Tucked 22 pages deep into the Financial Reporting Council’s 2024 Annual Review of Audit Quality report, this no doy declaration.
Several PIE and non-PIE audit firms in the UK have entered into private equity (PE) deals, and larger firms have also been approached periodically for discussions. We are closely monitoring this situation through our PIE Auditor Registration team and our supervisory engagement discussions with firms.
Historically, audit firms have been funded by their equity partners, supplemented by traditional bank financing. Recently, there has been a notable trend in the UK and internationally of PE investors acquiring substantial equity stakes in smaller audit firms, which through consolidation have moved into the top 30 firms by turnover. PE investment might drive growth and innovation in the UK economy, but there is a risk that PE investors may lack a deep understanding of audit practice objectives, and the public interest incentive to deliver audit quality. A lack of clarity or long-term thinking regarding PE exit strategies also raises concerns about maintaining audit quality and public interest motives over future years.
PE investment could have the potential to offer opportunities in the audit market, but it is essential to avoid conflicts of interest that may impair auditor independence or undermine the resilience of the market.
Ya think?
FRC Annual Review of Audit Quality [PDF]
Conflicts of interest, it caught, will only result in costs of doing business for the PE firms,
The question isn’t do they understand audit objectives, it’s do they care about audit objectives, or do they care about them as much or more than other objectives.
Based on PCAOB inspection results, the CPA partners at most of the firms may lack a deep understanding of audit practice objectives.