Independence is linked to the fundamental principles of integrity and objectivity and is critical to the profession’s public interest responsibility to bring trust and confidence in the information provided by reporting entities. In accordance with the IESBA Code and other equivalent ethical requirements, professional accountants must be independent in their work as they perform audits, reviews, or other assurance engagements. [See the IESBA Code and Exploring the IESBA Code, Installment 5.] In this context, independence has become a key focus of regulatory authorities in assessing the potential implications of PE investment. There are a number of potential challenges and risks to independence and conflicts of interest, as well as potential opportunities or benefits that may arise from PE investment.
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Potential Challenges and Risks
PE investment may introduce a “multiplicity” of independence and conflict of interest complications – as some regulators have suggested. For example, there can be challenges in harmonizing systems and protocols where PE has invested in more than one Firm or where there are multiple indirect / secondary rollup acquisitions.
A controlling or majority investment in an accountancy firm may introduce the greatest challenge to independence in audit and assurance engagements. Majority holdings of companies held as investments within a single PE fund or across a PE organization (i.e., a “portfolio company”) are also important considerations in evaluating possible threats to independence for Firms accepting PE investment or being consolidated into a PE-backed Firm. However, some audit practices may find it challenging or impractical to identify, assess and manage independence issues outside of the portfolio companies of one specific PE fund, let alone all of a PE organization’s investment holdings.
Independence and conflict of interest assessments must take into consideration firm-specific circumstances, but they may also require knowledge of relationships across a Firm’s global accounting network or accounting association. IFAC’s research has uncovered situations in which PE investment created potential independence / conflict concerns among network members—resulting in the resignation of the PE-backed Firm from the network/association. Engaging with network members before completing a PE transaction may help avoid or mitigate future independence/conflict-related complications.
PE-motivated strategic decisions to invest in and drive revenue growth by expanding advisory services may increase the number and nature of potential threats to independence and conflicts of interest. There may also be independence concerns about sharing client information between the Firm and the PE investors.
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Potential Opportunities and Benefits
PE investors are pragmatic and want to enhance, not diminish, the value of their investment in the accountancy profession. Therefore, they do not invite regulatory scrutiny, but look for ways to mitigate undesirable regulatory outcomes, minimize independence and conflict issues, and prevent reputational damage—both to their own PE organization and the Firm they have invested in.
IFAC’s research indicates a tendency on the part of PE investors (especially in the U.S.) to take minority interests in Firms where assurance services are offered to exchange-traded or PIE clients—helping to minimize regulatory/oversight concerns about influence and independence issues.
Deploying new technology and systems—paid for with PE capital—can enhance the identification, monitoring, and management of potential independence / conflict issues and harmonize different systems/processes that may exist across multiple Firms who have been consolidated by the PE investor.
PE investment strategies that focus on a single Firm or concentrate multiple investments within a single Firm network can also help manage or reduce the complexity of independence / conflict challenges.
1. PE investment may impact a Firm’s culture but does not change the responsibility of professional accountants to act ethically, with integrity, objectivity, and in the public interest. The IESBA Code, or jurisdictional equivalent, applies – regardless of PE’s investment or involvement in Firm management. [See IESBA Staff Alert – Private Equity Investment in Accounting Firms.]
2. Firms and potential PE investors should discuss and agree on an approach to independence and conflicts management before finalizing the terms of their transaction, including a review and update of independence policies and frameworks, post PE investment.