Private equity in accountancy: public interest under pressure

ANALYSIS REPORT Changes already visible The share of statutory audits performed by accounting firms collaborating with private equity is increasing: this year it is estimated at 30%. Collaboration between accountancy and private equity is increasing 2023 2024 2025 11% 21% 30% 1 2 The effects of this will be visible especially in the long term. Based on data analysis, however, we already see indications of short-term changes on four indicators: % of the number of hours written by an external auditor relative to the total number of hours -60 0 60 120 Indicator 3: Involvement of an external auditor % of audits where a quality assurance was implemented -60 0 60 120 Indicator 4: Identification of independence threats % of assignments where one or more independence threats were identified -60 0 60 120 Indicator 1: Use of quality assurances average number of identified significant risks per statutory audit -60 0 60 120 Indicator 2: Identification of significant risks Difference (%) before and after interest or collaboration with private equity, in ... Decreases No change Increases Each dot represents one or more accounting firms with the same private equity investor. Decreases Increases ANALYSIS REPORT 8 APRIL 2025 Private equity in accountancy: public interest under pressure In short The market share of accounting firms with a regular license and private equity investments has grown rapidly to approximately 30%. This is a reason to review the effects of this again. We see short-term opportunities for private equity and long-term risks. Changes are already visible now, as appears from our data analysis. For the AFM, the risks weigh heavier than the opportunities. For accounting firms collaborating with private equity, it is important that they keep an eye on public interest and prioritize the quality of statutory audits.

ANALYSIS REPORT Contents

1. Summary 3
2. An introduction to private equity in the accountancy sector 5
3. Opportunities and risks of private equity investments in the accountancy sector 7 3.1 Opportunities 7 3.2 Risks 8
4. Private equity investments in other sectors with public interest 10 4.1 Limitation of private equity investments 10 4.2 Effects of private equity investments in other sectors 10
5. First analysis of short-term effects of private equity in the accountancy sector 12 5.1 The use of quality assurances 13 5.2 The identification of significant risks 14 5.3 The involvement of the external auditor in the statutory audit 14 5.4 The identification of independence threats 15
6. The AFM has attention for private equity in its supervision 16 Appendix 1: Bibliography 17 Appendix 2: Explanation and justification of performed data analyses 19

Private equity investments in the accountancy sector 3 ANALYSIS REPORT

1. Summary Private equity parties are investing more and more in the Dutch accountancy sector. In a few years, the share in statutory audits performed by accounting firms with a regular license that have entered into agreements with private equity has risen rapidly to approximately 30%. This is a reason for the AFM to review the effects of private equity again. There are opportunities and risks, but the AFM still weighs the risks of private equity more heavily than the opportunities. Accountants have an important public task. By performing audits on (annual) reports and giving an opinion on them, the accountant adds trust to social intercourse. The importance of performing these audits well may come under pressure due to commercial incentives. Private equity in the accountancy sector can put the vulnerable balance further under pressure. Therefore, there is a constant need for internal (from within the accounting firm itself) and external (from the AFM) counter-pressure. The opportunities of private equity We see that private equity can offer solutions in the short term for the challenges the Dutch accountancy sector is facing. This can be thought of in terms of scale advantages, bringing in expertise, investment power, and ensuring a stronger competitive position. It can also offer a solution to the succession problem that some accounting firms experience. The risks of private equity In the long term, we also see risks. Especially regarding the pressure that can arise on the quality of statutory audits. Commercial incentives can strengthen the commercial interest of accounting firms and thereby exert pressure on the vulnerable balance between commercial interest and public interest. This can manifest itself in pressure to grow too quickly and/or become profitable, insufficient investments in structural improvements, uncertainty about the exit, a leverage strategy that goes wrong, and threats to independence and confidentiality (such as offering other services to audit clients). Results of a first analysis on our own data There are a number of accounting firms with private equity that use fewer quality assurances, identify fewer significant risks, and/or involve the accountant less in the statutory audit. There are also accounting firms with private equity where one or more of these indicators for safeguards and prerequisites for the quality of statutory audits are used more. Supervision by the AFM The AFM supervises the ownership structure of accounting firms and ensures that the majority of voting rights remains in the hands of accountants, accounting firms, or audit firms. We cannot prevent investments by private equity parties. Because collaborating with private equity can offer extra challenges to securing quality, we are in much conversation with these accounting firms that are already collaborating. In addition, we take private equity into account as a risk indicator in our supervision. This can mean that we involve the accounting firm more frequently in investigations or that we test statutory audits more frequently. Quality of statutory audit must remain guaranteed It is important that accounting firms that want to enter into agreements with private equity weigh the opportunities and risks carefully against each other.

