PE Bought the Auditors. Independence Was Always the Collateral.

The independence doctrine in public company audit was never just disclosure forms, financial interest tests, and rotation rules. Those are the surface. The deeper economic premise, the one no rule book states, is that an auditor has somewhere else to go. A firm that can credibly resign a client, absorb the lost fee, and replace it with another engagement is a firm whose opinion carries weight. Remove that and independence collapses into a checkbox.

Private equity now sits behind Citrin Cooperman, Cherry Bekaert, Baker Tilly, EisnerAmper, Aprio, Grant Thornton, and most of the tier behind the Big 4. The roll-up logic is unambiguous, multiple expansion, cross-sell, headcount leverage, exit in five to seven years. That math does not coexist with willingness to fire a client over a disputed estimate. Leveraged equity holders do not absorb walked revenue the way a partnership did. The marginal client matters more after the LBO closes, not less.

The PCAOB inspects audit firms. It does not inspect the alt-practice advisory shells where the PE capital actually sits. That bifurcation was engineered to keep the regulator on one side of the wall and the economics on the other. Inspection deficiency rates already exceed forty percent at multiple firms. 

Enforcement remains reactive and dwarfed by the pace of consolidation. There is now serious talk of folding the PCAOB into the SEC, that is not strengthened oversight, that is dilution.

And here is the part the framework missed. Independence is partly a function of competition. It always was. A client that disputes its auditor’s position needs somewhere to take the engagement, and the auditor needs to know another firm could absorb the lost fee. Both sides of that bargain require a deep pool of independent firms with comparable capability. That pool shrinks every quarter. Each consolidation removes a credible alternative. Each PE roll-up replaces partnership economics with leveraged equity economics. Each merger narrows the universe in which a real independence stand can even be taken.

You cannot regulate independence into a market that has structurally eliminated the conditions for it. The framework rests on assumptions that no longer hold. The next major audit failure will say so for us.