Private equity groups (PEGs) benefit from outsourcing their accounting and compliance needs to CPA firms with the right industry knowledge and expertise. When these decisions are decentralized, the Fund and Portfolio Companies (Port Cos) engage different CPA firms to perform these services. For example, each Port Co might have a different CPA firm performing the audit of their annual financial statements or preparing their tax returns. These decisions are often driven by legacy relationships that Port Co CFOs have with local CPA firms. Given the number of entities within a PEG structure, this could result in relationships with many CPA firms.

When a PEG opts for a “one-stop-shop” CPA firm that meets multiple service needs of the Fund and Port Cos, it can offer a fresh perspective, better efficiency and positive results for all parties. It also allows the CPA firm to “see the whole picture”, opening opportunities to provide broad advice about the Fund strategy and Port Co performance and share thought leadership as a valuable advisor.

FINDING CONNECTION POINTS

Using multiple CPA firms for different service needs of the PEG is inherently inefficient and can be disjointed. While it is certainly possible to establish communication and collaboration among multiple CPA firms, it is typically not as effective as creating a collaborative partnership between departments at a single CPA firm.

Juggling multiple CPA firm relationships can also place a time-consuming burden on a PEG's managing team, in addition to a higher price tag for services. Getting up-to-speed on several CPA firms’ systems, platforms, technologies and approaches can make it difficult to achieve efficiency, particularly when trying to meet time-sensitive deadlines.

SIMPLIFYING THE PROCESS

PEGs that decide to work with a single CPA firm can benefit from streamlined operations, including access to one dedicated PE service team to collaborate across service lines (including audit and accounting, tax and transaction advisory services). The service team shares information across service lines, so information only needs to be provided once.

For larger funds, when one team serves multiple Port Cos, it offers consistency across the board and better accountability. One lead represents the accounting and advisory functions to serve as the team captain for the overall relationship. This person holds service line leaders accountable and ensures the highest level of execution, without the PEG having to determine whose court the ball is in.

PEGs can also enjoy a holistic fee strategy across service lines within one CPA firm. This inclusive fee arrangement takes into account the significance of the relationship, efficiencies and leverage of information.

Perhaps most important, a “one-stop-shop” CPA firm is more likely to deliver an outstanding client experience (CX). A more significant overall relationship with the PEG and its Port Cos incentivizes the CPA firm to ensure an exceptional CX. The relationship will likely be prioritized and serviced with the highest quality resources and attention.

GREATER VISIBILITY INTO THE BUSINESS

Using a single CPA firm provides the opportunity for the CPA firm to provide relative insights into the PEG’s Port Cos, including:

• Benchmarking

• Corporate Governance

• Data Analytics

• Financial Reporting

• Internal Controls

• Performance

• Personnel Quality/Needs

• Resources

• Technology

There are also improved synergies across services lines, such as:

• Audit, review and accounting advisory engagements
• Financial due diligence (FDD), including buy-side, sell-side and working capital analysis
• Tax diligence, structuring and compliance

PEGs also experience a more seamless transition from buy-side FDD to annual audited financial statements. The audit team can leverage information from the FDD process, such as:

• Accounting policies

• Quality of Earnings (QoE) model, workpapers and report

• Risk analysis

• Working capital analysis

At the other end of the investment cycle, the work performed during the audit of the annual financial statements can be leveraged for sell-side FDD. Plus, the FDD and audit teams are able to collaborate and share information, minimizing the burden of information requests from management.

There is also collaboration between the tax compliance team and audit team to share information and insights that assist with the preparation of tax provisions and tax returns.

DISPELLING MYTHS

There may be valid reasons why it does not make sense for PEGs to adopt a single CPA firm approach, and this is often determined on a case-by-case basis. However, there are some misconceptions, including entering a conflict of interest and being constrained by the CPA firms located in your city.

There are certain areas where working with one CPA firm can be a conflict of interest. For instance, you cannot have one CPA firm audit your financial statements and the same firm provide transaction processing services. But the firm you are working with is aware of the regulations, and that firm can recommend the best way to maintain independence for assurance engagements under AICPA independence rules.

Additionally, many Funds and Port Cos consider location first. However, remote work has become the standard, in terms of workflow, accessibility and security. The location of the entity is not necessarily a determining factor in choosing the best partnership for advisory, audit and tax services. In fact, it is likely in their best interest to widen those search parameters and choose a CPA firm based on specialized expertise rather than location.

Given a PEG’s unique structure and needs, there is a value proposition to invest in a more holistic relationship with a “one-stop-shop” CPA firm to service the needs of both their Funds and Port Cos.

Please contact GHJ’s Private Equity Practice to learn more about this topic.