The PE firms are attracted to auditing and accounting for several reasons:
The opinions about PE investments in accounting firms, however, are not all positive. The Securities and Exchange Commission (SEC) has raised numerous concerns about the risk posed to the public by attest firms who are “dependent” upon nonregistered, PE-owned nonattest firms. The SEC has emphasized that PE ownership in accounting firms poses “significant threats” to auditor independence. Among the concerns that have been raised include:
Recent research bears the SEC out. Businesses that have been acquired by PE firms are 10 times as likely to go bankrupt as those that are not.1
This blog explores the ethical implications of PE investment in audit and attest firms. It focuses on both the issues of attest firm independence raised by PE investments in related unregistered nonattest firms, as well as the threats of undue influence that may be created by PE investments in alternative practice structures.
The AICPA Professional Ethics Executive Committee (PEEC) has produced a second draft of a proposal to address the independence implications of PE ownership of attest firms that operate in an alternative practice structure: Proposed Revisions Related to Alternative Practice Structure, December 29, 2025. This proposal is significantly improved from the first discussion memorandum PEEC issued on March 10, 2025. Most notable, PEEC recognized that the typical alternative practice structure relationship between an attest firm and affiliated PE-owned, nonregistered firm produces a “dependency” of that attest firm on the nonregistered entity.
PEEC’s view is that the “dependency” of an attest firm on an affiliated PE-controlled nonattest entity should subject the nonattest entity to the same independence standards as the attest firm. We agree, but the PEEC proposal remains deficient in several aspects.
First, the PEEC exposure draft does not go far enough with the definition of “network firms” of both the nonattest firm and the PE investor. PEEC wrote, “relationships and circumstances that impair independence may differ based on the level of investment of the investor in the nonattest entity.” It is the authors’ view that there is no level of PE investment that will not impair independence.
Second, the exposure draft fails to cast a sufficiently wide enough independence net over the entities with which the PE investors have relationships. The following discussion explores several different avenues that may better protect the public interest.
One significant issue is the auditor’s independence with respect to upstream entities of the investor in the nonattest entity associated with the attest firm. The exposure draft (paragraph 18d) concludes that, “In a controlling investment, when the investor either (i) has significant influence over an attest client and the attest client is material to the investor or (ii) controls the attest client.” (Our emphasis added.) In our opinion, this is too restrictive. The public interest in ensuring that audit firms are perceived by the public to be independent would be to conclude that independence would be impaired when the PE investor in a controlling investment either has significant influence over the attest client or the attest client is material to the investor, or controls the attest client. The simple fact that an investor in the nonattest firm has a stake in an entity that is material to the investor should impair the independence of the attest firm. It is critical that the “and” in paragraph 18d be changed to “or.”
A second alternative to broadening the reach of independence rules to entities with which PE investors in accounting firms have relationships would be to define upstream entities the way the SEC defines affiliates.2 Hence, upstream entities that the attest firm would be unable to audit because independence issues would include:
Following this SEC standard would place a higher emphasis on the auditor’s duty to the public, not the audit client. Further, the changing nature of the attest firm justifies enhancing the nature of the independence standards.
Further, it is the authors’ view that PEEC should require that the SEC’s and PCAOB’s independence rules should be applied in their entirety to all audits of nonpublic companies undertaken by private-equity-affiliated audit firms.
We believe this is justified because of the greater risks to auditor independence posed by attest firms that are “dependent upon” nonregistered PE-owned firms. The long-time rationale for less-stringent independence standards for nonpublic company audits has been that the audited entities do not have the same significance to the public’s interest than a publicly registered company. That analysis had assumed, however, that the attest firm was owned and controlled by a majority of CPAs (traditional model) and not a PE-owned nonregistered firm. Changing the nature of the attest firm justifies enhancing the nature of the independence standards.
A benefit of adopting SEC/PCAOB standards and rules would provide, in some cases, decades of interpretation and explanation that will not be available by modifying PEEC rules. At a time when conditions are rapidly changing within the audit field, consistency is invaluable to public protection.
The old assumptions that attest firms operate as partnerships owned by a majority of senior accounting professionals may no longer be the case, or it may not be at the core of the relationship between the attest firm and the nonregistered nonattest firm. We have heard of practice structures that have only one attest professional as a partner in the audit firm, with all other partners and professionals being leased from the nonattest firm or shared services entity. The only purpose of such a structure is to hollow out the attest firm and minimize the potential responsibility/liability of the attest firm.
The question is not whether PE capital is present. The question is whether the attest firm truly retains decision-making authority over audit quality, partner evaluation, compensation, and its system of quality management. The PEEC Exposure Draft is clear that partners in the attest firm may be leased from the nonattest firm or a shared services entity. What happens if a shared services agreement or alternative practice structure allows the PE-backed entity to influence attest partner compensation, performance evaluations, or quality control decisions? In our opinion, the undue influence threat becomes impossible to mitigate at the firm level alone. If firm-level internal safeguards cannot mitigate the threat, then the accounting profession must consider what professional safeguards are needed to mitigate the threat.
Let’s be clear: we are not talking about optics. If shared-services agreements allow the PE-backed entity to influence attest partner compensation, performance evaluations, or quality control decisions, this very structure threatens the independence, integrity, and objectivity of the attest firm – and the audit profession itself. In our opinion, the only viable solution involves state board regulations requiring partners who sign attest reports to be employed by the attest firm, not leased from another entity. Further, regulations should require that the governance of attest firms be such that decisions about performance evaluations and compensation of attest professionals and the firm's system of quality control be under the control of the attest partners.
We believe that PE investments in nonattest firms with close ties to attest firms pose substantial threats to auditor independence and, depending on the nature of an alternative practice structure agreement, may pose a significant undue influence threat. If PE investors participate in decisions that affect attest firm independence, quality control, partner compensation, or performance evaluations, we believe the undue influence threat that is created cannot be mitigated by firm-level safeguards. The only viable solutions would involve increased regulation of the accounting profession by state boards of accountancy.
Comments on the PEEC Exposure Draft were due April 30, 2026. As the PEEC evaluates the comments, we hope that we will have one more exposure draft to comment on. The profession must be vigilant and consider plans for bolstering auditor independence, along with the integrity and objectivity of accounting firm professionals, in a situation that calls for additional action.
1 https://blogs.cfainstitute.org/investor/2024/08/02/private-equity-in-essence-plunder
2 Regulation S-X, 210.2-01 (f)(4)
Raymond Johnson, PhD, CPA-retired, is a professor emeritus from Portland State University. He is a past president of the Oregon Society of CPAs, a past chair of the Oregon Board of Accountancy, and a recipient of the NASBA Distinguished Service Award.
Joseph P. Petito is a retired Principal of PwC, having headed its state and local public policy group. An attorney, he served as a public member and chair of the Maryland State Board of Public Accountancy, as well as on numerous AICPA and NASBA committees. He currently resides outside of Sarasota, Fla.
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Statements of fact and opinion are the author's responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.