Today's post is by Jim Alerding (CPA/ABV, ASA) of Alerding Consulting. Jim has over 45 years of experience working with businesses in various consulting matters and over 30 years of experience working with complex valuation and litigation support matters. He lectures frequently on business valuation and forensic services and has testified many times on valuation and economic damages in a variety of Federal and State courts. Jim has published numerous articles on business valuation and related subjects. He is the author of Valuation of a Closely Held Business and Purchase or Sale of a Closely Held Business as part of the Tax Advisors Planning Series published by Research Institute of America, and he co-authored "The Handbook for Divorce Valuations" and "Financial Valuation: Applications and Models," a treatise on business valuation published by John Wiley & Sons. He was one of the three individuals selected by the American Institute of Certified Public Accountants task force that wrote the Statement on Standards for Valuation Services issued in 2008 that provides the valuation standards for the AICPA's 300,000+ members and is an Inductee in the AICPA BV Hall of Fame.
My kids will all tell you that I was born one hundred years too early. At least that is what I have always told them. Since a very young age I have been enthused about technology and its advances. Since Neil Armstrong landed on the moon, I have wished I would have more time on this earth to see what happens in the future of technology. Movies like 2001 A Space Odyssey and the Terminator (and its sequels) have simply wetted the appetite more. Those movies focused on Artificial Intelligence (AI) clear back to 1968.
In 2020 I dipped my toe into the AI world and put together my first webinar on the subject.
The time was not ripe yet.
“There were certainly things happening already in 2020. For example, a professor of biology at VMI in Lexington, Virginia and an associate of hers, an assistant professor in computer and information sciences, partnered to use Drones to assist in determining why some soybean plants grow and others do not. The purpose is to determine how to improve soils so that yields are increased. If you are valuing a farming business that uses this type of technology to increase yields you should take this into account especially in comparing that farm to the expected yields based on industry data.”
Since about 2019 Purdue University in Lafayette, IN, USA has had about thirty mobile robots that are used to deliver food to just about any location on Purdue’s expansive campus. As well the US Air Force by 2020 had established the Ultra Long Endurance Aircraft Platform (Ultra LEAP) consisting of a high-performance, cost-effective, sport-class commercial airframe converted to a fully automated system with autonomous takeoff and landing capabilities.
Of course these advances were not of the type to raise any eyebrows or create much excitement.
And yet little by little AI has been increasing in ways we hardly notice. As I write this article in a Word document, Word is completing my sentences for me. Another example of AI. So truly AI is here, and it is exploding all around us. Here are a few examples of what is happening today, in 2023, with AI that are of interest to the BV community:
• The IRS is using an AI application to assist in identifying complex partnership structures that could lead to discovery of noncompliance (1);
• ChatGPT can be used to assist with Excel, much of which can be applied to valuation analyses (2);
• KPMG is using a customised version of ChatGPT to help put together sales proposals to land new clients (3);
• PwC gave its lawyers a chatbot service to help with their productivity (4); and
• An AI-powered tax help service nicknamed TaxGPT understands tax questions phrased in natural language and is intended to give out actionable tax advice in plain English (5).
“The recent advance of ChatGPT has been sucking the oxygen out of news of other AI advances.”
It behooves us to spend a little time in this article to talk about ChatGPT. “ChatGPT is an AI-based tool that helps make content creation faster, easier, and more efficient. It uses natural language processing (NLP) technology to generate optimised content tailored to your website’s needs. By using this tool, you can reduce the time spent researching topics as well as other manual content-creation tasks. (6)”
We could write a book chapter or more on what is happening with ChatGPT but here is a sampling of how ChatGPT is making news:
• Some students in high school and college are surreptitiously using ChatGPT to write their papers for them. I know of one such college student who has done that this school year in multiple subjects and has received an A on every such assignment.
• For a recent webinar that I gave on AI I had “Bard,” a Google experimental Chat Box write an introductory slide. It was passable and I started the webinar using that slide as my introduction.
• In the Journal of Accountancy for January 30, 2023, Kelly Williams, CPA, PhD, an associate professor of accounting at Middle Tennessee State University wrote an insightful article on how ChatGPT can be used to assist with Excel.
• Samsung workers have unwittingly leaked top secret data while using ChatGPT to help them with tasks. Since ChatGPT retains user input data to further train itself, these trade secrets from Samsung are now effectively in the hands of OpenAI, the company behind the AI service (7).
• ChatGPT searches the entire internet for its product, but it cannot reach behind pay walls. In that sense then it is limited in its knowledge.
• Do-Not-Pay, an AI service that provides legal services, primarily drafting documents and complaints, etc., has been sued by a Chicago Law Firm in a class action lawsuit for the unauthorised practice of law.
