties would be appraised for. Mary called Saks, and a few galleries to secure prices and provided authentication and a hefty value for the properties in her appraisal report. Bea was happy and noted how she was looking forward to having Mary broker some of her pieces.

According to USPAP what did Mary do wrong? To begin with, Mary was experienced in 18th century fine art not in contemporary art or pistols. Being inexperienced she should have disclosed her lack of experience, secured education for competency or declined an assignment she was not competent to carry out. Further, the IRS review panel would have thrown out her report since she used the wrong approach to establishing her opinion of value. Fair market value approach should have been used rather than retail replacement value. Mary misstated her value and could be penalized and possibly excluded from future IRS appraisal work. Failing to follow accepted roads to the IRS over the last few years has resulted in a failure rate of between 50 and 70 percent of IRS tax write-off reports pertaining to appraised values. Providing a thrown-together report might have involved Mary in violation of criminal law since the appraisal was intentionally ill-devised with Mary providing authentication without proper education and training. In point, Mary's actions could be looked upon as being involved in a conspiracy to defraud the bank, given that she provided values lacking proper supports and methodology.

By accepting fees and the future brokering job Mary violated future stipulated results and contingency fee rules. Mary was also negligent in using the retail replacement value which is normally employed for insurance purposes. Mary was also wrong in accepting an assignment with her best friend, since to do so amounts to bias and advocacy. Lastly, her best friend could have sued her for malpractice since Mary violated both ethical and legal rules.

Problems with USPAP

In general there is no legal requirement that an appraiser follow USPAP. One may choose to be USPAP certified (passing the written exam), become USPAP certified in order to be part of the major appraisal organizations, or be qualified to practice before the IRS. One could argue that without this requirement and hence the following of the standards, the public is at risk when they need an appraisal. In addition to the lack of USPAP requirement to provide an opinion of value, there is no policing of appraisals or enforcement protocols to insure that appraisers who passed the USPAP exam actually follow the standards and rules.

The competency rule regarding securing competency via education has allowed appraisers to saddle up to a seminar without testing and maintain that since they took a seminar for two hours or a field trip to a foreign land they are now competent in a given field. Carpenters do not establish competency by touching a piece of wood, nor does an accountant establish competency by carrying around a multiplication table. The problem is that competency has not been given structure and process. Competency is not achieved by presence or association but by demonstration of knowledge. USPAP designation is achieved by classroom hours and exam passing and there is no reason why competency could not follow a similar route.

There is a belief on the part of the population that opinions of value equal authentication of a property. They do not. There is little if any training available for an appraiser to qualify him or her to authenticate an object. For an appraiser to profess that he is capable of authenticating while he or she is appraising is to mislead a client and a violation of the ethics rule. Appraisers provide opinions of value. Others trained and following the principles of provenance, scientific analysis, and connoisseurship may be capable of providing authentication.

There are those appraisers who maintain a specialty or expertise in a given field. They have been performing their specialty for many years but then again, who or what established their expertise? Merely because one performs a certain task over many years does not establish that one is specialized or an expert. He or she might have been doing it wrong all along. Is the so-called expert or specialist misleading clients by professing such expertise in the absence of any certification or documentation establishing such specialized knowledge and abilities?

There are many ethical rules as mentioned above, and most lack definitional clarity. What exactly does it mean to be biased, advocate, provide misleading information, and so on? Definitions with conditions should be developed so that both the appraiser and the client know what to provide and to accept as satisfying or dissatisfying the rule. Fraud has been identified in most legal venues as misrepresentation with intention to secure a benefit to the fraudster at the cost of the injured party. There is no reason why clarity can be provided in the law and not in ethical rules.

Comments

The fact that appraiser reports sent to the IRS have a 30-50% chance of being accepted is a note that the process of appraisal report development is problematic and troublesome given that USPAP has been around for 20+ years. The significant insinuation from the IRS low approval rates of appraiser reports is that lacking the sanctions of monetary penalties, and disbarment it is possible to hypothesize that non- IRS reports would probably have higher disapproval rates. The factors surrounding and endemic to the process require more research and examination. One could easily argue that appraisers are incompetent in their field. This would be an oversimplification. The problem is grounded on a group of variables not easily identified or examined. Such factors include but are not limited to the politicization of the IRS panel of investigators, the process used by the IRS investigators to reach their opinion of value, the use of fair market value data and where the data emerges from, the markets used to establish the data, the time spans used to construct the data, the level of expertise of the appraiser providing the reports, the extent to which the appraiser follows the IRS guidelines, and the standards and rules of USPAP.

In upcoming articles examination of USPAP and the appraisal process will continue.

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— by John Daab Ph.D.  |  April 30, 2010

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