Private equity audit capital under scrutiny

Audit firms have been asked to report to watchdogs if they are considering allowing private equity outfits to invest in them.

The Financial Reporting Council (FRC) published an open letter this week, saying it had no objections to changed ownership structures but there are potentially risks to independence and public interest that need to be considered.

“Like for any other significant change relating to a UK firm,” says Richard Moriarty, chief executive of the FRC, “any party interested in a change of ownership by introducing external private capital must be able to continue to provide assurance that it will be able to support the public interest, the independence dimensions of audit and all applicable regulatory expectations.

“It is important to demonstrate that the legal requirements, including those pertaining to control, are met both in substance and in form.”

The FRC stresses at the opening of its letter that firms undertaking statutory audits must be “controlled” by “qualified professionals”.

The letter follows a number of deals which saw private equity firms invest in auditors. Dains, a small audit firm, has revived investment from Horizon Capital while Cooper Parry is backed by Dutch private equity investor Waterland.

Private equity interest has increased at a time when many firms are exploring the capital needed to exploit new technology such as GenAI, and as many partners retire, extracting their equity.

Are zombies eating shareholder rights?

Corporate governance is turning into a horror story. That, at least, is the inference from a Financial Times story with a headline saying that “zombies stalk US boardrooms”.

To be fair, the FT is being a little disingenuous with its language. Senior independent directors aren’t trying to lunch on anyone’s face. The story is that scores of US directors are failing to win a majority support from shareholders for re-election, but remain in post nonetheless.

And while they stumble about groaning, globally minded investors are worried about other developments, among them the softening of dual-class share rules in London and Italy’s reform of its “board slate” system of voting.

All of these developments, the FT suggests, add up to a worldwide trend of diminishing shareholder rights.

Jen Sisson, the almost-new chief executive of the International Corporate Governance Network, tells the FT that shareholders do not want a race to the bottom on governance standards.

“Governance is one of those things that is all very boring until something goes wrong,” she says. True that.

City hungry for further reform

A fresh survey reveals City leaders seek more changes to shore up London’s reputation as Europe’s leading capital market.

Deutsche Numis finds that 61% of those polled want the new government to “streamline” corporate governance. Last year saw the previous government jettison planned new disclosure regulations, while a recent review of the UK’s Corporate Governance Code saw watchdogs set aside a number of new measures that had long been touted.

In recent weeks, the Financial Conduct Authority has agreed to soften the rules around dual-class shares, while removing the requirement for a shareholder vote on significant transactions.

City figures have also celebrated changing the minds on the issue of higher chief executive pay.

But as the Deutsche Numis survey shows: FTSE leaders, please sir, want more.