Private equity investments in the accountancy sector 4 ANALYSIS REPORT When making this assessment, it is of great importance that there is sufficient counter-pressure against the commercial interests of the private equity party to continue to secure the quality of statutory audits. For accounting firms that already collaborate with private equity, it is also important to implement safeguards to continuously provide sufficient counter-pressure for the commercial incentives. Pressure from outside is also needed to guarantee quality, as the quartet makers emphasized in their final report 'Pressure and counter-pressure'. The AFM will continue to do this. This contributes to the quality-oriented culture and quality of statutory audits.

Private equity investments in the accountancy sector 5 ANALYSIS REPORT 2. An introduction to private equity in the accountancy sector 1 Organizations in the Netherlands are subject to audit obligation when they meet at least two of the following three criteria for two consecutive years: (i) net turnover higher than €15 million, (ii) total balance sheet higher than €7.5 million, and (iii) at least 50 employees. 2 CSRD legislation has not yet been implemented in the Netherlands, but it has already been determined that only accounting firms with an RV or OOB license may provide CSRD assurance (Financieel Dagblad, 2024a). 3 In a European context, this stems from Directive 2006/43/EC. Art. 3 para. 4. In Dutch law, the voting right requirement appears from Art. 16b of the Act on Supervision of Accounting Organizations (Wta). 4 The market share is viewed as the share in the total number of statutory audits performed by regular license holders. The calculation was based on the date the investment was first announced in the media. Private equity has been taking an increasingly larger stake in the accountancy sector in recent years. What are the drivers of this 'new' co-shareholder? And how does the collaboration between private equity and the sector take shape? An introduction. The accountancy sector in the Netherlands is generally a financially healthy sector, achieving good financial results. There are legal requirements that determine when enterprises are subject to audit obligation1 and in the future this will also be the case for assurance on sustainability reporting2. In addition to this stable stream of assurance assignments, many accounting firms also perform other activities, such as advisory services. This means that the accountancy sector generates a stable income stream both now and in the future. Healthy sector with challenges Although the accountancy sector is financially healthy, there are also challenges. Think here of digitalization, aging population, less inflow of new employees, and new services (Accountancy Vanmorgen, 2024). Private equity parties can help to meet the challenges with their investments and growth ambitions (ING, 2023). Characteristics of a private equity investment Private equity parties focus on influence, growth, and profit. Important characteristics of a private equity investment are usually obtaining the majority of voting rights to exert influence on management, and realizing a successful exit or profitable sale within 5 to 7 years. To realize this result, a private equity party will take measures to grow (through a buy-and-build strategy), improve the financial performance of the enterprise, and/or increase the sale value upon exit (see for example Wright & Robbie, 1998; Kaplan & Sensoy, 2015; Boot, Ligterink & Martin, 2020). Majority of votes not legally possible Although private equity parties generally strive for a majority of voting rights, this is not possible in the Dutch accountancy sector. It is legally established that the majority of the voting rights of the accounting firm must be in the hands of accountants, accounting firms, or audit firms.3 This creates some tension with the strategy that private equity parties often employ. On the one hand, the private equity party wants to exert influence on the organization of the accounting firm, while on the other hand this is limited by the legislator. The market share of private equity parties in Dutch accounting firms with a regular license is still growing. Meanwhile, accounting firms with private equity together account for approximately 30% of the market share of regular license holders.4 Currently, private equity parties

