Regulators will ‘monitor’ audit firms that receive investment from private equity outfits, according to officials overseeing auditors and corporate reporting in the UK.

Watchdogs say they will be looking to understand the potential impact on audit quality, highlighting there may be risks and opportunities.

The Financial Reporting Council (FRC) said in its most recent annual report on the audit sector that private equity investment, a recent development for the sector, would be an issue to watch.

Richard Moriarty, chief executive of the FRC, said in a statement: “While we recognise the potential for private equity investment in UK audit firms to drive innovation and growth in the sector, and potentially provide funding that firms might not otherwise be able to access to improve audit quality, we must also carefully consider any risks to audit quality and the public interest.

“We are actively engaging with firms to understand the impact of these changes and to ensure that the fundamental principles of good-quality auditing, resilience and public trust remain at the forefront of the evolving audit landscape.

“It’s important to note that the law currently requires audit firms to be majority owned by accountants, which adds an additional layer of consideration to any potential investment structures.”

Growing trend

The audit sector has seen a number of recent private equity investments. In February this year, it was announced that Baker Tilly in the US, a major mid-tier player in audit, would receive investment from private equity players Hellman & Friedman and Valeas Capital Partners. The firm said the money would be used to “grow and invest”.

Earlier this year, it was reported Grant Thornton in the UK was in talks with private equity parties with a stake in the firm under discussion.

Elsewhere in the UK, the relatively new player Azets Group has accepted private equity backing including a tranche of cash from PAI Partners to sit alongside shares held by fellow private equity unit Hg.

Industry observer Julie Corkish, head of practice at accountancy body ICAEW, said in an article for the institute’s website that “multifaceted” pressures—funding retirements, investing in AI and pursuing for net-zero goals—were pushing audit firms to review PE opportunities. “Most firms say that it’s not off the agenda and they may be open to discussion, potentially,” she said.

The FRC’s annual review of audit quality names private equity investment as one of a number of key developments for the audit sector, together with “de-risking”, for larger firms, and the “growing prevalence” of AI.

Two sides of a coin

The report says private equity investment may have both upsides and risk.

“PE investment could have the potential to offer opportunities in the audit market, but it is essential to avoid conflicts of interest that may impair auditor independence or undermine the resilience of the market.”

The news comes at a time when the UK prepares to overhaul audit regulation. The recent King’s Speech—a statement of Westminster’s legislative programme—resurrected plans for a new regulator, with strengthened powers, to replace the existing arrangements.

Briefing notes for the draft audit reform and governance bill emphasised the watchdog’s role to “protect against conflicts of interest at audit firms and build resilience so quality audit is available to all companies that need it”. Sources say that this places private equity well within the regulator’s watching brief.

The issue has a particular resonance in the UK, where regulations state that audit firms must be owned by registered auditors.

Investment has always been a tricky issue for audit firms. The emergence of AI and, in particular, generative AI applications such as ChatGPT, have created an urgent need for investment if firms are to remain competitive.

Observers believe PE backing could make auditors more competitive but it could also push consolidation among firms falling behind and struggling to match funding. Audit firms appear to be entering a new phase in their development.