Private Equity Buying Up Accounting Practices. What Could Go Wrong? The Health Industry Gives Some Ideas

I must confess, due to the often-firehose level of information on major stories (Gaza, Ukraine, the US elections and Covid, for starters) that we have not always written up developments on our traditional beats that in less crazy times would be seen as important. One is the fact that the private equity eye of Sauron has turned to accounting practices. The Financial Times noted this development in a story today, but accountancy publications have been discussing it for some time.

This trend reflects the fact that private equity has money to burn and believes it can successfully “roll up” small accounting firms as well as wring more revenue and profits from the big ones. As we’ll explain, the lack of much in the way of a pre-existing consolidation/corporatization trend in accounting gives reason to believe. And the bright ideas that private equity has for improving performance look, not unsurprisingly, to have the potential to be to client disadvantage and not so hot for one-time independent owners.

Anyone who has seen (or worse, been on the receiving end of) private equity’s tender ministrations in the health care industry should be alarmed at private equity trying to strip-mine other professions.

Private equity has been an accelerant of the corporatization of medicine, with its notorious, patient-unfriendly, care-degrading and cost-bloating practices like strict and short time limits with patients, up-selling, even more overtesting, and aggressive upcoding, which more regulators and insurers should be attacking as rank fraud.

Now admittedly, corporatization of medicine has been underway independent of private equity involvement, which points strongly to the fact that the “economics” could be made to look as if they supported consolidation and standardization. But there is ample evidence that extracting more profit from what should not be a profit-oriented activity comes from crapification of care and cheating insurers.

Doctors in corporatized or private equity owned entities routinely report being unhappy at having their status reduced from being in charge of their practice to being employees required to comply with a rule-book, often including recommendation about care.

Bear in mind the US already has a doctor shortage, which as we will explain soon is the direct result of the ratcheting up of profiteering over time. Last year, The Hill reported on one outcome, that one in four med students are seriously considering abandoning their studies:

A new report on how medical students view the future of their careers has found that a quarter of aspiring physicians in the U.S. say they are considering quitting their studies, with many expressing concerns about their mental health and how they can find a study-life balance…

Overall, 12 percent of medical students around the world said they were considering quitting their studies. Among U.S. students, this percentage more than doubled to 25 percent.

Even worse:

More than half of medical and nursing students — 58 percent — said they viewed their current studies as a stepping stone to careers in health care that don’t involve treating patients.

And how did this situation come about? IM Doc explains:

First of all, we have so restricted both medical school admissions and residency admissions that there is absolutely no way on earth to make enough doctors. How many of the NPs and PAs that are out there and poorly trained would give their eye teeth to go to medical school? I would say a fair number of them….. And for that matter – how many other bright kids all over the place do not get to go to medical school? They have no money. No contacts. No “proper” upbringing. No desire to have 200K in loans. You name it. When you give these type of kids the chance to do this – I guarantee you they will be the ones most likely to go back to their own communities and be “the doctor”….

What have we done instead in this country? We make about half the doctors we need. This really took off in the mid 1980s…..It has taken that long for the disaster to unspool. Medical schools across the country in that era were forced to drastically cut student numbers – because the powers that be saw a massive physician glut coming. Being grievously wrong is a habit for these morons. For example, my class was 102 students. The year before was 130. And four years before was 210.

So what did we do when the disaster was becoming apparent…..We started importing the rest. For whatever reason, this is largely from just a few areas of the world. Pakistan, the Levant (ex-Israel), the Philippines, India and a few countries in South America. Time and time again, I have seen this disaster play out. I would never presume to go and put up a practice in Karachi. I have no clue what the customs and traditions of that society are about being ill and dying ( believe me, this is of the most critical import). And yet, we get these people straight on their J1 right off the boat and plane and expect them to be PCPs….

So when the hospitals in the USA are doing all kinds of things that make no sense as far as patient care – look immediately into who is on the committee and who is in charge. J1 is likely their middle name. And the J1 is taking orders from headquarters. If not, there is a first class ticket back to Damascus…

The one thing they did not see coming was that people decided to stop coming in droves to the USA from other countries. The health care system here now has a reputation for total drudgery and nightmares. Who wants to do that? For awhile they were going mainly to the UK – but we cannot have that – so the UK system is now under attack from all sides. Here, as I alluded earlier, we have decided to fill the shortfall not with kids who would give all they had to be a physician and train the correct numbers – NO – we are handing our system over to NPs and PAs.

