November 2024
The rise and rise of private equity (PE) ownership of UK audit firms is causing ripples of concern within the industry.
Continual media interest has meant the Financial Reporting Council has now officially warned firms that audit quality, independence and public interest focus need to remain the top priorities, no matter who owns the firm.
A letter, signed off by CEO Richard Moriarty, also encourages early engagement with the FRC for firms considering such changes, and reaffirms the FRC’s commitment to monitoring developments in this area.
FRC explained while ownership structures are a matter for the firms, UK law states audit firms undertaking statutory work must be controlled by qualified professionals.
Moriarty stressed that it needed discussions with firms introducing private capital to be early and with full candour. It also wants to talk directly with any investors considering entering or expanding into the UK audit mark to help explain the regulatory framework and expectations.
A leading audit partner told PQ magazine: “If everyone has sold out before you get there, how do you provide an incentive for the partners of the future?” She felt PE takes away the aspiration in firms. “If I want to be an owner of the firm where’s my opportunity?” she said.
And she felt PE was just an excuse for the current partners to max out their returns. She worried that it was all very short-sighted.
One man who also has very clear thoughts on private equity is Lord Sikka. In the House of Lords in July 2022 he moved a motion looking at the economic and social risks created by the regulation and practices of private equity.
Turning to the recent rise of PE buying into accountancy firms, he told PQ magazine that medium firms aren’t going to be able to tackle the power of the Big 4 without capital investment. With some partners unwilling to provide it, this leaves a hole for PE to fill.
Lord Sikka believes PE is interested in accounting firms because it opens the doors to lucrative consultancy, tax, insolvency and other businesses.
And he is, of course, concerned about the PE business model in general. He explained: “It is essentially based on high leverage, high prices, low investment in productive assets, wage/staff cuts, tax abuse, asset stripping and short- term interests.”
Looking to the future Lord Sikka said: “With PE buying firms we could be emulating the business model used in many other industries – for example,shareholders/directors of drug companies don’t need to be pharmacists, shareholders/directors of airlines don’t need to be pilots orengineers. So why do shareholders/ directors of accounting firms need to be accountants/auditors? In this model, the businesses need to be tightly regulated and will pose challenges to regulation, notions of independence, professionalism, and accountability.”
PQ magazine columnist Robert Bruce warned earlier this year that we had to “beware accountants when they get a whiff of money” around PE. He was sure regulators are worried and felt reputational risks multiplies with PE. He even claimed: “It will all end in tears!”