Private equity investments in the accountancy sector 6 ANALYSIS REPORT only invest in relatively large accounting firms with a regular license and not in accounting firms with an OOB license. Incidentally, some accounting firms also generate a large part of their revenue from activities other than statutory audits. These other activities can be particularly interesting for private equity parties. Forms of collaboration Private equity parties and accounting firms give shape to their collaboration in various ways, which can influence the organizational structure and management. For example, some accounting firms continue their activities under their own name, while others adopt a joint name. There are also differences in, among other things, the extent to which a joint system of quality management is followed, and the extent to which shared services (such as HR, ICT, and financial services) can be used. Situation abroad In other countries, private equity parties also invest in accounting firms, and sometimes these accounting firms perform audits on organizations of public interest (OOBs). We see private equity investments mainly in Belgium, the United Kingdom, Ireland, and the United States. In the United Kingdom, for example, there are private equity investments in various OOB and non-OOB accounting firms (FRC, 2024). In the United States, private equity parties have now invested in approximately one-third of the thirty largest accounting firms (Financial Times, 2024a). Regulators abroad regularly express their concerns about private equity and state that they are monitoring the developments. They also expect a further increase in private equity investments. In Belgium, the College of Supervisors on Corporate Auditors (CTR) expects an increase in private equity investments in the coming years due to aging in the sector and increasing compliance and digitalization costs (CTR, 2024). In December 2024, the International Forum of Independent Audit Regulators (IFIAR) pointed out in a statement that accounting firms considering private equity investments must ensure that private equity parties continue to guarantee the quality of the statutory audit and that commercial interests do not detract from this (IFIAR, 2024).

Private equity investments in the accountancy sector 7 ANALYSIS REPORT 3. Opportunities and risks of private equity investments in the accountancy sector The investments by private equity in the accountancy sector offer opportunities. Nevertheless, we also see risks. The AFM weighs the risks of private equity more heavily than the opportunities. 3.1 Opportunities Private equity can offer accounting firms opportunities to tackle the major challenges in the sector. Think here of digitalization, the tight labor market, and the development of new services (such as assurance on sustainability reporting). Private equity can provide scale advantages, expertise, and greater investment power. This can subsequently lead to a strengthened competitive position. It can also offer a solution to the succession problem within the current partner model based on goodwill. Scale advantages Scale advantages can arise from consolidating multiple (smaller) accounting firms. Private equity can, by bringing together different parties, provide shared services in the field of ICT, HR, financial services, the knowledge network, and/or the help of other branches (see for example Financieel Dagblad, 2024b; Accountancy Vanmorgen, 2024). The use of shared services can relieve external accountants. As a result, their involvement in the execution of statutory audits can increase. In addition, it can ensure standardization of processes, which can contribute to further improvement of the quality of statutory audits. Expertise and greater investment power Private equity can lead to an increase in expertise and greater investment power. With the expertise and greater investment power that private equity parties bring, accounting firms can optimize their management. In addition, private equity can contribute to innovation, which can lead to more efficient management. Furthermore, innovation can improve the attractiveness of the profession (see for example Financieel Dagblad, 2024b; Accountancy Vanmorgen, 2024). Strengthened competitive position A strengthened competitive position can help the accounting firm to recruit employees and clients (Financial Times, 2024b), lower the prices of statutory audits, and/or increase the quality of statutory audits. Recent research shows that the number of employees of accounting firms grows strongly after private equity, but that these employees are not used for performing statutory audit work. The new co-employees are mainly used for other services such as (tax) advisory services (Doan, Utke, Zhou & Zou, 2025). Solution to the succession problem Private equity can also offer a solution to the succession problem within the current partner model based on goodwill. The succession problem means that it is difficult for senior partners to exit in a financially attractive way. There are various causes for this problem, including (i) aging among accountants, (ii) young professionals choosing a partner function less often (NBA Young Professionals, 2023), and (iii) new partners experiencing obstacles to obtaining financing for the goodwill upon purchase of the shares of retiring partners (Accountant.nl, 2025). The private equity party can offer a solution by buying out the sitting partners (partially).

