Private Equity in Accounting: Trends and Implications

Why Are Private Equity (PE) Firms Investing in the Accounting Space? 

Private equity firms are making bold moves into the accounting sector, recognizing its steady revenue streams, tech-driven transformation, and high-growth potential. But what’s fueling this trend? 

From M&A opportunities and AI-driven accounting solutions to regulatory demand and consolidation strategies, PE investors are reshaping the industry. However, what does this mean for auditor independence and professional ethics? 

 Read our in-depth analysis to understand the drivers behind this shift, recent developments, and how it impacts the future of accounting firms.

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The accounting and professional services industry is undergoing significant transformation, driven by technological advancements, increased regulatory oversight, and globalization. Private equity (PE) firms are recognizing the immense potential of this sector, drawn by its steady revenue streams, consolidation opportunities, and high-margin niche services. However, these opportunities come with regulatory challenges, particularly concerning auditor independence under Section 144 of the Companies Act, 2013. This article examines the drivers of PE interest, notable global and Indian trends, regulatory considerations, and implications for the accounting profession.

1. The Global and Indian Accounting Landscape

1.1 Global Trends

• Market Size: The global accounting market is projected to reach $1.3 trillion by 2030, growing at a CAGR of 5.9% (Source: Statista).
• Big Four Dominance: EY, Deloitte, PwC, and KPMG collectively hold over 60% of the global market, primarily through audit, advisory, and tax services.
• Technology Adoption: The rise of AI, blockchain, and ESG compliance reporting is enabling accounting firms to offer innovative, high-value services.

1.2 Indian Market Landscape

• Fragmentation: With over 75,000 registered firms (Source: ICAI), the Indian accounting sector is highly fragmented, creating opportunities for consolidation.
• Regulatory Complexity: Increased adoption of GST, Ind AS, and SEBI’s ESG reporting guidelines has driven demand for specialized advisory services.
• Market Value: The professional services industry in India is valued at ₹35,000 crores (2023) and is growing at a CAGR of 10.5% (Source: Research and Markets).

2. Why Are PE Firms Investing in Accounting Firms?

2.1 Steady Revenue Streams

Accounting firms generate predictable cash flows through recurring services such as audits, tax filings, and retainers.

• Example: True North’s investment in Mazars India highlights the appeal of consistent revenue from compliance-based services.
• Stat Insight: Over 13 million GST-registered businesses contribute to an annual compliance market worth ₹6,000 crores (Source: GSTN).

2.2 Consolidation Opportunities

India’s fragmented accounting sector offers PE firms the opportunity to consolidate smaller firms into scalable entities.

• Stat Insight: The top 20 firms in India control less than 10% of the market, compared to 40% in developed economies like the U.S. (Source: ICAEW).
• Example: Everstone Capital consolidated mid-sized firms like Resurgent India to create regional leaders in financial advisory.

2.3 Technology-Driven Growth

PE firms are drawn to accounting firms that integrate AI, blockchain, and automation for increased scalability and efficiency.

• Example: ClearTax raised $75 million from Kora Capital to expand its AI-powered compliance platform.
• Stat Insight: Firms adopting automation have reported 30-40% cost reductions, while AI-powered accounting services are expected to grow at a CAGR of 25% globally by 2028.

2.4 Demand for Niche Expertise

Complexities in ESG reporting, forensic audits, and cross-border taxation have created demand for high-margin services.

• Example: Alvarez & Marsal India, backed by PE funding, has expanded niche offerings like insolvency resolution and ESG compliance.
• Stat Insight: The ESG compliance market in India is projected to grow at 20% CAGR by 2028 (Source: SEBI ESG Guidelines).

3. Regulatory Implications: Section 144 of the Companies Act, 2013

The entry of private equity into the accounting space brings with it significant regulatory scrutiny, particularly concerning auditor independence. Section 144 of the Companies Act, 2013, acts as a safeguard, limiting the scope of non-audit services an auditor can provide to audit clients. This regulation ensures the impartiality and credibility of financial reporting while posing challenges for PE-backed firms seeking to diversify services.

3.1 Overview of Section 144

Auditors are prohibited from directly or indirectly offering the following services to their audit clients, their holding companies, or subsidiaries:

1. Accounting and bookkeeping
2. Internal audit
3. Financial information system design
4. Actuarial services
5. Investment advisory
6. Management services
7. Any other services as prescribed

These restrictions ensure that auditors maintain independence and avoid conflicts of interest.

4. Case Laws Highlighting Independence Issues

The importance of maintaining auditor independence has been reinforced by several high-profile cases in India and globally. These cases highlight the consequences of conflicts of interest, lapses in oversight, and the risks of compromising audit quality.

4.1 Price Waterhouse & Co. v. SEBI (2019)

• Context: Price Waterhouse was banned for two years for its role in the Satyam fraud.
• Relevance: Emphasized the importance of auditor independence and highlighted reputational risks associated with conflicts of interest.

4.2 Deloitte Haskins & Sells LLP v. NFRA (2020)

• Context: Deloitte faced scrutiny for lapses in its audit of IL&FS.
• Relevance: NFRA highlighted the importance of maintaining strict compliance with independence norms.

4.3 Grant Thornton LLP Advisory Case (2021)

• Context: Grant Thornton was scrutinized for providing management services to an audit client.
• Relevance: ICAI reinforced that indirect violations of Section 144 could result in penalties.

5. How PE Firms Extract Profits from Accounting Firms

While direct ownership of audit firms is restricted in India, PE firms employ innovative and compliant strategies to generate profits:

5.1 Global Network Model

• Establish global or regional networks where audit firms pay licensing fees for using proprietary methodologies or brand names.
• Example: S.R. Batliboi, EY’s affiliate in India, pays royalties for the use of EY’s brand and methodology.

5.2 Shared Services

• Create shared service centers to handle IT, HR, and compliance for audit firms, generating revenues through outsourcing fees.

5.3 Advisory Services

• Invest in non-audit verticals like tax consulting, ESG reporting, and transaction advisory, which remain unrestricted by Section 144.

5.4 Technology Platforms

• Develop proprietary AI-powered tools and license them to audit firms for a fee.
• Example: ClearTax’s AI-driven compliance platform generates subscription-based revenues.

6. Implications for Auditor Independence

The involvement of private equity in the accounting sector raises concerns about potential conflicts of interest and the erosion of auditor independence. Regulatory frameworks like the Companies Act, 2013, and guidelines from ICAI and NFRA aim to mitigate these risks.

6.1 Conflict of Interest

• PE-backed firms offering both audit and advisory services to the same client may face ethical challenges.
• Case Example: A PE-backed firm in 2023 was fined for violating ICAI’s independence guidelines.

6.2 Regulatory Safeguards

• ICAI and NFRA enforce strict separation of audit and non-audit functions to preserve objectivity and public trust.

6.3 Mandatory Rotation

• Auditor rotation requirements ensure independence but pose operational challenges for PE-backed firms reliant on long-term engagements.

Conclusion

The accounting sector offers immense opportunities for private equity firms, driven by predictable revenues, consolidation potential, and technology integration. However, the presence of robust regulations like Section 144 of the Companies Act, 2013, underscores the need for careful structuring and compliance to maintain auditor independence. As the profession evolves, PE funding can accelerate growth and innovation, but only by balancing profitability with adherence to ethical standards and public trust. Navigating these challenges successfully will allow PE firms to unlock the full potential of the accounting industry while ensuring long-term sustainability