Pennsylvania CPA Journal
When private equity interests become a part of an accounting firm, the practical consequence is not only organizational change but also a change in professional exposure and liability coverage. This Liability Lessons column explains the new liability risks and what steps practitioners should take if part of an acquisition or merger.
Insightful lessons can be learned by reviewing professional liability issues. With this in mind, Gallagher Affinity provides this column for your review. For more information about liability issues, contact Irene Walton at irene_walton@ajg.com.
Private equity interest in accounting is no longer a topic meaningful to only a handful of large national firms. Private equity groups have been actively pursuing investments across the accounting sector, and in doing so they have changed the ownership dynamics CPAs have been used to. For many, the practical consequence is not only organizational change but also change in professional exposure and liability coverage. This column explains the new liability risks, how claims-made insurance and a stand-alone extended claims reporting period (ECRP) work, and what steps practitioners should take if their firm is part of an acquisition or merger.
Why Is PE Investing in CPA Firms?
Private equity investors target CPA firms for the same reasons they target other service businesses: stable recurring revenue, strong client retention, and opportunities to scale. That interest has resulted in a wave of transactions across the profession in recent years. Industry trackers have documented dozens of private-equity-related deals since 2020, with an estimate of billions in capital deployed as private equity groups build platforms and roll up regional practices.
Private equity involvement, however, is more than an infusion of cash. Often these deals alter firm structure in ways that can affect professional exposure. Partners who once held equity positions may be asked to accept employment agreements, earn-outs, or rollover equity arrangements. Client relationships may change as a combined enterprise seeks efficiencies and cross-sell opportunities. Each shift can reallocate who holds responsibility for past professional advice and who controls claims-handling.
ECRP Protections
From a liability perspective, the most important fact to understand is how professional liability insurance attaches to claims. Most liability policies are written on a claims-made basis in which coverage attaches when a claim is reported to the insurer, not when an alleged act occurred. A potential coverage gap can open when a firm changes ownership or dissolves because the policy in place at the time the work was performed might not be active when a claim surfaces years later. An ECRP expands the reporting window for a claims-made policy after it terminates.
In a private equity acquisition, different models exist for addressing prior acts exposure, but not all solutions afford the same protection. Some acquirers assume liabilities for predecessor acts or purchase run-off coverage for the acquired firm as part of the deal. Others may decline to take responsibility or elect carrier structures that create ambiguity about which policy responds. Stand-alone ECRP solutions allow the selling firm to secure a separate reporting period that remains tied to predecessor acts, regardless of the buyer’s choices.
Practical Steps CPAs Should Take
CPAs should treat ECRP planning as a central component of all diligence work. Practical actions include reviewing the firm’s current professional liability declaration and endorsement language to confirm the insurer’s rules for mergers and successor firms; secure written confirmation from the buyer about which entity will accept prior acts liability; and request ECRP coverage quotes from your current professional liability carrier or stand-alone ECRP. Preserve and index engagement files and working papers with secure retention protocols, and involve a knowledgeable insurance broker and legal counsel early to negotiate contract language that clarifies named insured and additional insured status post-closing.
Cost vs. Risk Considerations
ECRP pricing varies with the length of the reporting period. Typical options include one, three, five, and unlimited year reporting periods with incremental cost for greater duration and higher limits. Firm buyers and sellers can build ECRP responsibility into the letter of intent or purchase agreement, either as a seller obligation with a purchase price adjustment or as a shared transitional cost. The essential point is that ECRP should be an explicitly negotiated item, not an afterthought.
Conclusion
Regulators and leaders in the profession have flagged the need for transparency and safeguards to preserve audit quality and independence. Regulatory scrutiny reflects the reality that ownership changes can create both opportunity and of risk for clients and practitioners.
For Pennsylvania CPAs negotiating or considering a transaction, the takeaway is clear: liability exposure does not end because a firm changes hands. Effective risk management requires documenting who will bear prior acts responsibility and securing an ECRP if that responsibility does not transfer or if doubt exists. By taking early steps to review policy terms, secure appropriate reporting periods, and document client work, CPAs can protect their standing and financial interests while allowing their firms to pursue the benefits private equity may enable.
Irene M. Walton is area vice president, affinity manager, with Gallagher Affinity in Mount Laurel, N.J. She can be reached at irene_walton@ajg.com.