Accounting & Private Equity – Collaborating or Confounding?
Happy new year!
Amongst other issues, comments by the AICPA’s out-going chief executive in a Financial Times (FT) interview[1] re-visits the trend of private equity investment in accounting firms. Given Mr. Melancon’s tenure, responsibilities and bird’s eye view of the profession, his skepticism is notable.
While there are a number of issues facing the accounting profession, many have implications for a number of other constituents. Near the top are recruitment and retention; audit quality as measured by regulatory oversight; and technology and related infrastructure. The need to address them is urgent and capital investment has emerged as a key requirement. Viewed through this lens, private equity (PE) appears to be offering a solution, namely access to capital[2].
As private entities, accounting firms do not disclose their own financial information (a curious observation no doubt!) Consequently, typical metrics on profitability, return on capital and cash flow trends are unavailable. However, it is unquestionable that audit firms have a monopoly on financial statement audits, deemed mandatory by securities exchanges for any publicly traded firm. Most analysts would opine monopolistic tendencies make an industry highly attractive and valuable.
PE firms, too, have likely identified this attractive feature. However, accompanying the monopoly are other requirements including professional standards of due care. The outcome of audit firm efforts is relied on by markets and other stakeholders, forming the basis of the importance of an assessment of audit quality, critical to on-going reliability. While skepticism on the benefits of PE firm involvement is understandable, there are opportunities as well. Understandably, the PCAOB has taken a particular interest in this emerging issue. This was addressed by a panel at the September 26, 2024 Investor Advisory Group meeting[3]. Unsurprisingly, the panelists raised both opportunities and risks, highlighting the varying timelines of their impact. What we all agreed upon was that important change is underway. At least on this, the profession and markets are in agreement.
Alicia Damley, CFA, CPA, CA (Canada
[2] A helpful summary article: https://www.ft.com/content/c30585d8-40d1-4b1a-b62b-32511214fa30
[3] September 26, 2024 PCAOB Investor Advisory Group Meeting (Part 1 of 2.) Relevant panel discussion begins at 1:55:10. https://pcaobus.org/news-events/events/event-details/pcaob-investor-advisory-group-meeting-september-2024