Issue No. 1 - Spring 2026
This briefing paper addresses selected issues shaping the environment in which the global accounting firms deliver audits for the world’s large companies.
The assurance function has been vital to commerce since the emergence of trade. But the audit model invented in the Victorian era is today exposed to an expanding set of external pressures – litigation, regulation, and law enforcement – and to persistent criticism following eruptions of financial malfeasance, under the familiar cry, “Where were the auditors?”
Senior leaders need to be well informed on the implications of these fast-evolving issues. Decisions made now, on client selection, risk tolerance and practice quality management, will be judged under less tolerant conditions. The perspectives here draw upon my decades of hands-on experience – including both advice and defense in response to the external threats, and counsel on the firms’ internal concerns over organization, structure, operations and practice quality.
Future papers will be forthcoming periodically, guided by the timing and significance of developments.
This inaugural edition is available at no cost. Subscription information for future issues and the archive appears below.
Audit Regulators: Retreat will have Consequences
It is apparent that the capital markets are again at that point in the cycle where the attitude of the major regulators toward the auditors is at best one of indifference.
In the US, the actions and messaging of SEC leadership are reflective of White House priorities: the focus is on unleashing and enabling the advocates of crypto (see its March 17, 2026, release of 68 pages of Interpretation and Guidance, asserted “to provide clarity for crypto asset issuers and investors,” although immediately wryly questioned by one commentator as to “whether this clarity is the same as certainty” (emphasis the author)).
At the same time, SEC enforcement activities have plummeted. As posted on LinkedIn by John Reed Stark, former Chief of the SEC’s office of internet enforcement, on January 11, 2026, “the SEC isn’t just pulling back – it’s vanishing – quietly adopting a new ethos of absence, silence and regulatory invisibility.”
Stark expanded on the somnolence of the agency’s Enforcement Division: “No agenda-setting speeches, no interviews, no podcasts, and no public messaging campaign laying out enforcement priorities.” Instead, “In FY 2025, the SEC initiated just four actions against public companies under current SEC Chair Paul Atkins – the fewest since FY 2013.”
The unsubtle tone of Atkins’s April 7, 2026, release of the agency’s 2025 enforcement results doubled down with consistency: priorities adjusted because “resources have been misapplied in prior years to pursue media headlines and run up numbers”; seven crypto-related actions against prominent players dismissed; and an advance excuse for future opacity floated, that a focus on “matters of fraud” makes for “cases that inherently require more time and resources to develop and bring, often requiring up to two or more years to manifest results.”
A reading on the agency’s attitude came within a week of the departure, abruptly announced on March 23, 2026, of Enforcement Director Margaret Ryan, who had arrived from her senior military judgeship only six months earlier, with no securities experience or credentials. Leaving not a trace of influence, she had reportedly “clashed with agency leaders over the direction of its enforcement program, including the handling of cases with ties to President Donald Trump and his family” and “faced resistance from SEC Chair Paul Atkins….”
The amount of influence Atkins’s thumb on the Enforcement scale will have on Judge Ryan’s newly-announced successor as Director, SEC alumnus and Gibson Dunn partner David Woodcock, remains to be seen. Visible history considered, it will not be zero.
Meanwhile the budget of the PCAOB has been slashed, its personnel count has dropped, and the activist rule-making and standard setting under the prior Chair have been side-lined. The new Chair is career EY audit partner Jim Logothetis, coming out of his 2019 retirement. He is joined by Brent Simer, who returns for a second tour as chief of staff after three gap years at EY himself. Corners of the financial media were alarmist in associating these appointments with EY veteran Kurt Hohl’s position as the SEC’s Chief Accountant – e.g., here - although offering no basis for the innuendo that it is a supposed “‘anomaly’ to see such concentration of influence by a single firm.”
The new Chair offered what was billed as a Statement on Strategic Priorities on March 31, 2026. With the sweeping scope of his generalities, however, nothing in his messaging or qualifications or those of the new members coming from political appointments in the executive branch suggests revived agency energy (see Bloomberg’s Amanda Iacone, here and here).
