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Does Private Equity Ownership of CPA Firms Violate Audit Independence

Independence Standards at Risk

Perhaps you are aware that private equity firms have started to acquire a controlling interest in accounting firms, which these days are better referred to as “professional services” firms. The first such acquisition was in August 2022, when Tower Capital Partners purchased the stock of Eisner Amper LLP, a majority-owned CPA firm and top twenty firm. The deal split Eisner into two entities: attest services firm (majority CPA-owned) and a separate tax and consulting firm. Licensed CPAs do not have to own any part of the consulting and tax practices. The reason is the independence requirement applies only to audit services. The audit service part of the firm must be owned by licensed CPAs. Some states require 100% owned; others 2/3 ownership; and still others greater than 50%.

The Independence standard prohibits certain relationships between the audit firm/auditors and the client/client management that would be violated absent the split-off of tax and consulting services. Independence applies only to audit services and the private equity firms cannot perform those services.

The result of these combinations is to create an “alternative business structure” (ABS). One danger is that the non-audit entity might unduly influence the audit entity thereby impairing independence. The American Institute of CPAs Code of Professional Conduct addresses this issue by stating that the CPAs are responsible for all attest work and the independence standard must be met.

Benefits of Private Equity Arrangements

Why are private equity firms seeking to acquire CPA firms? The reasons include:

  • CPA firms are an ideal market for growth.
  • Private equity firms seek to take advantage of an opportunity to become market leaders in spaces that aren’t controlled by large, dominant players.
  • Steady returns are likely to be earned by private equity firms.
  • CPA firms are trustworthy and make for good partners.

The reasons that accounting firms are becoming involved with private equity firms are:

  • Use funds to satisfy retirement obligations.
  • Enhance growth of professional services.
  • Attract large amounts of capital that can be used for efficiency-minded investments in technology and machine learning.
  • Deal with the pipeline problem by attracting non-accounting graduates to the profession, including finance and information systems students.

Accounting firms are expanding their services into digital technology, data analytics, machine learning (AI and ChatGPT). These and other non-audit services (i.e., valuations, merger and acquisitions) are likely to grow in the future and provide increasing sources of revenue for the firms.

One problem that may affect the non-audit entity when it deals with the audit entity is a clash of cultures. Consultants and tax advisers are not steeped in the ethics of the profession as are auditors. Private equity

From an ethical perspective, the questions are:

  • Will independence be impaired as the non-audit service firm grows and expands their client base?
  • Will the audit firm retain the quality controls needed to provide reliable services to clients?
  • Will these alternative business structures best serve client interests?
  • What will happen when the acquiring entity sells its ownership stake probably in about four-to-seven years and then sells it to a larger private equity group?

SEC Independence Requirements

Accounting firms should pay attention to the quality of their work when they become involved in private equity acquisitions. A different culture exists between a private equity firm when compared with licensed CPAs that own the audit-side of the practice. This can create tension with respect to how each entity meets its professional and ethical obligations.

One ethical standard that is of great concern is the ability of auditors to maintain their objectivity and impartiality given these arrangements. Independence is evaluated on whether a “reasonable investor” looking at these arrangements would conclude that objectivity and impartiality has been impaired, therefore, independence has been violated.

Rule 2-01 (c) (3) of the SEC regulations addresses independence as follows: “The accounting firm or any covered person may not, at any point during the audit and professional engagement period, have a ‘direct or material indirect’ business relationship with a client or persons associated with the audit client in a decision-making capacity, such as officers, directors, or substantial stockholders.” This standard has recently been loosened by the SEC by qualifying “in a decision-making capacity” to those “that have the ability to affect decision-making at the entity under audit.”

There is a difference between having a disqualifying position and having the ability to influence decision making. I consider it much like the difference between independence in fact and appearance. Having a disqualifying position means that it may appear to a reasonable observer that independence might be impaired. The new interpretation means that those in such a position must have the ability to influence decision-making, but this may not be known at the time so a factual determination cannot be made.

In an August 2022 statement, Paul Munter, acting chief accountant of the SEC, wrote that accounting firms that receive investments from private equity must exercise great caution. “Complex transactions with investors that are not traditional accounting firms and have not previously been subject to the same independence and ethical responsibilities elevate the risk to an auditor’s independence.”

I agree with Munter and urge the SEC to take a holistic view of the independence standards, including recent changes, and address the private equity structures directly and any possible impairment of independence. The public interest deserves no less.

Posted by Dr. Steven Mintz, aka Ethics Sage, on September 27, 2023. You can learn more about Steve’s activities by checking out his website at: and signing up for his newsletter.