• Just today another article noted that a mayor in Australia is threatening a defamation lawsuit because ChatGPT named him as a bribery convict when in fact he was not the perpetrator but helped to solve the crime. ChatGPT has a month to clear up the problem.
As Business Valuation professionals it seems obvious that AI will eventually, if not already, have an impact on the values of the businesses that we value.
Automated valuation platforms now integrate some level of AI into their infrastructure and are no longer simple calculators. For example, a colleague of mine recently saw a demo of the Valutico platform performing a private company valuation. The platform is designed to do a qualitative analysis, automatically select market comps, suggest market transactions, estimate cost of capital, and create reports (8). It should always be kept in mind that the human element of professional judgment cannot be replaced by AI, at least not now and, I would argue, not ever.
It is also important to keep in mind how new BV Professionals are going to be trained if many of the process steps are replaced by AI.
Some might think that the next generation of BV practitioners would fully embrace new technology including AI. A survey from January 2023 by Fishbowl that revealed over 4,500 professionals from major companies such as Amazon, Google, and Bank of America are using ChatGPT. Not surprisingly, Gen Z professionals have the highest adoption rate (9).
But from what we have heard, young BV analysts are cautious about it and feel that technology would not totally replace the human element in the valuation process (10). Some are a “little nervous” about too much technology, feeling that experts may lose touch with the underlying concepts. But some do feel that automated tools could enhance understanding by freeing up analysts’ time typically spent on number crunching to delve more into what is behind the numbers. It is up to those of us who are more experienced to make certain that we find ways to give younger BVers a path to gain that experience and knowledge also.
“There is now so much to read every day that it is hard to separate the wheat from the shaft. But it is clear that the BV Professional can no longer ignore what is going on in the world of AI.”
If you are in a multi-person practice, consider appointing someone to monitor what is going on in AI and regularly report on it to the rest of the BV professionals in the firm. Even a solo practitioner should spend time searching for and reading updates on what is going on with AI. So how does developing AI impact the valuation process? My first inclination regarding AI was if something does not impact the cash flow then it does not impact the value. But AI is a development that we have not likely seen since the industrial revolution, so it demands attention from appraisers. I believe that the past history of a subject company will be less important in the future as AI increases in value and importance. Therefore, the DCF method under the income approach is likely the most appropriate method to use for valuing a company that has and will be materially impacted by AI.
To perform the DCF, the BV Analyst should ask their subject company’s management as many questions as possible about the impact of AI on their business both currently and in the future.
The analyst should:
• work with management to determine the yearly impact of AI on the cash flows of the subject company.
• determine the time periods when impacts are likely to occur in the industry.
• examine the impact of likely AI changes in the industry as they apply to the subject company (some clues can come from information from public companies);
• investigate whether and when the subject company will implement AI changes, and what the impact will be if they do not keep up with the industry and competitors; and
determine the costs that will be incurred by the subject company to implement AI changes required to keep up with the industry and competitors, and the feasibility of funding those changes.
When cash flow impacts cannot be determined, the analyst is left to assess the impact on the denominator of the valuation equation. The needle on the company-specific risk factor may need to be moved depending on the analyst’s findings.
In addition to the considerations on a specific engagement, the BV Analysts need to keep up to date on AI developments globally, which are happening at lightning speed.
Sources:
1. https://www.bvresources.com/blogs/business-valuation-law-news/2023/03/16/ai-now-helping-the-irs
2. “Using ChatGPT with Excel,” Kelly L. Williams, CPA, PhD, Journal of Accountancy, Jan. 30, 2023; https://www.journalofaccountancy.com/news/2023/jan/using-chatgpt-with-excel.html
3. https://www.goingconcern.com/kpmg-is-putting-chatgpt-to-work-it-probably-wont-be-stealing-your-job-for-now/
4. https://www.pwc.com/gx/en/news-room/press-releases/2023/pwc-announces-strategic-alliance-with- harvey-positioning-pwcs-legal-business-solutions-at-the-forefront-of-legal-generative-ai.html
5. https://www.taxaroo.com/
6. www.bloggersideas.com/what-does-chatgpt-do/
7. Samsung workers made a major error by using ChatGPT, Lewis Maddison, Techradar Pro, 2023
8. https://valutico.kinsta.cloud/wp-content/uploads/2023/02/Valutico_Quick_Demo-_1_.webm
9. https://www.fishbowlapp.com/insights/chatgpt-sees-strong-early-adoption-in-the-workplace/
10. “More Insights From Young BVers About the Profession,” Business Valuation Update, Vol. 29 No. 3 March 2023
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