While in the UK, eight years have passed since the collapse of Carillion provided the center-piece for a banquet of over-heated rhetoric and under-realizable calls for “audit reform.” That sound and fury has dissolved.
On March 26, 2026, the Financial Reporting Council, audit regulator in the UK, released its “evolved approach to audit supervision.” For context, the FRC has survived post-Carillion despite lacerating criticism as, e.g., a “weak and ineffective regulator,” so described in the March 2019 report, “The Future of Audit” (p. 70), by a Parliamentary sub-committee of the Department of Business, Energy and Industrial Strategy, chaired by then-Labour MP Rachel Reeves.
The primary focus of this current FRC offering, a small-scale approach without specific goals or metrics, aims at scaling its own functions toward the smaller firms, without reference to the structural changes in the profession or its own full-on replacement as called for in the post-Carillion furor.
That is consistent with the predictable position of the government of Prime Minister Keir Starmer - even with the elevation of Reeves in 2024 to the office of Chancellor of the Exchequer - which, as reported by the Financial Times on January 19, 2026, “scrapped a bill promising to reform the audit market,” rationalizing, as an unnamed official was quoted, that a bill “was ‘not the best use of our legislative time’ and did not align with the government’s broader push to cut regulatory red tape.”
While regular practitioners before these regulators will experience the daily impact of their priorities, there are broader implications for the strategists and risk managers in the firms. That’s because new exposures will flow as the cycles turn in the capital markets, the emergence of financial malfeasance, and the associated criticism of the work of the auditors.
If history is a guide, that turn will be sudden, not gradual. Memories should still be vivid of the inflamed rhetoric and impassioned hostility from all directions - politicians, law enforcement, institutional and private investors and the media - in the post-Enron environment that inflicted Sarbanes/Oxley and the PCAOB on the capital markets, and the misery of 2007-2008 when iconic institutions collapsed to rubble on a global scale.
As Stark concludes his critique of the state of the SEC, “history suggests that when deterrence collapses, misconduct expands – and the odds of a market rupture rise.” It should not be a source of present comfort that, when the current “hands off” attitudes will give way to a period of reckoning – only then, as Warren Buffett put it, “when the tide that lifted all the boats goes out do we learn who’s been swimming naked.”
Tempting as it may be to relax into over-confidence or even complacency in the perception of a “Goldilocks moment,” when risk tolerance may drift out of focus, it should be a working assumption that current benign conditions will be followed by aggressive retrospective scrutiny of the firms’ risk resources and performance quality.
Private Equity and Other Third-Party Capital: Golden Cup or Poisoned Chalice
It’s a matter of perspective whether the recent rush of third-party capital to invest in accounting firms is of real relevance and concern, and for whom.
(For useful surveys of the background and the landscape of issues, see the information papers issued by Accountancy Europe in June and November, 2025, and the research report, "Private Equity Investment in Accountancy," issued in March 2026 by the International Federation of Accountants.)
The Big Four have so far shown no interest, nor is anyone making a case that they should, grown as they have to 2025 global revenues between $ 36 and $ 65 billion and with no inhibitions on their ability to fund their future aspirations. At the other end of the scale, small-firm transactions of all sorts proliferate, driven by Baby Boomer retirements and succession planning: buy-outs, acquisitions, consolidations, mergers and the arrival of outside capital in all forms and manners. How “success” in this tail of the sector will be defined and achieved will vary with the interests involved; the single certainty is that the small size of the firms and the deals means that the structure of the market will be unaffected.
It’s in the “middle tier” where it matters – where the interests of outside investors threaten to create sudden and dramatic conflicts. For the mid-tier firms, access to outside capital is argued to be an enabler of scale. At the same time, critically, they are large enough that their success or failure will be impactful – particularly as their audit reports on publicly-listed and large private companies are relied upon by shareholders and other providers of investor capital.
That is, by accepting the appeal of private equity, the firms not only undertake the responsibility to identify and manage independence and conflict issues that will test the extent and fitness for purpose of their resources, they also expose themselves to an expanded population of potential claimants in “bet the firm” litigation.
