Insight - Real Estate Valuation Audits

In a recent presentation for the RICS, Wendy Clemmonson and Sandra Rhodes from KPMG's Real Estate Centre of Excellence discussed how valuers can effectively address auditor queries.

I am not a valuer, but I do review and assess the adequacy of the valuations presented to me as part of my services. Therefore, I found it very useful to learn about the considerations auditors take into account while performing their roles, as well as their expectations for what constitutes best practices.

I have used Gemini to produce a summary of the presentation (below). But the recording and slides are also available on the RICS website.

Key takeaways & focus areas

• Increased Scrutiny: The real estate valuation profession faces increased scrutiny due to regulatory focus on audit quality, as valuation is often the most significant and judgmental figure on a balance sheet and is defined as a significant risk in audits.

• Regulatory Drivers: High-profile corporate failures (e.g., Carillion, Thomas Cook) led to heightened regulatory scrutiny, requiring greater rigour in audits. Auditors are required to demonstrate robust challenge on significant judgments and accounting estimates and apply professional scepticism.

• Valuation as an Estimate: Valuation is fundamentally an estimate, relying on judgment and sentiment, and is categorised as Level 3 under IFRS 13 (based on unobservable inputs), which drives the need for more challenge and work from auditors.

• RICS Guidance: The recent edition of the RICS Global Red Book introduced VPGA 11 (Relationship with Auditors), which provides best-practice guidance for valuers on understanding roles, completing documentation, communicating, and handling queries.

Auditor Query Focus and Information Requirements

Auditor questions generally fall into two categories:

• Compliance: Valuer competency, capability, independence, and RICS compliance.

• Assumptions and Inputs: Questions on assumptions (e.g., market rent, yields, growth rates) and whether they are within a reasonable market range, which is the key area of review.

Auditors Need....

• RICS Compliant Valuation Report (or local equivalent) - The more detailed, the better, to reduce follow-up questions.

• Rationale/Story - Understanding the background and valuer judgment for key inputs on sampled assets.

• Comparables - To support key assumptions. This is a key component of audit evidence to deem the valuation reasonable.

• Detailed Valuation Calculations - Showing assumptions on a tenant-by-tenant basis (e.g., Argus files or detailed DCF summaries for sampled assets).

• Summary of Key Changes - Explaining material changes in value over the accounting period.

Typical Valuation Issues Leading to Queries

• Inaccurate Source Data: Differences in tenancy information (rent, unexpired term, floor areas) between the valuer's report and the audited entity's data.

• Costs Incorrectly Applied: Data entry errors, often relating to future void or non-recoverable costs not flowing through.

• Key Inputs Unsupported: Assumptions (market rent, yield) not supported by market comparables or benchmark data, or out of line with market sentiment.

• Purchase Costs: Assumptions about corporate sale/reduced stamp duty need confirmation on alignment with the audited entity's agreed accounting treatment.

• Lack of Professional Scepticism: Valuers taking information from clients (e.g., build costs, off-market offers) at face value without adequate challenge or evidence.

Improving the Audit Process (through collaboration)

In the panel's view, all parties would benefit from greater collaboration among the audited entity, the audit team, and the valuer. Some of the panels recommended actions are as follows:

• Audited Entity. Ensure the valuation date aligns with the year-end date; appropriately instruct the valuer to scope in audit queries; instruct their auditor to complete the audit as close to the valuation date as possible.

• Audit Team. Use audit experts with real estate experience wherever possible; provide questions in advance of valuer calls; and be more mindful of sending questions better suited to the audited entity to the valuer.

• Valuer. Recommended Action. Provide the complete supporting package (report, calculations, comparables, rationale) at the outset to reduce queries.

Rectifying a Misstatement

If an auditor suspects a material misstatement, the process is rigorous and non-negotiable:

• Consultation: KPMG uses a risk panel of experienced, independent valuers to challenge the firm's own conclusion on whether there is sufficient disconfirming evidence.

• Reporting and Opportunity: The conclusion is reported to the audit team, the audited entity, and the valuer, who is allowed to provide more supporting information for their opinion.

Final Conclusion: 

While the process involves discussion, it is not a negotiation. The ultimate decision to report a misstatement rests with the signing audit partner.