GIVEN THE FAMILIAR HORROR STORIES THAT SEEM to follow when private equity converges with business— think: Red Lobster, Payless Shoes, Sears—it’s no surprise that for some, the trend in accountancy firms joining those ranks sounds warning bells. Restaurant and retail chains are one thing, after all, but businesses responsible for the integrity of our financial infrastructure, and in turn our lives, are another. In arenas where professional ethics are as important as profits, is a private equity (PE) presence enhancement or threat? According to Cathy Allen, a former Board of Accountancy member in New York, while there is reason for caution, she notes that outside investment in accountancy firms is not a new phenomenon, although she acknowledges the trend has been accelerating since 2021—and with such notable names as Baker Tilly, Grant Thornton, and Cherry Bekaert included in that upswing. “Accounting as a field is attractive to PE,” explains Allen. “For one, it’s a fragmented industry that lends itself to consolidation and scaling small to large. It’s also a business that has regular and stable sources of revenue. And for firms, the infusion of PE cash allows them to invest in critical technology, as well as to offer better compensation to recruit and retain talent. Plus, with AI reducing the demand for some accounting services, firms with more resources can offset those losses by offering more types of advisory services.” But while the capital advantages to a firm’s bottom line may be clear, how PE impacts these firms’ public protection mandates is less so. In an interview1 with the Institute for New Economic Thinking, federal prosecutor Brendan Ballou, who wrote Plunder: Private Equity’s Plan to Pillage America,2 describes PE’s specialty as finding legal and regulatory holes that allow it to make profits quickly and shift risks and costs to others. Private equity is a simple idea, Ballou says, but it has three basic problems. “One is that PE firms tend to invest in the short term to get a return on their investment in just a few years. The second is that they tend to load up the companies that they buy with a lot of debt and extract a lot of fees from them. The third is that private equity firms tend not to be held legally responsible for the actions of their portfolio companies. All this means you’re on a very short timeline with a very risky leverage model, and you’re not necessarily going to be held responsible if things go bad, leading to business strategies that can be very extractive and hurt consumers and employees.” Ballou adds that PE has increasingly taken on the role that investment banks used to have, but unlike investment banks, “private equity firms are vastly less regulated. What this means is that PE firms are doing a lot of the work that these companies did prior to the financial crisis, but they’re doing it with even less oversight.” He adds that “the basic story here is that private equity firms are able GETTING PICKED FOR PE Private equity’s increasing investment in accounting firms is causing anxiety among regulators, but can PE and proper oversight coexist? BY THE NATIONAL ASSOCIATION OF STATE BOARDS OF ACCOUNTANCY (NASBA) CONTINUED ON PAGE 22 21 nescpa.org
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