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This is a red flag for audit firms: the buyout barons are coming. Private equity investment into accountancy firms is on the rise on both sides of the Atlantic. About one-eighth of the respondents surveyed by the Institute of Chartered Accountants in England and Wales last year had already secured private equity investment; another eighth are expected to do so in the next three years. In the US, a third of the top 30 accountancy firms could soon be snaffled up by PE.
The attractions are well rehearsed. Audit firms could use the cash and expertise in deploying it in areas such as artificial intelligence. Funds can also be used to incentivise non-equity partners and manpower further down the pecking order. That can help some firms compete — for staff and clients — with bigger firms. For private equity, the sector’s strong recurring income appeals.
Not everyone is happy. Regulators fret about erosion of independence and audit quality. The US Securities and Exchange Commission sounded a note of caution a couple of years ago. In the UK, the Financial Reporting Council is monitoring activity.
The truth is that poor quality audits are hardly a matter of ownership. Just last week the FRC called out BDO and Forvis Mazars, two firms that rank just below the Big Four, for shortcomings in their audits for the fourth year on the trot.
But there are concerns. The smaller firms most in need of cash infusions may already be struggling with quality and keenest to chase billings. Private equity ownership raises some of the same issues that separation of audit and management consultancy capabilities are due to erase — at least theoretically. It adds other conflicts of interest to manage, with investee companies and end investors.
Nor does the business approach naturally align. The need to maximise returns could clash with auditor independence by pushing to take on riskier billings.
Auditing is, or should be, an industry where culture and ethical responsibilities are set from the top and stamped through the organisation. That is harder to instil when those at the top are no longer in the office.
Innovative structuring can allow existing partners to keep the reins when it comes to running day-to-day business — and crucially be seen to do so — while more junior staff still have the lure of joining their ranks.
Last year, for instance, the UK’s Moore Kingston Smith retained its limited liability status after investment from European private equity firm Waterland. Finding ways to preserve the best parts of the business model while bringing in cash will be required to make this trend add up.
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