COMPETENCY RULE or SCOPE OF WORK RULE: Which Rule Rules? (part 1 of 2)
(by William M. Novotny, AQB Certified USPAP Instructor. This is the first part of a two-part article focusing on the generalist appraiser and the issue of competency. For Part 2 of this article, go here.)
Both the SCOPE OF WORK RULE as well as the COMPETENCY RULE of USPAP contain disclosure requirements that are particularly relevant to the generalist appraiser.
- The SCOPE OF WORK RULE disclosure requirement mandates that sufficient information be disclosed to allow users to understand the scope of work actually performed in the assignment. A scope of work disclosure typically addresses such issues as the type and extent of research performed, or the assistance that was provided by an expert.
- The COMPETENCY RULE disclosure requirement calls for the appraiser to disclose a lack of knowledge and/or experience to the client before accepting the assignment, at whatever point in the appraisal process that it becomes apparent to the appraiser that his or her lack of knowledge and experience will prevent the development of credible assignment results. This is referred to as a “competency disclosure.”
The SCOPE OF WORK RULE applies at all times, and requires the appraiser to do whatever is necessary to develop credible assignment results and to disclose the scope of work performed in the appraisal report. The COMPETENCY RULE requires the appraiser to have the knowledge and experience to complete the assignment credibly and to make a disclosure to the client and in the report when unable to do so.
This paper explores critical considerations that go into making a COMPETENCY RULE disclosure. It also examines related USPAP requirements that have particular relevance to generalist personal property appraisers who often encounter objects about which they have limited experience. It is when such properties are encountered that an appraiser must choose whether or not to expand the scope of work or make a competency disclosure to the client.
USPAP’s COMPETENCY RULE states that an appraiser must:
- be competent to perform the assignment;
- acquire the necessary competency to perform the assignment; or
- decline or withdraw from the assignment.
If the appraiser determines that he or she is not competent prior to accepting an assignment, the appraiser must:
- disclose the lack of knowledge or experience to the client before accepting the assignment (or at that point in the appraisal process at which the deficiency is discovered);
- take all steps necessary or appropriate to complete the assignment competently (such as through expanded personal study/research or consulting with an expert); and
- describe in the report the lack of knowledge and/or experience and the steps taken to complete the assignment competently.
The fact that competency can apply to many factors within an assignment is addressed in the COMPETENCY RULE’s Comment to the “Being Competent” section which states:
“Competency may apply to factors such as, but not limited to, an appraiser’s familiarity with a specific type of property or asset, a market, a geographic area, an intended use, specific laws and regulations, or an analytical method. If such a factor is necessary for an appraiser to develop credible assignment results, the appraiser is responsible for having the competency…”
The SCOPE OF WORK RULE states that for each appraisal an appraiser must:
- 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.
The Appraiser’s Challenge
For most clients who require a complete household contents appraisal it is more convenient, more meaningful and less expensive to make use of a single appraiser who is capable of appraising all (or most) of the personal property rather than retaining the services of numerous specialist appraisers. The never-ending challenge for the generalist appraiser faced with a whole-house appraisal is to recognize whether or not he or she has adequate knowledge and experience to complete the appraisal competently for certain property types.
A generalist personal property appraiser encounters all types of property. For some types of property the appraiser knows immediately that he or she is not sufficiently competent to perform the appraisal. For the generalist appraiser such property types commonly include gems & jewelry, machinery & equipment and, of course, possibly other property types. For such property types, the appraiser clearly must take the COMPETENCY RULE steps noted above including making an immediate competency disclosure to the client.
But generalist appraisers also encounter types of property about which they are familiar but lack extensive expertise. Though the appraiser might even have a level of familiarity consistent with that of typically-informed market participants, the appraiser would not be regarded as an expert. Examples might include decoys, firearms, Orientalia, books, Native American objects, or coins and stamps, etc. These types of property are often encountered when appraising the contents of entire households, such as might be the case when doing an estate appraisal.
Each appraiser’s knowledge and experience is unique, and each appraiser must decide for each subject property whether or not he or she has the knowledge and experience to perform the appraisal assignment. The types of property encountered will vary from household to household. The burden is on the appraiser to ascertain whether his or her knowledge and experience is sufficient to develop credible assignment results. The appraiser must evaluate his or her abilities, and then choose whether or not to make a competency disclosure as required by the COMPETENCY RULE.
When encountering properties about which the appraiser has limited experience and knowledge, the appraiser is faced with several commonly-used options:
- Implement the COMPETENCY RULE requirements regarding a deficiency in competency including making a competency disclosure to the client.
