ICAEW.com works better with JavaScript enabled.

Private equity investment in audit firms

Author: Professional Standards Department

Published: 25 Oct 2024

The Financial Reporting Council (FRC) recently published a letter explaining that any firm interested in, or considering a change of ownership to introduce private capital should engage with both the FRC and the firm’s recognised supervisory body (RSB) at the earliest opportunity. All such discussions will be in confidence. This requirement to engage with the FRC and the firm’s RSB applies to all audit-registered firms, and not just those firms that hold public-interest-entity authorisation with the FRC.

Any ICAEW firm considering private equity investment can contact ICAEW’s Regulatory Practice and Policy team at auditregistration@icaew.com for more information.

Read the letter from Richard Moriarty, CEO FRC, issued on 26 September 2024: External Private Capital and UK Audit Firms

ICAEW Insights article: FRC and ICAEW support accountants exploring private equity

Independence implications of private capital funding

The Financial Reporting Council has confirmed to us that in circumstances where a Private Equity (PE) Fund acquires an audit firm, the audit firm will then be prohibited from providing audit services to the PE Fund, portfolio companies of the PE Fund and/or the significant affiliates of the companies in the PE Fund. If audit services are provided, this would be viewed as a threat to auditor independence, and probable breach of the FRC’s Ethical Standard.

Additionally, a further risk in this scenario arises if the PE Fund or its employees become a ‘covered person' which due to the particular circumstances, is in a position to influence the conduct or outcome of the audit, for example by virtue of holding a very senior position or having a mentoring role. As a covered person, the PE Fund itself would be subject to independence requirements (including personal financial independence) under the FRC’s Ethical Standard Overarching Principle A2: In relation to each engagement, the firm, and each covered person, shall ensure (in the case of a covered person, insofar as they are able to do so) that the firm and each covered person is free from conditions and relationships which would make it probable that an objective, reasonable and informed third party would conclude the independence of the firm or any covered person is compromised.

Audit firms that have received external investment from a PE Fund or any firm that is considering external investment, should carefully assess whether the PE Fund, or its employees are covered persons for the purposes of the FRC Ethical Standard and take the appropriate steps to ensure the independence requirements are being met. The assessment should be kept under review as the circumstances of the firm and PE Fund change.

Further information provided by the FRC