Bruce Cartwright of ICAS discusses the need for audit quality to remain unaffected by private equity’s growing influence in the profession, as well as the value of identifying models different from the traditional partnership approach.
As private equity’s presence in the accounting profession continues to grow, so too do the concerns of those who aren’t sure about the implications – be it good or bad.
On the back of that rising influence, the Institute of Chartered Accountants of Scotland (ICAS) is calling for a multi-stakeholder review of the framework governing who can own audit firms.
The organisation’s private equity working group has launched a new paper looking at the impact on the longstanding rules that oversee audit firm ownership.
The document analyses both the risks and opportunities of private equity investment, while also highlighting that the aforementioned rules have not been revisited in depth for several years.
Among the opportunities are succession planning, capital investment which may enhance audit quality, growth with economies of scale, and successful partnerships between firms and investors. The risks include audit quality, ethical challenges, market impact, culture and what happens next?
Asking the right questions
Bruce Cartwright, chief executive of ICAS, has spoken to AccountingWEB about audit quality needing to remain unaffected by private equity, why trust must remain earned, the value of identifying models different from the traditional partnership approach, and what’s making it a “really interesting time” for the profession.
He believes the private equity models seen so far are “quite diverse”, as are the approaches. Such variety was mirrored in the early approach of ICAS’s new paper. “What do we do with private equity, good or bad? How does it fit in?” said Cartwright.
“Actually, what I think it quickly moves to is – that’s not the right question.
“Everybody has been focused on private equity. It’s come in different formats and different jurisdictions, and it doesn’t respect geographies. The real question is a structural question, of which private equity funding is a subset.”
He stressed: “I don’t think we’re going as far as saying the structure is not fit for purpose. We haven’t concluded on that but have undoubtedly concluded that it’s been a long time since anyone’s really considered the structure.
“I think that’s the key for me – there’s more work to be done around what’s the appropriate structure and what does ownership look like?”
Appropriate time to look
Cartwright’s view on the matter is that it’s about time those structures were looked at.
“Dare I say – if you really want to be brutal about it – it’s maybe only 100+ years but when Mr Price and Mr Waterhouse were here, they didn’t set up to have global entities and franchises.”
He recognised that there has been a “massive change in the ownership structures and controls”, albeit with “probably not the same degree of open and transparent conversation about what is the best way”.
“The accountancy profession has to act in the public interest but part of that public interest is to have thriving accountancy practices that are resilient and strong going forward.”
Cartwright added: “It just feels like an appropriate time to look wider and actually say, ‘Well, how do we facilitate that and what does it look like?’ because, as we all know, the pace of change is just huge.
“I think it’s just a really interesting time. I don’t think ICAS is saying we have the answer but we are saying we’re approaching the question from the wrong angle.”
The need to retain quality
The report noted that firms must be satisfied that private equity investment will not negatively impact quality or lead to ethical challenges “which cannot be managed”.
It’s obvious where the focus of ICAS’ publication lies, with the word “quality” appearing 20 times across its nine pages.
Cartwright said the topic has “been at the forefront of an awful lot of discussions in the past five to 10 years”.
“I’ve been CEO now for seven years and I can visibly see that audit quality has been a real focus, and I think it has been enhanced in the UK and across the globe.
“Rightly or wrongly, there could be conceptions about how private equity operates and what they believe in. Audit quality is not that different from other business models in the sense that a quality product reputation sells in the marketplace and is good for business.
“So why would it be any different for an audit firm or an accountancy practice than an engineering firm or something different?”
Within that context, Cartwright thinks there is a misconception that “private equity is driven by the need for profit margin and business models to give a payback”. He added: “There’s nothing wrong with that per se, because at the end of the day, to my mind, that ties in with audit quality.
“Audit quality is a long-term thing and so is the reputation of a business that could be destroyed overnight. So I don’t think they’re misaligned. I think there might be a misunderstanding.”
Reversing into it
The report recognises that the rules on ownership of audit firms “have not been revisited in-depth for a number of years”.
“Given the evolution of society and market conditions in which such firms operate, now would seem an opportune time to reassess whether these rules are still fit for purpose,” it added.
“They cannot be lightly disregarded but must be subject to objective, independent scrutiny to ensure that they still best serve the public interest.”
The document stresses that such a review “must be undertaken by a wider group of stakeholders than just the firms themselves”.
Cartwright was not sure he could define who he would like to see involved in that conversation, instead recognising that there would need to be “some debate about who those stakeholders are”.
“Obviously, regulators have a big say in this,” he added. “I think the regulators themselves would come up with criteria that we’re trying to meet. What criteria is it? Audit quality being one of them and then the structure you’re proposing – how does it meet the quality and the other criteria that we’re setting?
“You always have to understand what good looks like, and then reverse into it. That doesn’t mean that you have to have a one-structure-fits-all if it achieves the objectives.”
Writes AccountingWeb