Monday Afternoon Accounting News Brief: Did You Just Call PE Vultures?; Aussies Won’t Be Bamboozled PwC-Style Again | 12.23.24

Hello and welcome to what is probably the last Monday news brief of 2024! Just popping in to wish everyone a Merry Christmas — or Happy Holidays, or Joyous Time Off From Fking Work, whatever you prefer — and let you know that we’ll be running repeat articles and shitposts this week (as usual really eh?) so we can take a nice break and will then put up some Best of 2024 stuff to get us through the end of the year.

For now, here’s some news I was able to scrape up.

City A.M. answers the question “Why is private equity so interested in professional services?” We already know but let’s see what they’ve got anyway.

Why are these PE firms circling professional service firms like birds eyeing up their prey? Plainly, the sector is struggling with flat profits and partner pay, with cracks starting to show at the bigger firms.

Even at the Big Four giants the cracks were visible, with headlines all year regarding swarms of layoffs across the businesses. This cold feeling inside the Big Four has yet to settle; their most recent batch results revealed each firm has a profitability problem.

Big 4 ≠ the firms private equity is gobbling up.

What are the PE firms getting out of it? According to the Department of Business and Trade, the professional and business service sector accounts for 12 per cent of the UK’s total economic output, with a collective turnover of £277bn.

“The sector is attractive because they are stable, non-cyclical businesses providing reliable workflows and revenue streams,” explained James Paton-Philip, a partner at Hill Dickinson told City AM.

They added that these firms can be “consolidated and merged with other businesses”.

And:

Another area the investment vehicles are looking to transform is in technology. The majority of professional services firms, especially the Big Four, are pumping extra financial resources into building out tech, with a spotlight on AI.

“Private equity firms are keen to invest in professional services firms that have a big potential to be transformed by investment in technology,” explained Fiona Czerniawska, CEO, Source Global

She added that “AI has significant potential in areas like audit, tax, and parts of consulting, and private equity firms are eager to be early adopters of this and other technology, get ahead of competitors in the market, and generate a good return on their investment.”

At least one private equity firm invested in accounting has fully revealed its playbook: Invest, grow, reduce the debits, offload. We are currently in the invest and grow stages of the cycle though the expense reduction stage may already be in effect at some PE-backed firms. In five or six years, market conditions willing, we’ll start to see PE dump their merged and purged practices (if they can find buyers).

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The SEC handed an energy company a $12 million fine:

The Securities and Exchange Commission today announced that Entergy Corporation, a Louisiana-based utility company, agreed to pay a $12 million civil penalty to settle charges that it failed to maintain internal accounting controls to ensure that its surplus materials and supplies were accurately recorded in its books and financial statements in accordance with generally accepted accounting principles (GAAP).

According to the SEC’s complaint, filed in the U.S. District Court for the District of Columbia, from at least mid-2018 to the present, Entergy included materials and supplies at their average cost as an asset on its balance sheets. However, during this time, Entergy had allegedly been informed by its employees and management consultants that this asset included a substantial amount of potential surplus, including aged materials and supplies in excess of Entergy’s anticipated future use or exceeding the maximum stocking levels deemed necessary by its business units. According to the complaint, Entergy failed to establish a comprehensive process to review these materials and supplies to identify surplus, remeasure it, and record any differences between its average cost and remeasured cost as an expense, in accordance with GAAP.

“Internal accounting controls serve as a front-line defense in ensuring the accuracy and reliability of financial statements,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “Investors rely on public companies, such as Entergy, to ensure that adequate internal accounting controls are in place. We allege that Entergy failed to fulfill its obligation in this regard.”

The SEC reported its total enforcement actions for fiscal 2024 last month: 583 total enforcement actions and orders for $8.2 billion in financial remedies, the highest amount in SEC history.

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PwC really did bork everything up for professional services firms in Australia. The government just isn’t going to let that tax scandal thing go.

The Aussie attorney general released this today:

The Albanese Government is today releasing a discussion paper on the use of legal professional privilege claims in Commonwealth investigations as part of the Government’s comprehensive response to the PwC tax leaks scandal.

Legal professional privilege is a fundamental tenet of our legal system but abuse of it can undermine investigations and erode trust.

The discussion paper tests key issues identified through initial consultation in the Government’s review of the use of legal professional privilege in Commonwealth investigations.

Around 100 stakeholders from across government, the legal profession, academia and industry contributed to the initial stage of consultation, jointly led by the Attorney-General’s Department and the Treasury.

Last year the Albanese Government announced a significant package of reforms in response to the PwC scandal.

We are cracking down on misconduct and rebuilding confidence in the systems that keep our tax system and capital markets strong.

The legal professional privilege discussion paper has been published to the website of the Attorney-General’s Department.

The TLDR is PwC attempted to cockblock the government from obtaining information it sought about the firm’s malfeasance and the government is still pissed about it. See also: Tax Office halved $1.4m PwC fine for false privilege claims [AFR, October 2023]

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Y’all better not sleep on Weaver (IPA #31 with $346.6 million in revenue), they appear to be doing big things. Like doubling their office space in the Houston exurbs:

Houston-based Weaver leased and will renovate a full floor at the One Hughes Landing building, located at 1800 Hughes Landing Blvd. in The Woodlands, the company confirmed. The firm initially moved into an 11,087-square-foot space on the fourth floor of the tower in December 2023. Weaver will move into a new fifth floor space, totaling 26,031 square feet.

When we last wrote about Weaver in September, it was because the Houston-based firm upgraded to an entire floor in NYC. A whole floor! Of their own! YUGE.

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EY India does something nice for the visually impaired:

EY India has partnered with the National Association for the Blind (NAB) to create over 600 audiobooks, aiming to benefit more than 1,00,000 people with visual impairment across India. The initiative is part of EY Ripples program, where EY employees devote their time to SDG-focused projects, bringing together their combined skills, knowledge and experience to positively impact wider sections of the society.

Estimates are that 0.36% of the total population of India is blind (5 million people) and 2.55% are visually impaired (35 million people). In addition, India has approximately 240,000 blind children.

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KPMG UK discusses generative AI in the financial and professional services sector:

AI and Generative AI (GenAI) are no longer a new phenomenon. For over a year, KPMG has been actively using and investing in an internal GenAI tool, seamlessly integrating it into ways of working and exploring possibilities of augmentation. Since making GenAI available to colleagues, the firm has seen a 15% boost in productivity over the last year and generated over 1.3 million prompts in just one month alone. [X]

There is no doubt that AI and GenAI will continue to transform the way people work. Across industries and functions, people are empowered to embrace new possibilities, performing new tasks and achieving remarkable results in a single day. This transformative shift unlocks large potential, driving innovation and business growth.

Over the next five years, the estimated boost to productivity by adopting Gen AI is 58% across support functions (e.g. HR, Finance, Customer Service and IT), 45% across control functions (e.g. Risk, Compliance, Internal Audit), and 44% across revenue functions (e.g. Sales, Marketing). Support functions are expected to gain the most from AI and GenAI, driven by the automation of bulk operational processes, user support via conversational dialogues, and code generation in IT. This means colleagues will free up more time to focus on strategic and business-partnering activities, as well as expanding the capacity and reach of their operations. While these statistics are FPS focused, the functions exist across all industries and similar impact is expected.

Who stands to benefit from this so-called boost in productivity, I wonder?

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I hope everyone has a safe and restful holiday. If you need me, email or text any time. Text is best, my email is overflowing with idiotic PR pitches about the best cities in which to be a naked vegan (I wish I was joking) and other off-topic foolery. Love ya, mean it!