Wall Street Journal recently published a story about a pair of ER doctors who have shared a dire warning to accounting firms cozying up to private equity: Trust and quality will suffer. As we said on X, we’re pretty sure partners already know this and don’t care. But let’s look at what the good doctors had to say anyway:
Drs. Bob McNamara and James Keaney, both former longtime emergency-room physicians, were early critics of private equity in healthcare who now say such ownership in accounting could shake trust in an industry that investors rely on for getting trustworthy financial information about companies.
“If accounting holds itself out as an ethical profession, which puts the client first, they should have never let private equity in because that’s what we did and it hurt the patients,” said McNamara, a professor and chair of emergency medicine at Temple University.
“There’s been a reduction in the quality of care, a massive reduction in the trust of institutions. The analogy with accounting is perfect. If you compromise the auditors, then it’s a total coverup,” said Keaney. Don’t worry doc, the audit businesses are being siloed off from the private equity-backed side of the firm, nothing to see here.
Although accounting’s private equity rush began in earnest in 2021, regulators have only recently started voicing concerns about outside investment in firms. “PE investment might drive growth and innovation in the UK economy, but there is a risk that PE investors may lack a deep understanding of audit practice objectives, and the public interest incentive to deliver audit quality,” said UK audit regulators at the Financial Reporting Council in last year’s annual report. “A lack of clarity or long-term thinking regarding PE exit strategies also raises concerns about maintaining audit quality and public interest motives over future years.”
In 2022, then-SEC Acting Chief Accountant Paul Munter reminded firms that auditors must be independent in both fact and appearance. “In the current environment, as some accounting firms may be considering changes to their capital and firm structures, we expect accounting firms to keep as their top priority a focus on their vital gatekeeper function,” he wrote. “In particular, the fundamental importance of auditor independence, ethical behavior, and a focus on audit quality to maintain the trust of investors. Any business decisions made by an accounting firm should be made with these foundational principles at the forefront.”
In a 2024, Munter followed this up with a stern reminder that leadership has a responsibility to model a commitment to ethics from the top down (see: Audit Firms’ Tone at the Top Sounds Like a Brown Note, Says SEC Chief Accountant):
“Audit firms are private businesses with the same legitimate interest in making a profit that all private businesses have. But audit firms have also been entrusted to be essential gatekeepers in maintaining the integrity of our capital markets. The leaders of audit firms, and the tone that they set, play a central role in ensuring that professionals within audit firms do not sacrifice integrity and professionalism for profit and growth,” he said.
Audit firms have also sought investments from third parties, such as private equity firms, that have not been subject to the same independence and ethical responsibilities as auditors. Depending on how those investments are structured, they could lead the firm’s professionals to question the firm’s commitment to both independence and high-quality audits. Firm leaders need to be sensitive to the message such arrangements could send and stand ready to correct any such misimpressions.”
Accountants serve a trusted public role in promoting the integrity of our markets and the protection of investors. The value of an audit and auditors depends on their credibility and trustworthiness. “Audit professionals in particular have a difficult job—they sometimes must make difficult determinations that pit the public interest against self- or firm-interest. But that is precisely how public accountants fulfill their gatekeeping function to help protect investors: by ensuring that issues are promptly identified and addressed. To maintain that function, and in training the next generations of public accountants, it is critical that leaders of public accounting firms lead by example and foster a healthy tone at the top by prioritizing integrity and professionalism over profit and growth.”
Further reading: What Happens When Private Equity Takes Over a Hospital (Harvard Medical School), Slash and burn: is private equity out of control? (The Guardian).
At least no one will die directly from a dip in quality and ethics at an accounting firm.
