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As Private Equity Increasingly Seeks to Invest in Accounting Firms, Legal Questions Arise

S.J. Steinhardt
Published Date:
Nov 7, 2022


Private equity firms' interest in investing in accounting firms has increased in the past year, presenting opportunities and posing legal questions for all concerned, Accounting Today and the Financial Times reported.

Accounting firms make tempting targets for private equity firms as they are “trustworthy partners and generate steady returns," Matthew P. Bosher, a partner at Hunton Andrews Kurth, a law firm that has been involved in several deals, told Accounting Today. “There's not a lot of debt generally and real opportunity for growth, particularly in non-attest advisory services. You combine a history of steady returns with an opportunity for growth and scalability through technology, and it becomes a good bet."

Form the firms' perspectives, the influx of cash offers multiple opportunities.

EisnerAmper used the cash from the sale of a majority stake to TowerBrook Capital last year to conduct 13 mergers-and-acquisitions transactions in the past nine months. The deal offered “the opportunity to recapitalise the firm,” CEO Charly Weinstein told the Financial Times, noting that this model means that profits can be more easily reinvested into the business than in a partnership.

But some firms still demur, preferring to retain the traditional partnership structure.

“We’ve been partnerships for a long time. Part of those partners’ desire to be here is they are business owners,” Eric Miles, chief executive of Seattle-based Moss Adams, told the Financial Times. His firm has entertained offers but has not accepted any yet, preferring to wait.

Complicating these deals are Securities and Exchange Commission (SEC) audit independence rules for firms accepting  private equity investment. In August, SEC Chief Accountant Paul Munter issued guidance on independence for audit firms considering restructuring, which helps to clarify some of the issues, according to Accounting Today.

"Where there's attest work, whether it's audit or SOC [System and Organization Controls] work, that attest business has to be owned by a licensed CPA firm," Kevin Georgerian, the head of law firm Hunton Andrews Kurth's accounting firm M&A team, told Accounting Today. "In New York, a licensed CPA firm has to be 100 percent owned by individual licensees. ... So that really precludes private equity investment, or really any outside investment, in a CPA firm that does attest work.”

In such cases, such as the EisnerAmper sale and the Citrin Cooperman’s deal to sell a majority stake to New Mountain Capital, the firms needed to separate their audit and attest practices before other parts of the firm could accept the investment, particularly on the consulting side.

"The SEC independence rules do not currently contemplate this structure, so for a long time parties were left to form judgments about how to apply the SEC independence rules in a structure of this nature," said Bosher.

“Accounting firms, starting with the Big Four, have gradually evolved to not only be your audit provider, your tax provider, but also to be your business expert,” Andrew Nicholas, a professional services analyst at William Blair, told the Financial Times. “Now smaller and midsize businesses also prefer to have a single vendor relationship.”

These deals are different form the proposed split of Ernst & Young into into two main business entities, auditing and consulting/advisory services. In cases such as those, Munter’s guidance said that the divested entity shouldn’t profit from the accounting firm’s name or logo and that the two businesses can’t share any marketing or advertising.

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