Joe McConnell
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This is a wake-up call for accounting firms: the buyout barons are coming. Private equity investment in accounting firms is on the rise on both sides of the Atlantic. About an eighth of respondents surveyed by the Institute of Chartered Accountants in England and Wales last year had already secured a private equity investment; another eighth are expected to do so in the next three years. In the US, a third of the top 30 accounting firms could soon be snapped up by PE.
The attractions are well-tested. Accounting firms could use the money and expertise to deploy in areas such as artificial intelligence. The funds could also be used to incentivize non-equity partners and labor lower down the hierarchy. That can help some firms compete for staff and clients with larger firms. For private equity, the industry’s strong recurring revenue is attractive.
Not everyone is happy. Regulators are concerned about the erosion of independence and audit quality. The U.S. Securities and Exchange Commission sounded a cautionary note a couple of years ago. In the U.K., the Financial Reporting Council is keeping a close eye on activity.
The truth is that poor audits are hardly an ownership issue. Just last week, the FRC called out BDO and Forvis Mazars, two firms that rank just below the Big Four, for audit deficiencies for the fourth year in a row.
But there are concerns. Smaller companies that need the most cash injections may already struggle with quality and are more likely to chase invoices. Private equity ownership raises some of the same issues that separating audit and management consulting capabilities should, at least in theory, erase. It adds more conflicts of interest to manage, with investee companies and end investors.
Nor does the corporate approach naturally align. The need to maximize returns may clash with auditor independence, prompting riskier billing.
Auditing is, or should be, an area where ethical culture and responsibilities are established from the top and imprinted on the organization. This is more difficult to instill when those at the top are no longer in the office.
An innovative structure can allow existing partners to keep the reins when it comes to running day-to-day operations (and, crucially, be seen as such), while more junior staff are still tempted to join their ranks.
Last year, for example, the UK’s Moore Kingston Smith retained its limited company status aVsceker an investment from European private equity firm Waterland. For this trend to materialize, it will need to find ways to preserve the best parts of the business model while bringing in liquidity.
louise.lucas@Vscek.com
