The Role of Economist and Accountant in Business Valuation

The above discussion highlights the difference in approach between economics and accounting. Of course, a business valuation is not performed by an entire school of thought; it is performed by individuals. Most such individuals will be primarily trained in either economics or accounting. Which training is better suited for the task?

We concluded that accounting was never intended to provide the basis for market value and that standard accounting statements can never be relied upon as an indicator of market value. Furthermore, we argue that understanding the economic conditions in the industry is essential to understanding the growth prospects of a business and therefore its value. Economists are certainly trained for this task. However, the first place to start in valuing a firm is its accounting statements. The evaluation of costs, the calculation of profit margins, etc., will normally be done more knowledgeably and effectively by an accountant.

To properly value a firm, you must apply both intrinsic economic skills and accounting skills. Some individuals have both; many do not. In such cases, we recommend that a person with complementary skills be included on the valuation team. This suggestion is also made by Patrick Gaughan, who describes independently and in very similar terms the advantages and deficiencies of accountants and economists.213

In our experience, economists natively grasp the underlying growth prospects of the firm and more quickly see how changes in conditions (or interventions by other parties) affects the value of firms. However, the inclusion of an accountant skilled in evaluating accounting statements greatly reduces the chances of misreading the fundamental condition of the business and improves the accuracy of cash flow models.

213 Patrick A.Gaughan, Measuring Commercial Damages (New York: John Wiley & Sons, 1999); Chapter 1.

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