The Financial Reporting Council (FRC) is undertaking a review of its governance code for audit firms amid shifts in ownership structures driven by increased private equity investment and public listings. The regulator is examining whether existing rules provide adequate oversight for firms adopting novel ownership models in the UK’s audit sector.

Traditionally, major British accounting firms have operated as partnerships. However, in recent years, several have sold stakes to private equity groups or floated on public markets. Grant Thornton, for example, has been majority owned by Cinven since 2024. Other firms such as MHA recently listed on London’s Aim market, while RSM—the world’s seventh-largest accountancy group—is considering a potential public offering as it seeks capital to compete with equity-backed rivals.

Anthony Barrett, head of supervision at the FRC, highlighted that the existing audit firm governance code was designed for a particular time and partnership model. “We’re seeing that develop, so we need to make sure that we develop our code and guidance accordingly,” he said. Barrett noted that ownership changes are a significant focus but not the sole concern of the review.

The sector’s growing use of external capital is largely aimed at funding acquisitions and investment in technologies such as artificial intelligence. Yet, these ownership shifts have raised concerns among regulators about potential conflicts of interest, threats to audit independence, and the impact on audit quality. The International Organization of Securities Commissions (Iosco) is reviewing these implications globally, while the Dutch financial regulator has expressed caution, stating the risks of private equity involvement may outweigh the benefits.

In the UK context, the FRC has previously indicated it is not fundamentally opposed to alternative capital structures. Nonetheless, it has recently increased inquiries with large accounting firms, seeking input on possible updates to the governance code to address vulnerabilities linked to external ownership. Industry sources say the regulator’s focus includes ensuring firms backed by private equity or listed on stock exchanges have robust governance arrangements.

One key issue under scrutiny is the emergence of dual governance layers within audit firms that have created parent entities to oversee separately governed audit businesses. This structure can lead to situations where the leadership running the audit division has limited influence over decisions made at the parent company level. The FRC is concerned that such separation risks accountability gaps—where problems may be overlooked or responsibilities blurred—while others argue the model can introduce unnecessary duplication.

The audit firm governance code, reviewed comprehensively every six years, mandates that independent non-executive directors hold firm leadership accountable. The ongoing FRC review aims to ensure these principles remain effective in a landscape where ownership and organizational arrangements are evolving rapidly.