Fine Art Appraising #4:

The Appraiser and Promoting the Public Trust

Read the previous articles in the series: Fine Art Appraisals

The thrust of the Appraisal Foundation's Uniform Standards of Professional Appraisal Practice (USPAP) is to promote the public trust in the process of appraising or providing opinions of value. Appraisal practices are grounded in an array of rules and ethical principles designed to lead to a credible result. As was pointed out in the preceding article, it is not altogether clear what these rules or ethics mean. That is, the rules and ethics grounding the providing of a credible result may be too amorphous or lacking in definitional structure to provide a clearly developed credible outcome in a given assignment. The focus of this article is to shed some light on the practical application of various ethical principles.

The Unraveling of Rules and Ethics in USPAP

In any system of law or ethical abidance it is necessary that there are sanctions which can be imposed to promote adherence. The IRS provides the sanctions of financial penalties and disbarment for violations of the rules regarding the submission of appraisals for donations or estates. Various governmental bodies provide policing sub-organizations to enforce the rules and principles. Upon receipt of a complaint, appraisal organizations will sanction an appraiser for violations of the rules and ethics, with the possible extreme consequence that unethical behavior may result in losing one’s appraiser designation. The Appraisal Foundation has no sanctions for USPAP violations nor does it have any police or enforcement unit watching out for violators. More significantly, it notes that appraisers are not obligated to follow USPAP unless by law, client, or choice. It does not indicate which assignments or types of assignment are to follow USPAP, nor does it require adherence to any particular format, form or style in the development of the appraisal reports. The advisory opinions and frequently asked questions in the USPAP manual are not included to concretize possible ambiguous standards or rules but are to be used as illustrations.

The lack of sanctions, monitoring, and looseness of appraisal requirements creates an environment whereby wiggle room seems to color an understanding of what requirements are really necessary to provide a sound and credible result in arriving at an opinion of value. One can imagine the outcome of allowing looseness in filing tax returns. This is not to throw out the pot because the water is dirty, but to note that a little too much laissez-faire in developing a sound methodological processing of appraising lends to a misunderstanding of the appraiser's duties to the public. Additionally, challenges and critiques may more easily arise to questionably prepared appraisals. In order to provide some muscle to this problem of looseness or obfuscation, a composite case study will follow to draw some practical understanding of how USPAP should connect with the appraiser.

A Composite Case Study

XYZ gallery, a recognized purveyor of fine art, frequently offers for sale or at auction various works attributed to well known artists. The gallery uses senior appraisers belonging to respected appraisal organizations. The appraisers not only offer opinions of value for the works but one of them authenticates the artworks as well. The type of appraisal provided is a Retail Replacement Value (RRV). RRV appraisals are intended primarily for insurance purposes in that if properties are lost or damaged the carrier is expected to pay a higher price since the owner must replace the work quickly and in a relevant market or market frequented by the owner. Appraisers secure value via comparable prices found in the owner’s location. Such prices may be from a gallery in the neighborhood or a major department store. Such values are not Fair Market Value or values one would secure from auctions. Such values would normally be somewhat lower.

One of the appraisers has provided the gallery with a template report to allow the gallery to be involved in the appraisal so as to expedite it more efficiently. The authenticating appraiser has noted that he has authenticated thousands of pieces of art over many years for the gallery. The mantra of the authenticating appraiser is that instead of using the standard curatorial or forensic step of a signature to provide evidence that a work is from a given artist, the work should authenticate the signature. Both appraisers are paid for their assignments based on a percentage of the selling price of the work. The authenticating appraisers have also made additional monies from the sales due to the fact that they had a financial interest in some of the works. XYZ gallery always provides an amount that the appraisers strive for in their opinion of value.

Over the last three years the gallery's customers have attempted to resell or return the works purchased. The gallery has refused to refund their monies and other galleries have refused to buy the works, claiming that the prices asked for are nowhere near the value of the works. Some have noted that lithographs which the buyers paid $500,000 for are worth as little as $5,000-$10,000. One police organization claims that their investigation revealed that the work supplied was a fake. Other experts confirmed that the works had questionable value and were not from the hand of the artist but forgeries. Currently, over 400 past buyers are requesting a return of their money via mail, complaints, or individual or class action litigation. The appraisers maintain that their appraisals and authentications are correct and the gallery is arguing that they are victims of a smear campaign. What violations occurred in regard to USPAP?

Providing a Credible Result in an Appraisal

USPAP requires that appraisers provide a credible opinion of value. Credible support for an opinion flows from appropriate evidence based on logical analysis. USPAP does not require perfection but 400+ complaints and a slew of investigations arriving at conclusions contradicting values and authenticity can hardly be said to be providing credible results. Moving from $500,000 of value to $5,000-$10,000 is to state that the value is off by 80-90%. In point, the value is not credible but "incredibly in error."