Here, the relevant history can be dated – because of their magnitude - to the adoption of an ESOP structure by the US firm of BDO in the summer of 2023 with the support of Apollo Global Management, and the private equity positions taken in Grant Thornton US and UK in 2024 by, respectively, New Mountain and Cinven.
It’s the early stage in the life cycle of typical private equity transactions. Across the population of mid-tier transactions there is as yet little record of either significant performance achievements or exit strategies, IPOs or deal restructurings. Understandably, commentators vary widely in the degree of their enthusiasm, beyond “wait and see.”
Shaping the environment in which firms partaking of private capital must manage their competing interests and ethical responsibilities, the comment period will close on April 30, 2026, on the American Institute of CPA’s ethics division’s exposure draft, released last December, “Proposed Revisions Related to Alternative Practice Structures.” Explicitly driven by the influx of PE investment, these extensive revisions will - eventual adoption being assumed – provide guidance on independence impairment decision-making – an architecture at least providing a framework for decisions if not making them either easier or less hazardous. Not coincidentally, on March 26, 2026, the International Ethics Standards Board for Accountants announced a staff workstream on the same topic, whose short reporting deadline of June, 2026, would confirm the likelihood of alignment with the AICPA’s efforts.
Meanwhile official attention continues to lag. The popular tone of “early days” was sounded in February, when it was reported by the Financial Times that “global regulators are set to probe the risks of private equity investments in audit firms, intensifying scrutiny of the rising number of buyouts in the financially sensitive sector.” In the continuing absence of substantive attention by local country regulators such as the SEC and the PCAOB in the US and the UK’s Financial Conduct Authority and Financial Reporting Council, the casual announcement by IOSCO, the global association of securities regulators, that it is “planning ‘an exploration of the growing interconnectedness between private equity activities and the audit sector’” amounts to a concession that these important authorities are giving a passing wave to developments in the capital markets that have already passed them by (emphasis added).
Which does not mean there are not serious issues that are sure to ripen into significance. Three examples, all inter-related:
First, how to address the inevitable extent of influence a PE investor will have? At its simplest, even with the use of a holding company and an Alternative Practice Structure with PE capital held in an organizationally separate subsidiary, the incentives and pressures - labeled by the AICPA as the “undue influence threats” - cannot be wished away.
Second, forging the tools with which to identify and manage the ethical and independence challenges - specifically, questions of “control” and “significant influence” - is only just underway. Even in the most plain-vanilla case, timeliness of decision-making will be fraught. A PE fund invested in an accounting firm will continue to pursue its fundamental business imperative - “do deals or die.” It could, at any time and without warning or pre-clearance or notice, create a conflict by adding to its investment portfolio an audit client of the accounting firm in which it is already invested - putting stress beyond mitigation on the auditor’s existing client acceptance and risk-monitoring resources.
The transaction complexities only mutate and expand. While the regulators are idle and the standard-setting bodies do their work, decision-makers must function in the absence of comprehensive guidance, much less authoritative standards. Here it is important to recognize that the legal systems typically do not recognize “safe harbor” defenses based on claimed compliance with professional standards. So the auditors must bear their own responsibility, whether and how to choose and deploy the tools for engagement and performance management that are available to mitigate risks, as are available in the private sphere but are not permissible in the public securities markets.
From which follows the third: a small but real number of these transactions are destined for failure - either in the basic capital investment transactions themselves or with the emergence of issues of practice quality and disputing that reach the courthouses. In litigation, plaintiffs will seek to pierce the complex, PE-driven operational separations assumed to be protective, exposing the multi-entity structures to be ineffective in defense and forcing defendant firms into strategies narrowly relying on the substance of their engagement performance. There, the issues of blame allocation and the ability of a PE investor to shield itself from damage claims and the loss of its position (or worse) will be aired out in ways that, history has taught, range from unpleasant to intolerable.
