Private Equity and Public Accounting: New Development or Variation on a Theme?

SYNOPSIS Private equity investors have recently begun acquiring stakes in public accounting firms, both small and large. The structure that enables these investments is called an alternative practice structure (APS), a mechanism devised in the 1990s to permit “consolidators” to acquire equity interests in public accounting firms. This paper investigates the antecedents of private equity investment in U.S. CPA firms, including audit companies, accounting firm merger and acquisition activity during the 20th century, and the profession’s decision to allow non-CPA ownership of CPA firms. We demonstrate that modern private equity investment represents a return to an operating model the CPA profession previously abandoned, and we offer important historical insights—including a review of private equity investment in the healthcare profession—into the risks, implications, and regulatory challenges presented by these recent events.