Private Equity Deals Leave State Accounting Boards on Sidelines

State regulators are sounding the alarm as private equity-backed accounting firms test the limits of longstanding rules and laws designed to protect the objectivity of licensed CPAs.

Firms that have cut PE deals rely on a complex legal structure that has touched off a cascade of ethics and professional conduct concerns. State regulators fear the evolving ownership models could erode the value of professional accounting licenses and ultimately undermine the capital markets that depend on auditors’ work.

State laws hamper regulators’ ability to oversee the new arrangements because of the narrow scope of firm licensing requirements—a gap some state boards aim to close.

“It’s a very profit-driven, short-term ownership structure,” said Haley Lyons, chair of the Oregon Board of Accountancy. “How do we ensure long-term relationships for members of the public? How do we ensure quality standards are upheld over time?”

The effort to bolster oversight comes as a rising number of US accounting firms have cut deals with third party investors in the last six years, with nearly half of the top 30 firms now at least partially owned by private equity.

The volume and speed of the ownership overhauls has caught boards of accountancy flat-footed as they look to enforce state ownership and ethics requirements for licensed CPA firms meant to ensure companies and private individuals work with a dependable, independent accountant.

Firms themselves are looking for more guidance. Grant Thornton Advisors LLC, one of the biggest US firms with private equity ownership, said in its latest transparency report that it put in place its own safeguards to ensure its auditors make critical decisions regarding promotions, staffing and its client roster. But the firm and others are calling for updated conflict of interest rules to help manage a complex mix of threats to their independence.

Out of Reach

The largest private equity-backed accounting firms operate nationwide and are licensed in multiple states, making it harder for individual states to police requirements that at least 51% of a registered firm’s owners are credentialed CPAs. In some cases, regulators don’t know that a firm has new non-CPA owners.

But the primary challenge facing accounting regulators is those private equity-backed businesses don’t meet the definition of a public accounting firm even though they provide the same services, said Elizabeth Almer, an accounting professor at Portland State University in Oregon.

“They are trying to intentionally fall outside of these rules that are set up to maintain the public’s trust,” Almer said.

Firms skirt state ownership laws by creating a two-part operational structure. A new legal entity that accepts outside investments runs tax and advisory services while also providing administrative services like human resources and marketing. Meanwhile the legacy CPA firm provides audit and assurance services.

The legacy firm is owned and operated by audit partners, not the outside investors. But in practice, the partners and audit teams work directly for the new business entity and are leased out to the assurance practice through service agreements.

The Oklahoma Accountancy Board has been asking its registered accounting firms about their ownership structures and what measures they have in place to protect CPAs from outside pressures and influence, said John Curzon, vice chair of the board.

“I want to make sure that what we are saying is clear,” Curzon said, and that “those who play in our sandbox understand the rules and abide by them.”

States Respond

State boards have formed a task force to scrutinize the impact of outside investors and the growing use of non-traditional ownership structures. They plan to study how new ownership models could reshape firm governance and the public’s perception of CPA firms among other factors.

Oregon is already discussing possible changes to its requirements so it can oversee PE-backed businesses that exercise “significant influence” over a legacy CPA firm, Lyons said. The board aims to have the updates ready for the 2026 legislative session.

The Virginia Board of Accountancy over the next year plans to review whether it should clarify its firm licensing and independence requirements to address new ownership models, said Dale Mullen, a lawyer and vice chair of the board.

Financial pressures that could sway an accountant’s judgment aren’t new to the industry. The temptation of lucrative consulting business tainted Arthur Andersen’s audits and contributed to its demise two decades ago.

The difference for private equity-backed firms is they have a contractual agreement spelling out what the firm has to achieve in order to earn periodic payments from the outside investors, said Joe Tarasco, CEO of Accountants Advisory Group LLC.

Ethics Standards

Industry watchers fear the profit targets common among private equity-backed businesses might encourage auditors to take shortcuts or accept work that falls outside their qualifications.

State accounting boards are also monitoring an industry ethics committee that is working to provide clearer guidance as firms navigate potential conflicts of interest among their auditors, the PE-backed business, and the universe of companies also held by their outside investors.

An initial proposal from the American Institute of CPAs ethics body doesn’t go far enough to address the pressures CPAs will face to meet their investors’ demands, state regulators have told the committee.

“The guidance cannot resolve a fundamental structural issue: the inherent conflict between private equity investment objectives and professional independence requirements,” the Washington State Board of Accountancy in a letter to the committee. The board didn’t respond to a request for comment.

Firms should set up a framework to preserve the independence of their accountants before any deals close, Grant Thornton said in a statement to Bloomberg Tax.

Many state regulators want to see the ethics committee’s approach before revising their own licensing requirements.

“I haven’t seen a case where the existence of private equity on the attest side of an audit practice has resulted in a negative impact,” said Mullen, who serves on the Virginia board. “This is not to say that we will wait until that problem occurs. We won’t.”