Those in charge clearly are a suicide cult in more ways than one.

And then to part 2, how well turning more of medicine over to nurse practitioners (NPs) and physician assistants (PAs) is working out. Again from IM Doc:

I played out in my mid all kinds of routes for the demise starting about 15 years ago when anyone with a brain back then could see what was coming. Never in a million years did I see the NP thing coming. I love RNs – but their training is not even close to what we do as physicians. I would never dream of usurping an RN on the wards – their entire world view and work is vastly different. But the NP thing is really quite frightening. They get their RN – and then the vast majority of them nowadays get into NP school usually within the first year. Virtually zero actual independent clinical experience. The vast majority of them then end up in a 16 month or so correspondence school and are then unleashed upon the world as “providers”.

The tragedies I have had to deal with from this arrangement are just too numerous to discuss here. But there are very simple and tangible ways this too is absolutely cratering the system. Because they are so poorly clinically trained in diagnosis – they make many mistakes. But they also send almost every patient to all kinds of consults with specialists that would be unneeded with a properly trained PCP. Therefore, the specialists offices are now drowning in way more consults than they can handle for the most ridiculous of things.

What does that mean for everyone else? – Well, I now have two very sick patients that need urgent subspecialty attention [the nearest appointment for one was 5 months out, the other, eight months]. I do my best to take care of people as a general internist – and have been trained to do so from an intense program and career in the inner city where there were no specialists – but even I need help with very complicated patients. I am holding them together with bailing wire right now and calling weekly to beg for help. Never in my wildest dreams. And this is now chronic and across many subspecialties.

Furthermore, there is a myth out there that the NPs will be doing primary care. What a laugh. The ones that do get involved in primary care get burned out within a year just like the rest of us from the overwork and miserable pay.

The outpatient general internists and family practice docs are the lynchpin of our entire health care system. The emotional and spiritual duress is now becoming unmanageable. They are leaving in droves.

Now let us turn to the accounting industry. First, the key points from a Financial Times article earlier this week:

Private equity is accelerating its pursuit of consultancies, talent agencies and accounting firms, as it targets professional partnerships in one of the buyout industry’s last unconquered territories.

Two of the top-10 largest US accounting firms — Grant Thornton and Baker Tilly — have agreed to sell majority stakes to private equity in the past six weeks, and bankers and executives expect more deals to come….

One sector in particular has become a hot new hunting ground: accountancy firms…

Private equity has been attracted to accounting firms by the combination of steady income from tax and audit work and the opportunity to expand into new services such as consulting. “People recognised that these are generally stable businesses and ripe for consolidation outside of the Big Four,” Munzig said….

In contrast to some M&A, there can be room for both sides to think they are getting a marvellous deal. Because partnerships typically distribute all their income to partners each year, they do not have a traditional earnings record, allowing acquirers to negotiate a relatively low valuation….

“Firms desperately need capital to transform the business,” he said. “Tax and audit work is being replaced by technology and the lowest price is winning, hence the transformation to consulting and advisory services. To make acquisitions in those industries you have to pay real money.”

Erm, so traditional accounting practices see their business under threat…and the way out for them is to sell more upmarket services? First, the track record here is poor, see how commercial banks struggled for decades to compete with investment bankers. The way they got there was in large measure the shift in the entire industry away from traditional investment banking to sales and trading, where commercial banks were relatively much less disadvantaged. Second, you are still supposedly going to offer those unsexy and allegedly declining core products. How do you get competent performance when the new owners will further downgrade the attractiveness of their careers via less autonomy and less status (being second-class citizens relative to the providers of the fancier, more lucrative services?)