- Expand the scope of work in order to complete the assignment competently such as by doing the necessary research and fact-finding and/or consulting with an expert.
- Retain the services of a specialist to independently identify and value the subject property. The specialist’s findings can then be embedded into the appraiser’s report. This method is favored by many generalist appraisers.
- Decline to appraise the property and, instead, refer the client to a specialist appraiser who would develop his or her own opinion of value and prepare a separate and independent appraisal report.
What if there are a thousand bottles of rare wine? What if the appraisal included ten-thousand rare records or books? What if an object is historically important and rare, such that no comparable sales exist? In these cases (as in all assignments) the appraiser must be competent to “identify the problem” and “determine the scope of work” required in order to develop credible assignment results. As noted above, this is often accomplished by expanding the scope of work through added research or consultation with experts.
It is important to note that making use of an expert’s appraisal assistance does not in and of itself equate to the appraiser having a lack of competency. USPAP’s Standards Rule 8-2 merely requires the disclosure of assistance in the report’s certification statement, but there is no link between obtaining assistance and the appraiser having a lack of competency.
Immediate Disclosure Premature?
There is no USPAP requirement that appraisal reports include a statement of competency. What USPAP does require is that a competency disclosure be made at the point in the appraisal process at which the appraiser recognizes that a lack of knowledge and/or experience that prevents the appraiser from completing the assignment competently.
While this might occur when the appraiser is first told the nature of the property, and even before the assignment is accepted, it often does not occur until the appraiser has had the opportunity to do a property inspection. Sometimes the competency disclosure occurs after initial attempts to solve the appraisal problem leave the appraiser feeling uncertain. In such cases the preliminary research, analysis and consultation did not result in credible assignment results. As a result, the appraiser’s options are to either decline to appraise the property, or to make a competency disclosure to the client and then take the steps necessary to achieve credible assignment results.
In other words, when faced with properties about which he or she is not familiar, the appraiser is obligated to acquire the knowledge necessary to identify the property’s value relevant characteristics and to understand the manner in which the market reacts to those characteristics. This can frequently be accomplished simply through the analysis of sufficient market data—in particular the analysis of comparable properties offered or sold in the relevant market. Such research will usually allow the appraiser to properly develop a credible value opinion.
That failing, the appraiser can often still complete the assignment credibly by consulting with an expert who does have the necessary knowledge and experience. In either case, if the assignment can be completed credibly, a competency disclosure to the client would not be required; however, a disclosure of the expanded scope of work that was actually performed in order to solve the problem would be required.
A lack of expertise does not necessarily equate to a lack of competency. So long as the appraiser can determine and conduct the scope of work required to develop credible assignment results, the appraiser can proceed with the assignment without making a COMPETENCY RULE disclosure to the client.
The close link between an appraiser’s competency and the appraiser’s knowledge and experience has been inextricably established by USPAP. Generalist appraisers who have a wealth of experience have solved many appraisal problems and are well familiar with the scope of work necessary to develop credible assignment results.
Less experienced generalist appraisers, on the other hand, are at a marked disadvantage. They must proceed very cautiously as the challenges are many. There is no shame in admitting to a lack of sufficient knowledge and experience. After all, the universe of properties about which the appraiser is expected to be knowledgeable is incomprehensively large. Beginning appraisers must make sure that they expend the effort necessary through research, fact-finding and consultation with experts to develop a credible opinion of value for each subject property.
More importantly, beginning appraisers often lack the experience necessary to understand their responsibilities, including the responsibility to properly identify the appraisal problem or the subject property. Accordingly, novice appraisers should be conservative and make a competency disclosure if they have any indication that they do, indeed, lack the requisite knowledge and experience. Beginning appraisers should not take the liberties that a highly-experienced appraiser might be willing to take.
Along a similar vein, the very experienced appraiser should be cautioned to not be over confident. The experienced appraiser must remember that he or she has no way of knowing what they do not know, and that a significant error could result from assuming that their level of knowledge and experience is greater than it actually is. It is better to err on the side of caution and to comply with the disclosure requirement of the COMPETENCY RULE whenever appraisers have reason to doubt that their knowledge and experience will be sufficient to develop credible assignment results.
This article will be continued in the next newsletter which will explore the above issues further by means of two hypothetical appraisal assignments performed by John Morgan who is a hypothetical, experienced, generalist personal property appraiser. In those two mini-case studies John must deal with critical competency issues for an insurance total loss appraisal assignment and for a separate equitable distribution appraisal assignment.
For Part 2 of this article, go here.
© 2010 William M. Novotny, AQB Certified USPAP Instructor