As private equity firms continue to invest in the accounting industry, establishing independence through conflict checking has become even more consequential than before. That’s the message we’re hearing here at Intapp from our accounting firm clients.
Below, we look at why reliable conflict-checking processes have become so critical for accounting firms, how these processes can also help your firm attract and even vet private equity offers, and how Intapp’s capabilities can help you manage the independence issues raised by PE investment in accounting firms.
PE investment creates growth expectations
If your firm has taken PE investment, you’re likely to grow through organic means and acquisitions.
This growth, combined with the PE ownership of your firm, means your firm’s compliance and independence challenges have become complex. That’s because when your firm is taking on a new client, it must check that client against not only your firm’s existing clients, but also all the companies owned in whole or in part by the PE firm that invested in your firm. Manually conducting such a broad conflicts check would require many staff hours and a very organized process.
To add further complexity, if you’re looking to acquire another accounting firm (a common scenario among accounting firms in receipt of PE capital), you’ll have to check for conflicts on all their clients against both yours and your PE firm’s holdings.
These extensive conflict reviews are further complicated by the need to check each potential client’s corporate tree against the corporate trees of your clients. While there may not be a conflict between a new prospective client’s parent company and the parent companies of your clients, your potential client’s subsidiaries may have a conflict with one of the subsidiaries of your clients.
These complex conflict reviews involving corporate trees and PE structures call for a conflict-checking software built for just these scenarios. Intapp Conflicts is accounting firms’ first choice for surfacing, resolving, and reporting conflicts across corporate trees and PE portfolio companies.
Alternative practice structures require thorough conflicts review processes
In addition to needing to conduct more, larger conflicts reviews, accounting firms that accept PE investment are often subject to greater regulatory scrutiny. When an accounting firm takes private equity investment, it splits into two separate entities:
- The advisory and tax services firm that is wholly or partly owned by the PE company
- A separate CPA-owned firm focused on attest services
These alternative practice structures have raised multiple concerns for regulators, who are focused on ensuring auditor independence.
One concern is that the CPAs involved in the original firm often end up wearing two hats: one as employees of the PE company, and another as partners of the attest firm. If one of these CPAs ever tried to perform attest work for either the PE firm or a company owned by the PE firm, their independence would be impaired because they have an incentive not to damage their employer.
To avoid such independence impairments, the attest firm must conduct extensive conflicts searches, checking to see whether potential clients are owned by the PE firm. These extensive conflicts checks require a reliable, digital process.
A strong technology stack can attract PE investment
Firms looking to attract PE investment should ensure they have technology in place that enables standardized, efficient processes. Private equity investors look especially favorably on conflict-checking software because it enables firms to quickly take on new business, a key objective for the PE firm during their holding term.
Moreover, PE firms view auditor independence issues as a worrisome problem that they’re unfamiliar with. If a target accounting firm is already effectively managing independence issues with purpose-built software, the accounting firm has eliminated a concern a PE firm would otherwise have and made itself more likely to receive PE investment.
Improved conflict checking facilitates reviews of PE investment offers
Accounting firms hoping to field offers of private equity ownership can also use conflict-checking software to evaluate the PE offers themselves. If a PE firm owns companies that your accounting firm is already doing attest work for, your firm may not want to accept the PE offer because it would require your spun-off attest firm to give up many of its clients.
Using Intapp Conflicts, your firm can evaluate the independence issues raised by a specific PE investment offer.
To learn more about how Intapp can help your firm address independence challenges in connection with private equity investment, please contact us.