SEC’s Top Accountant Intensifies Oversight of Private Equity in Auditing

WASHINGTON, D.C., December 10, 2024 – Paul Munter, chief ​accountant of the Securities Commission (SEC), expressed concern about the growing trend of private investment in capitalization of accounting companies. While such agreements can provide essential funding for technological improvements and talent acquisition, Munter stresses that the quality of audits ​and the independence of accounting companies must remain uncommitted.

In a year ​marked by significant private activity, companies ​such as Grant Thornton’s British unit, PKF O’Connor Davies ​and Carr, Riggs & Ingram announced private capital ​investments. Grant Thornton’s American division ​had ​already made the headline in May to become ​the largest company to pursue ​this agreement. ​These associations promise opportunities for growth, but Munter warns that they also pose risks, particularly with regard to cultural changes within companies that could compromise their commitment ​to hearing ​integrity.

The call and equity ​risk

Private capital investment has become an attractive option ​for medium-sized accounting companies seeking capital to improve their ​operational capabilities. According ​to Munter, these companies ​often use funds to invest in advanced technology and labour development. ​However, ​it notes that equity investors, generally profit-driven, cannot be aligned with the public interest underlying the Chartered Public Accountant (CPA) profession. “Maintaining ​independence is not just the responsibility for auditing,” Munter said. “It is the responsibility of ​the entire company, regardless of the service ​line you ​are on. »

He also explained that, although the structures of these agreements vary considerably, all companies must carefully assess and proactively monitor ​the potential for ​cultural change that could undermine their ​approach to audit quality. Companies are encouraged to exercise due diligence and ​to ​maintain oversight to ensure that these associations do not compromise their ethical and professional standards.

Role and observations of the ESA

The ​ESA took a proactive position by working with ​industry-wide stakeholders to assess the ​impact of private ​capital investments. Although Munter ​clarified ​that the ​ESA does not dictate ​how companies ​should structure themselves, it expressed the need for sound risk management strategies. According to Munter, these discussions are essential to ​help ​companies identify and address the challenges associated ​with external capital flows.

Disquieting trends have emerged in the profession, including ​unethical behaviours such as cheating and working papers. Munter acknowledged that these issues, although not exclusive to private equity companies, have aggravated concerns about the ethical ​position of the ​profession. “These circumstances very negatively reflect the profession,” he said, stressing the need for stricter adherence to ethical guidelines.

Audit quality and independence under control

The main concern ​of ​private investment is the possible impact on the ​independence and quality of audits. Mr. Munter noted that independence is not just a regulatory requirement, but a cornerstone of public confidence in the accounting profession. “He’s ​talking about a capital supplier that isn’t based on a public interest mentality ​like CPA,” Munter said. This misalignment of priorities could, if not proven, lead to a departure from the fundamental values of the profession.

To ​mitigate these risks, Munter calls for ongoing ​monitoring and proactive action. ​Accounting companies are ​urged to establish strict ​safeguards to ​ensure that audit ​quality remains a priority, including when adapting to new financial ​arrangements and ownership structures.

Key challenges in the accounting sector

Beyond risk capital, Munter highlighted other critical challenges facing the accounting sector. An important issue is the ​proper application of generally accepted accounting principles (GAAP). While some non-GAAP policies may be acceptable when they are ​small, Munter is ​concerned ​that companies deliberately exceed GAAP standards for ​large transactions. “Every time we see it, we find it worrying,” he said, stressing the ​ESA’s commitment to ensuring ​compliance with ​established accounting standards.

Mr. Munter also commented on broader ​issues such as the ongoing initiatives of ​the Financial Accounting Standards ​Board (FAB). He identified opportunities for a better breakdown of cash flow ​information and ​the accounting of intangible assets as key areas ​where AFSCA could focus its rulemaking efforts. These developments could provide greater ​clarity and ​transparency in financial reporting, addressing some of the concerns raised by regulators and investors.

The future of monitoring

As the SEC prepares for a leadership transition, President-elect Donald ​Trump appoints Paul Atkins to succeed Gary Gensler as President, industry observers anticipate ​significant changes ​in the Supervisory Board of Public Business Accounting (CPAOB). Munter, ​however, refrained from commenting on ​possible reforms, stressing his role ​as manager of the current priorities of the ​ESA. Asked ​about his future on paper, ​Munter ​expressed his willingness to continue serving but acknowledged that his ​position is subject to the vision of incoming management.

The accounting sector is at a crossroads, balancing the opportunities offered ​by private investment with the imperative ​of maintaining its ​ethical and ​professional standards. While ​Munter continues to monitor these developments, ​ESA remains committed to promoting a culture of accountability and transparency in financial reporting.