Investment by Private Equity funds in Accounting Firms – Boon with Caution
Yogesh Singhania
Managing Partner - M Y Singhania and Company, Chartered Accountants
1.? What is common between Grant Thornton, Baker Tilly, Citrin Cooperman, RSM and EisnerAmper other than that they are non-big4 global accounting firm?
Answer is that they all have raised the private equity investments in the last couple of years.
2.? Is the PE investment allowed in US in CPA or accounting firms?
The first question which comes to my mind is that so many investments are made by PE’s in these accounting firms, are these allowed?? As per the article of Andrew Kenney in Journal of Accountancy (Feb 1 2023)-“Regulations stipulate that audit firms must at least be majority-owned by CPAs, which disqualifies most would-be private-equity owners.” Hence it is clear that there are restrictions on investing in CPA firms which are involved in attest functions. But for other functions it is possible if they are independent.
3.? Then how can PE invest in these accounting firms?
To remain in compliance with regulations, firms partly owned by private-equity firms may adopt an “alternative practice structure,” which splits the firm into two organizations. Audit and attestation services remain with the original firm, which is owned by CPAs. The rest of the business is moved to a new, larger company, part of which is sold to the private-equity investors.
4.? Does it require any restructuring?
Yes. The attest business can be owned by CPA’s and hence it needs to be separated from other business which can qualify for PE Investment.
5.???? Why would any PE invest in an accounting firm?
PE firms prefer recurring revenue streams and accounting firms have strong recurring accounting revenue.
Second, consolidation happening in the accounting industry, there’s a need for capital and the ability to put that capital to work by partnering with strong management teams that have solid M&A strategies.
6.???? Why would any accounting firm would go for PE investment?
Post corona significant increase in the cost of Talent and manpower.
Pressure on margins due to increased cost.
Significant change in the technology and automation requirements from client need significant investment in technology.
Need capital to pay off the old and retired partners.
Expensive cost of Debt
Tough price competition from large firms.
7.???? Is there any risk on accepting the PE Investment in accounting firms?
Yes- Risk of Increased threat of Independence compliance as the accounting firm has to be extra cautious that they don’t attest any engagement of affiliate, investor or investee of PE investor.
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Risk of preference of quantity over quality. PE investors might influence the management of accounting firms to accept risky clients to meet the targets.
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
8.???? What will be the impact on the employees of these accounting firms?
Partners with equity Investment would be largely benefited due to the option of exit available to them early before their retirement.
Non-equity partners would get higher incentives for new business due to the business effectiveness monitored by the PE investors.
Mid-level and Junior level employees might face heat of aggressive targets.
9.???? Is the similar opportunity might come to Indian market for mid-size and small CA firms?
Why not! However similar to US, Indian CA firms also need to keep their attest business separate and create a separate legal entity for consulting business.
Invest more in technology and In-organic growth to target higher valuation.
Look for Talent for newly introduced services like Automation, AI, Robotics etc.
Links to the news of PE investment in the recent years: ?
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Senior at Citrin Cooperman | Ex-EisnerAmper | MS Excel Enthusiast | Tech Geek | Traveller
11 个月Good Read! Thanks for this insight.
Audit Supervisor at PKF Dubai | Statutory Audit | IFRS | US GAAP| Ind AS | Chartered Accountant | Finance
11 个月Good read! ??
India Finance Controller at dss+ | Ex-EY | Ex-PwC
11 个月If the PE firms invest in non attest functions of a CPA firm, which are established as a separate company, can the diversion of funds to attest functions be regarded as a problem ? Since it would be an inter company loan sort of thing. Further, since the fund has been received by a network of firms (as they operate under the same brand name), will independence norms apply to all firms operating under the network ?
Author of book ‘Inspire Someone Today’ | COO - Tax @ KPMG (KGS) | LinkedIn Top Voice | Podcaster | Storyteller of Leadership & Growth
11 个月Good work Yogesh!
CFO | 25 Yrs in Global MNCs, 15+ Yrs as CFO | Now Scaling Startups | M&A, IPO & Fundraising | Finance Transformation | EBITDA & Cash Flow Optimization | Growth & Expansion | Investor Relations | Risk & Compliance |
11 个月Good Read , Thanks Yogesh for sharing this insight