to use strategic bankruptcies to slough off obligations they don’t want to pay.” Obligations like—in the case of restaurant chain Friendly’s—pension obligations. Such moves can result in significant windfalls for PE investors but in others losing out. “One of the things that was surprising to me about private equity firms,” notes Ballou, “is that they often target industries that are highly regulated or those where a big chunk of the money comes from the government.” It’s possible that some of these firms, Ballou says, may take “an awfully narrow view of their responsibilities to their customers, to their employees, to society as a whole.” Recently, the Center for Popular Democracy estimated that, over the last decade, private equity firms were responsible for approximately 600,000 layoffs.3 It’s this narrative which worries regulators. “Private equity’s business,” says one executive director of a State Board, “is to invest in companies in hopes of gaining a good return on their investment, either by selling later at a higher valuation or through some other means. CPAs, though, have an obligation to the public before profit.” This executive director, who asked to remain unnamed, acknowledges that CPAs and their firms are entitled to be successful, but “they must follow a high ethical standard along the way. And sometimes this includes turning down lucrative opportunities.” For accountancy regulators, concerns are growing because, as the director points out, “we’re seeing a partner that [historically] has a bad habit of focusing on profit versus people.” Connected to profit pressures, regulators also worry that under PE management sloppier financial work could ensue. That, says the director, could be detrimental to the reputation of the CPA profession—and hard to come back from. “The hospitals that became involved with PE—what they’ve experienced—are good analogies.” According to attorney Matthew Bosher, however, PE investors are, in his experience, sensitive to the unique nature of attest work and the fact that outside investors cannot control or influence such work. Bosher is a partner at Hunton Andrews Kurth.4 His specialties include corporate governance and regulatory compliance. “I don’t think you can talk about PE and PE’s activities in this space as monolithic. Different investors are approaching firms in different ways. Accounting firms are approaching PE in different ways. There are many different variations.” Bosher has advised dozens of clients on forming alternative practice structures and outside investment in the non-attest entity in those structures. Alternative practice structures, he says, are designed to safeguard independence and ethical conduct. Alternative practice structures arise when the accounting firm splits into two separate entities: attest and non-attest. The attest entity remains (at least) majority owned by CPAs and maintains its own governance, partnership agreement, and decision making. In short, there are controls that limit interference by the new, non-attest entity, which is usually reconfigured with its own services (tax and advisory being the notable ones) and overseen by its own board, which may include representatives of the private equity investor. The two entities often then enter into an “administrative services agreement,” pursuant to which the non-attest entity leases to the attest firm such assets and burdens as equipment, office space, and marketing. The attest firm might also lease employees from the non-attest entity. But “the first step is separating the attest and non-attest businesses into two separate entities,” says Bosher. “At no point does the outside investor own the licensed accounting firm.” Bosher, who has served on the Virginia Board of Accountancy, calls the alternative practice structure model “tried and true. The model has been acknowledged in the Code of Conduct for a while. A couple of State CONTINUED FROM PAGE 21 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. 22 Nebraska CPA
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