ICAEW is reminding member firms that it can offer support on understanding the implications of ownership changes, after the Financial Reporting Council (FRC) outlined its position on private equity (PE) investment in the sector and emphasised the need to maintain audit quality and independence.

ICAEW argues that a one-size-fits-all approach to brokering PE deals fails to factor in each firm’s unique circumstances and urges proactive and early engagement, particularly regarding audit and other regulatory registrations. 

FRC’s position

In September, the FRC published an open letter to audit firms and supervisory bodies clarifying its thoughts on the injection of external private capital into the UK audit sector. The FRC confirmed that it was not opposed to such investment in principle and acknowledged potential benefits, including increased investment in audit quality, innovation and market choice. However, the regulator emphasised the need for firms to manage risks, particularly those concerning conflicts of interest.

The FRC said any firm interested in, or considering, a change of ownership to introduce private capital should engage with its supervisory body and the FRC at an early stage and with full candour. 

As a supervisory body, ICAEW is also encouraging firms to reach out. “Private equity ownership of accounting and professional services firms is a developing area gaining more prominence in the UK. It can be an attractive option for firms seeking to grow and offer a wider range of services, or extended geographical coverage to their clients,” says Sarah Ghaffari, ICAEW’s Director Communities, Business and Practice. 

“However, as in any deal, it’s crucial to find an investor and structure that works for everyone, and that’s rarely straightforward.”

ICAEW confirmed in its Regulatory and Conduct Annual Report 2023-2024 that it had seen a “slew of new PE-backed consolidator firms entering the market” in 2023.

ICAEW Head of Regulatory Practice Helena Murray explains how her department has been actively supporting member firms navigating PE investments to understand the complex eligibility criteria of the audit, probate and use of description regulations. 

“Firms looking to take on PE, or other external investment, often go through an organisational restructure that leads to changes in control of their business. Over the year, we have worked constructively with many firms who have received PE funding to gain the confirmation we need to ensure the firms remain compliant with the regulations,” she explains. 

“This has often involved members of my team scrutinising complex legal agreements and interacting with the firm, the investor and legal advisers from both sides.”

Murray encourages firms to get in touch with ICAEW in the early stages of transactions for support on navigating the complexities of the regulations. 

Increasing interest in PE

ICAEW research on mid-tier firms, published in May, highlighted the influx of private equity investment in accountancy firms as an important yet divisive trend. 

According to the survey, 57% of respondents identified PE as a top-three macro trend affecting the profession. Although 12% of firms had secured PE investment and a further 12% said they aimed to within three years, the majority of respondents (64%) said private equity was not attractive to their firm.

Get support on PE

Accountancy firms exploring private equity investment can contact ICAEW’s Regulatory Practice team for support in understanding the regulatory implications. auditregistration@icaew.com