An International Ethics Standards Board for Accountants' (IESBA) Staff Alert released Jul. 31 highlights the importance of ethics and independence provisions in the International Code of Ethics for Professional Accountants that are still applicable both prior to and after private equity invests in an accounting firm.
The alert details the different potential ethical and independence implications from such investments.
The implications from an ethics perspective include:
• threats to compliance with some of the Code’s fundamental principles, such as confidentiality;
• shifts in a firm’s ethical culture resulting from organizational restructurings, different incentives and evolving growth expectations that may erode ethical obligations; or
• undue pressure to act unethically in pursuit of new revenue goals.
From an independence perspective:
• worries due to a private equity organization holding a controlling interest in the firm while also having a financial interest in the firm’s audit clients;
• the inclusion of new entities as network firms and the complexities in identifying them, and potential related independence threats, if the firm becomes part of a larger and evolving post-investment structure; or
• situations where those in the private equity organization’s management could fall under the Code’s “audit team” concept and the applicable independence framework.
The Staff Alert stresses the significance of firms continuing the monitoring for shifts in clients, services, business and network relationships, as well as other pertinent factors with possible ethics and independence implications, both during the pre-investment phase and after completion of the private equity transaction, and continuing to act in the public interest.
It also underlines, in the private equity investment context, that compliance with the Code by firms improves the quality and consistency of the services they offer and supports public trust and confidence in their work.
Aside from accounting firms, this publication might also be beneficial for regulators and audit oversight bodies, jurisdictional standard setters (JSS), private equity entities and other investors, professional accountancy organizations (PAOs), and others with an interest or role in accounting firm work.
The Staff Alert's creation has been informed by the IESBA’s ongoing engagement with different interested parties such as accounting firms, private equity organizations, regulators, oversight bodies, JSS, as well as PAOs.