Sidebar: Andersen's Unique Approach
Although the profession’s rare attempts to structure themselves with public shareholders have met with little enthusiasm and less success, the December 2025 public offering and NYSE listing by the tax and consulting firm started up in 2001 and re-branded as Andersen in 2014, is worth mention if only because it is not likely to be replicated. That’s because the firm’s founders have maintained their original strategic decision to foreswear an assurance practice - for strategic reasons based on risk tolerance and exposure avoidance. Their future success will not depend on evolution into the audit space, then, but on their ability to manage a far-flung global aggregation of local practices while adapting to the same evolution of the profession as confronts their competitors under the influences of technology and artificial intelligence.
Litigation and Enforcement Exposure - Evolving, and Inevitable
The ultimate risk to an accounting firm’s ability to provide quality service would be a “worst case” litigation judgment or enforcement penalty, large enough to overwhelm its financial resources - commercial and captive insurance and the ownership interests of its partners. Rare as such cases are, the firms have never achieved “zero defects” or protected themselves from exposure at an existential level. The impact on a firm can be devastating - witness the collapse of Arthur Andersen in 2002 under the unbearable weight of Enron, despite that firm’s record of both profitability and cohesive global organization and governance.
Recent developments in two of the “big cases” -
Settlement in an undisclosed amount is reported in the long-running lawsuit brought in London by the administrators of NHC Health, seeking damages of £ 2 billion against EY, which had audited the Abu Dhabi-based and scandal-ridden enterprise using staff from EY Middle East led by partners from the UK. A worst-case outcome would have been bearable by the EY organization as a global whole, with its reported 2025 revenue of $ 53 billion. The resources of its firms in the Middle East alone would not remotely have sufficed, however; leadership would have required a global support strategy, at a level that was not displayed in that organization in the effort of Project Everest, aborted in 2023, to separate the EY assurance and consulting practices.
EY is well rid of a litigation of this magnitude. More broadly, however, the viability of the Big Audit model depends on the large firms’ continued ability to survive damage claims on such a scale, in context of the limits on their organizations, financial resources, and practice quality management capabilities.
That’s as demonstrated in the US, where the 2025 collapse of auto-parts conglomerate First Brands continues to resonate with scandal. At this writing the company teeters on the cliff of total collapse, selling off assets and closing down operations. Former CEO Patrick James and his brother Edward face criminal charges based on a catalog of machinations including unsecured exposures tied to accounts-receivable factoring and manipulations of off-balance-sheet debt and other credit facilities tied to assets and inventory. The company’s debt obligations range to $ 12 billion among the long list of capital providers.
At this writing no claims are reported against auditor BDO, although even at early days two observations are available:
· The potential for catastrophic litigation exposure is not limited to the Big Four. Any of the accounting firms are credible targets, that have the scale and accept the risk tolerance to provide audits for use in the capital markets for clients large enough to do business - and generate claims - at such magnitude.
· While bet-the-firm lawsuits have historically been lodged by classes of shareholders against the auditors of public companies, the explosive growth in the means and provisions of credit by private sources has opened whole new areas of exposure for auditors - new claimants will include the capital providers whether in the form of finance based on inventory, receivables or payables, private credit, M&A support, or private equity.
Whether the firms’ risk management criteria and resources are adequate - given the emergence of new threats and a pool of motivated and well-resourced new claimants - is the central question. Present frameworks will require re-calibration to remain reliable and effective at the scale of the next generation of exposures.
There’s a common theme across these topics. The accounting profession understandably has a bias toward optimism and success. That perspective will not, however, provide effective protection against the expanding array of issues. As conditions evolve - often abruptly and with little tolerance for defensive or evasive responses - risk-oriented strategies will need to evolve with speed and discipline.
What's Coming - In the Next Paper:
A close look at the greatest threat to the Big Audit model - unlikely to resemble Enron/Andersen; why Sustainability assurance risks are under-appreciated; the multiple dimensions of the First Brands scandal - whether or not there are claims against BDO.
Feedback, comments, inquiries - email: jrpllc@mac.com
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