Private equity investments in the accountancy sector 8 ANALYSIS REPORT The equity owned by partners becomes relatively smaller by the buyout. As a result, new partners need less equity to buy in. 3.2 Risks Although private equity offers opportunities, there are also risks that stem from the commercial incentives that private equity brings with it. Commercial incentives are of a financial nature and, for example, look at achieving value appreciation, result, and/or profit measure (such as EBITDA). These incentives strengthen the commercial interest of accounting firms and put pressure on the vulnerable balance between commercial interest and public interest when performing statutory audits. The main risks we see are: pressure to grow and become profitable, insufficient investments in structural improvements of audit quality due to a focus on an exit in 5-7 years, uncertainty about the exit, a leverage strategy that goes wrong, and threats to independence and confidentiality. Pressure to grow and become profitable Private equity parties have strong commercial incentives to let the investments within their funds perform well. Together with the accounting firms they work with, they employ a so-called 'buy-and-build strategy'. This allows them to increase the pressure on sitting executives and policymakers to grow quickly. Research shows, for example, that accounting firms with private equity grow relatively faster than accounting firms without private equity (Doan et al., 2025). Pressure to become more profitable can lead to higher workload, for example because employees are involved in relatively more audits, assigning important tasks to less experienced employees, cost savings such as lower or cheaper use of quality assurances, and/or taking risks that can stand in the way of the sustainable securing of audit quality. This can distract attention from the public interest during the execution of statutory audits. Insufficient investments in structural improvements of audit quality due to a focus on an exit in 5 to 7 years The commercial incentives can be strengthened because private equity parties do not focus on the long term. Many parties employ an exit strategy with a term of 5 to 7 years (see for example Doan et al., 2025). As a result, they have limited financial interest in structural improvements of audit quality, since most of the benefits can only be realized in the long term. Uncertainty about the exit In addition, the focus on 5 to 7 years creates uncertainty. Who will be - after the exit of the private equity party - the new owner? What consequences does this bring for the quality of the statutory audits and the focus on the public interest? The Securities and Exchange Commission (2022) gives, for example, an indication that aspects of the quality management system of the accounting firm can be less effective after the exit of the first private equity party. American research in other sectors shows, for example, that investments in innovation decline after an organization is resold by the private equity party to a next investor, such as another private equity party (Wright, Thompson & Robbie, 1992; Long & Ravenscraft, 1993; Wright, Gilligan & Amess, 2009). Two explanations are given for this. First, it may be that the new investor after a private equity exit does not contribute enough equity to make new investments. Second, an acquisition by another private equity party can lead to even greater pressure on profitability. In the context of accounting firms, this can mean that the sustainable securing of audit quality comes under pressure after the exit of the private equity party.

Private equity investments in the accountancy sector 9 ANALYSIS REPORT Leverage strategy that goes wrong Private equity parties may choose to raise debt with the accounting firm and thereby create a leverage5 that allows the return on equity to rise relatively faster (Boot, Ligterink & Martin, 2020). This leverage functions properly as long as the financing costs are lower than the return on total equity. However, the leverage also works the other way around: if performance falls short and financing costs turn out to be higher than the return on total equity, the return on equity drops relatively faster. This can create pressure on profitability, which can lead to taking extra risks that can stand in the way of the sustainable securing of the quality of statutory audits. In addition, the debts after the exit of private equity will probably end up with the new owner. To remain profitable, this new owner will continue to put pressure on keeping performance good. Threats to independence and confidentiality Another risk is that the independence of the accountant with respect to the audit client may be compromised by private equity. This can happen in two ways. First, accounting firms can perform statutory audits on organizations in which the private equity party has an interest. As a result, independence with respect to these organizations is no longer guaranteed. Second, the commercial incentives from the private equity investment can cause accounting firms to offer more other services to audit clients. Recent research indeed shows that revenue from other services increases after a private equity investment, while revenue from statutory audits remains the same (Doan et al., 2025). 5 Leverage = return on total equity - cost of debt * (debt / equity) Furthermore, the private equity party can use audit files of the accounting firm to gather information about potentially interesting acquisition candidates. Accountants may experience unwanted pressure to, despite their confidentiality obligation, disclose this information. The comme