Two years ago, two years after the first major private equity investment in a top 20 firm kicked off a flood of similar investments in some of the largest non-Big 4 firms in the country, the AICPA formed a task force to “look into issues raised by private equity investors in accounting.” And now the task force is about to solicit public comment on their preliminary conclusions.
A task force of the American Institute of CPAs’ Professional Ethics Executive Committee (PEEC) will seek public comment on its preliminary conclusions about revisions to independence rules related to alternative practice structures, changes driven by the increasing prevalence of private equity investment in accounting firms. The committee’s Alternative Practice Structures Task Force will ask stakeholders to weigh in on its conclusions and two interpretation options once a discussion memorandum is posted, likely later this month.
The AICPA Code of Professional Conduct has had robust protections in place regarding outside investment in CPA firms for more than 25 years. Only licensed CPA firms can provide attest services, with clearly defined firewalls required for investors taking a piece or outright control of an entity that provides only non-attest services. U.S. Securities and Exchange Commission rules and state law offer additional layers of protection in this area, but with private equity investment in non-attest entities becoming more common, the PEEC concluded more clarity is needed, particularly around issues involving auditor independence, portfolio companies and other private equity-related entities.
To get around this, PE-backed firms have been siloing their attest practices from advisory and tax. On paper, anyway. To read more about alternative practice structures and how they aren’t a new phenomenon, check out this amazing post on NASBA’s blog of all places: Getting Picked For PE.
An October 2024 Wall Street Journal story titled “Private Equity’s Ties to Companies’ Auditors Have Never Been Closer. That Worries Some Regulators” gives us a look at how the separation of audit and non-audit is happening at one firm:
Accounting firm Cherry Bekaert’s leadership team discusses organizational matters, often involving the audit business, weekly with Parthenon Capital Partners, the private-equity firm that took a stake in the Raleigh, N.C.-based firm’s nonaudit side of the business in 2022.
Sometimes the conversation is about Cherry Bekaert’s acquisitions of other firms, some of which have an audit business, said Michelle Thompson, CEO of its nonaudit arm. Cherry Bekaert also updates Parthenon on its financial results or risk management.
“We work very closely with the audit team,” said Andrew Dodson, managing partner at Parthenon Capital. “Making sure that we have the right controls over audit quality is something that we take super seriously and have a lot of visibility into,” he said, referring to compliance with an agreement between the audit and nonaudit sides. He added that Parthenon has no influence over individual audits.
As pointed out by former SEC Chief Accountant Paul Munter in a May 2024 statement about tone at the top at audit firms, private equity is not “subject to the same independence and ethical responsibilities as auditors.” So that’s something regulators and gatekeepers of the profession should really be on top of.
In that vein, this is what the PEEC task force wants opinions on:
The task force is seeking comment on its preliminary conclusions and two options for a draft interpretation of independence rules – one that includes a specific private equity-related example, and another that is more general. In both instances, the draft interpretations would create a three-step process:
Determine which entities associated with the alternative practice structure are network firms, a term defined in the code. Network firms are subject to independence requirements for financial statement audit and review clients.
Determine which individuals associated with the alternative practice structure are covered members subject to independence requirements.
Determine which additional relationships and circumstances associated with the alternative practice structure create threats to independence, and
Identify relationships and circumstances where independence would be impaired.
Apply the “Conceptual Framework for Independence” (ET sec.1.210.010) to any other relationships and circumstances that the member knows or has reason to believe may exist.
When evaluating the first step, the non-attest entity would be considered a network firm of the attest firm. Alternatively, a private equity investor, its funds and other portfolio companies would generally not be considered network firms, so portfolio companies could conceivably provide non-attest services to any attest clients. However, there may be circumstances where a portfolio company could be defined as a network firm for other reasons that will be spelled out in the task force’s discussion memorandum.
“Private equity investment in accounting is a great validation of the strength and stability of the profession, and it’s one way for firms to fund technology upgrades and growth acquisitions,” said Susan Coffey, the AICPA’s CEO of public accounting. “It’s crucial, however, to make sure integrity of the attest function is not compromised and that the public interest is protected. The PEEC has done extensive work to ensure those guard rails are both well understood and relevant to current practice.”
If you are unfamiliar with the work of the PEEC, check out this post: Opinion: It’s the AICPA’s Own Fault No One Wants to Be a CPA Anymore