Misrepresenting the Appraisal Role

The public assumes in many cases that appraisals are authentications of a given property and that an appraiser is an authenticator. The point is clearly established when the appraiser looks at a property and states that this part or that part is consistent with the time or history of the property. The ascertainment of a match between a present property and criteria or exemplar of a known one constitutes a forensic equivalence. Appraisers who authenticate under the same umbrella of appraising misrepresent their role. Appraisers provide opinions of value not authentications. Appraisers are warned that appraisals and other processes such as selling properties or brokering them require that the appraiser wear a different hat at the time of appraisal. This is accomplished by simply setting up two different entities to carry out services not falling under the appraisal hat. The appraiser above failed to follow the appropriate dictum and as such violated USPAP.

Competency Rule

The competency rule states that appraisers must be competent to carry out a given assignment. The IRS mandates that to provide a qualified appraisal to the IRS one must be experienced in the given property being appraised. The IRS is guiding appraisers by informing them that they must be competent. If an appraiser does not have the experience to provide an appraisal with a credible result he may refuse the assignment, hire an expert for assistance, or gain education about the property to provide a credible result. He must also disclose to the client how he or she went about gaining competency. Under various Daubert rulings since the 1990s courts have required that those appearing as expert witnesses possess training, experience, education, peer supervision, and have authored publications, in their field of competency. Many courts have ruled that the expert or competent person work in the field of expertise for 10+ years. In the above case the authenticator/appraiser lacked peer supervision, training, education, and basically lacked any identified designation demonstrating competency. There was no indication that the individual was trained or educated in authentication studies. This appraiser was no different from those individuals who simply self-proclaim competency or expertise without foundation.

Contingency Fee Payments

One of the problems that pushed the Appraisal Foundation into existence was property appraisals based on contingency fees. A contingency fee is a fee based on the outcome of the assignment result. Thus, fees or payments for assignment results would naturally be higher if the result is higher. A property appraised for $1,000 based on a percentage of 10% would provide an appraiser a fee of $100. The same property appraised for $10,000 would give the appraiser $1,000 in fees. USPAP mandates that such contingency fees are violations under payments derived from stipulated results. The rules further state that the appraiser must inform the client if he or she has any interest in the property being appraised. Since these appraisers were involved in a contingency fee arrangement and had an interest in the properties being sold, they violated USPAP rules.

Bias, Advocacy, or Stipulated Result

Both appraisers provided appraisals over a period of many years. XYZ gallery provided value numbers for properties to the appraisers to strive for. Striving for a specific value number provided by your client is a violation of USPAP and not far behind this violation emerges an issue of a long term relationship with a client providing a revenue stream to an appraiser. Common sense would dictate that if some entity is providing a revenue stream to an individual for a service over an extended period and will continue to do so, the individual would be hard pressed to deny that he or she is biased or an advocate for the revenue provider. Large organizations obviate such claims by severing ties with the service provider and supplanting the original as equal provider. Instead of using the same contractor over and over, universities remove the contractor from the bid list of contractors used. This approach challenges any claim of bias, advocacy or collusion.

Promoting the Public Trust

Trust is engendered by reliability and high ethical standards. I trust that I will get to work on time via my transit system because it is reliable 99% of the time. I trust that my doctor will not poison me when providing medicine to cure my sickness. Trust in the doctor arises from high ethical standards promulgated by the medical profession; trust in my transit system arises from the fact that it is rare that it does not show up on time. It is not that one expects perfection, but if the transit system fails to deliver on many occasions rather than few or if the doctor is found to be involved in poisonings, trust begins to weaken. The fact that 400 + complaints, class action suits, governmental criminal investigations, mass media investigations and court cases are currently under way questioning art appraisals and authentication protocols represent an attack on promoting the public trust via appraising. Trust in USPAP is seriously being undermined.

Conclusions

It is argued that the appraisers in the composite case study violated USPAP rules or standards and standards promulgated by Federal Rules of Evidence (FRE) by:

1. The quantity of complainants represents a critique of the public trust concept and a challenge to the system of appraising as promulgated by USPAP.
2. In accepting contingency fees and providing stipulated results the appraisers violated USPAP ethical rules.
3. In failing to provide credible results the appraisers violated scope of work rules.
4. In failing to disclose that the appraiser was not competent to authenticate, the appraiser violated the competency rule.
5. Common sense and practice would indicate that it would be in the best interest of the public if appraisers were not in the pay of the entity they are carrying out the appraisals for on a regular basis.
6. Providing authentication services while wearing the hat of an appraiser is a violation of the misrepresentation rule.
7. The authenticating appraiser failed to follow FRE standards relating to using accepted theories to ground his authentications.

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— by John Daab Ph.D.  |  June 1, 2010

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