Propping up CA firms with PE

By Ashok Haldia

The accounting profession in India, one of the most wide-spread worldwide, has been grappling with the challenges of a fragmented profession. The profession needs innovation, capacity building, technology, and infrastructure to match the imperatives of the Indian economy, which is fast-growing and highly integrated with the global economy. The Big Four in India are members of the global network, and the rest of the firms, with a couple of exceptions, are small-sized. The structural, legal and regulatory impediments being faced by Indian accounting firms in their growth and becoming global, have been debated for a number of years. Of the 1.8 lakh Chartered Accountant (CA) firms in practice, only about 60 firms have more than 20 partners. Constrained by resources, relatively larger firms have become members or associates of global networks rather than becoming big themselves or becoming Indian representation within the global network.

What has been lost sight of in the discourse so far is the fact that substantial investment is required for consolidation and capacity-building for small firms. The alternative sources available for financing the same need more attention. Firms by themselves are unable to generate sufficient internal resources as the level of audit fee in India is too low—they are even unable to sustain their operations necessary for performing quality audits. These firms are thus incapable of making investments in innovation, technology, and attracting and retaining talent.

The role of private equity (PE) in financing and supporting the growth and consolidation of CA firms has not yet been thought about in India; it has rather been discarded outright, stated as being against the fundamental principles of auditing—excellence, independence, and integrity. However, PE presents opportunities for accessing capital to small firms. Equally important is transformative change that PE firms bring in through improving governance, enhancing operational efficiency, and creating and developing the brand of the investee firm owing to their wide and varied exposure globally. PE investment thus helps in bridging the gap in capabilities and competence that currently exists between big and small firms. Erstwhile PE-backed small firms in the US and UK are now competing with big firms for high-end clients and top talent. PE firms with sufficient capital may acquire a number of small firms to become large, diversify services offerings, and expand geographically. For instance, LB Group Ltd in UK, backed by a PE firm, integrated many CA firms in different regions and is now functioning as a challenger accounting firm under the brand name Affinia. Similarly, Eisner Amper, now a US-based global firm with subsidiaries across jurisdictions, has already acquired 10 firms with more reported to be lined up.

Accounting firms have attracted PE interest due to their stable customer bases spread across sectors, recurring revenues, and resilience to turbulent market conditions. Globally, PE in the accounting firms (according to S&P) was highest in 2024, amounting to more than $6.3 billion. Of the 30 largest Certified Public Accountant (CPA) firms, 10 ranked above 100 in the US, but so did many of the small firms, which now have PE. More than 200 CPA firms are reported to be considering PE; they may also be acquired by larger accounting firms (backed by PE).

PE in accounting firms, however, needs to be checked for its perceived or actual adverse effects on audit quality, as the common perception is that PE is guided by short-term profit maximisation. The separation of audit and non-audit practices into distinct legal entities as a cover-up for independence concerns may cause more harm than good. Co-shared locations, shared personnel, information or clients flows between two entities, and the ability of PE firms to influence the governance and practice of audits must be effectively restrained through equity subscription agreements. The arrangement between PE and the accounting firm should be subject to scrutiny and regular monitoring by the regulators, which should also extend to the portfolios of the PE firms and changes in equity and governance structure of the separated entities for potential conflict of interest and impairment of audit independence.

PE in accounting firms offers a mix of opportunities and challenges. Utilising PE for small firms will go a long way in enabling the much-needed consolidation of the accounting profession. Threats to audit quality due to PE are misperceived, as it will be, in no way, worse than what it is now. Much will depend on pragmatism in regulations while promoting PE and in structuring the same with the consideration of the unwavering need for maintaining audit quality.

The writer is former secretary, ICAI.

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