Let’s look at a 2023 article that lays out the private equity theory of the case in more detail. From Poe Group:

Five reasons why private equity thinks accounting firms are an excellent investment: 

1. Steady Streams of Revenue:….

2. Resilience in Economic Uncertainty:

[there was no #3 in the source article]

4. Scalability and Efficiency: This is where it is exciting for us.  We know there is an opportunity to improve this profession in many ways. Private equity firms specialize in optimizing business operations.  By infusing capital and management expertise, they can help accounting firms scale their services efficiently, quickly and profitably. They are betting that they can transform firms.  By providing capital, organizational structure, and objective leadership, they see the potential for an attractive return on investment.  Many of these firms intend to “roll-up” multiple CPA firms to take advantage of the economies of scale that bigger firms enjoy. Technological advancements and streamlined processes enhance client satisfaction and increase profitability – a win-win situation for both parties.

5. Client Relationships and Cross-Selling Opportunities: Trust is the currency of our profession. Accounting firms often enjoy long-term, trusted relationships with their clients. Private equity firms recognize the potential of leveraging these relationships to cross-sell complementary services. For instance, offering financial planning to existing tax clients creates additional revenue streams. This ability to cross-sell is often well understood by many accounting firms but the ability to execute can sometimes be difficult. Private equity can be a catalyst for much more intentional business development.

Let’s parse the jargon.

If you read #4 carefully, you see a lot of magical buzzwords with an admission that private equity has no actual theory of the case except “surely we can sweat the asset somehow.” In particularly, once you get past low-complexity individual tax returns that can and are done by H&R Block, there is no reason to think there are any scale economies in accounting. Otherwise, you would have seen concentration in the industry growing over time. The bulk of the business is serving small to medium sized companies. Their needs are very non-standard. It is still not unheard of for small business owners to present their accountants with shoeboxes of records. Some small businesses are very aggressive with the expenses they classify as business expenses.1 The difference in client willingness to incur audit risk alone works against private equity grandiose ideas of standardizing services, which is what the blather about efficiency amounts to.

#5 is even more hopium. I want my accountant to do accounting and tax. I am not at all rich, but even with my modest net worth, I would not trust my accountant pushing me to use someone within his now much bigger institutional empire as a financial advisor. Why is there any reason to assume that person is any good? And the wealthy are likely to be more resistant, and already have their own advisors.

This general suspicion was confirmed by McKinsey decades ago. Back in the stone ages of higher equity market commissions, individuals who were not at discount brokers had their own retail salesman handle their stock trades. The industry over time tried to migrate to an asset management model, where instead of paying for trades, the client paid a percentage of assets under management and got all or a certain large-ish number of trades for free.

The former salesmen, now “asset managers” were subject to internal pressure to put their clients into in-house funds. Those nearly always performed worse than the average of third-party funds. The asset manager would also get bonus credits for putting clients into doggy in-house funds.

The salesmen who were big producers could resist this pressure, since they had enough client loyalty to leave the brokerage firm if they thought they were being pressed too hard to fleece their clients. Then there were plenty of “prime brokers” like Bear Stearns set up to handle all the back-office needs of individual brokers with big enough client bases.

In other words, this sort of cross-selling scheme requires the accountant to sell out the best interest of his client by pushing him to buy other services from within the same corporate umbrella. And you can be sure that any accountant who tries to protect his client and introduces only competitive or better internal services will be subject to internal sanctions or worse. Unless he really does “own” his clients, he risks having the reassigned. And once he’s been substantially stripped of his revenue source, how easy would it be to land elsewhere?

Mind you, these grand private equity roll up schemes may not work in practice. But that does not matter. All the private equity firm needs to do is make it look pretty enough for long enough to offload the operation onto a greater fool…which could include another private equity firm which is convinced it has a better accounting secret sauce, or that merely bulking up even more in accounting can produce an IPO.

One reader, an oil patch expert, once had an argument with a private equity partner over a deal he wanted to do that made no investment sense.

The partner laughed. “You don’t get it. I’m not selling steak. I’m selling the sizzle.”


1 Even though I gave the shoebox example, most accounting firms are not willing to do the bookkeeping for their tax clients, since they eat much more liability. Standard engagement letters have the client represent that they are responsible for the accuracy of the financial information provide, and any accounting firm liabilty is limited to the fees they received.

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  1. John

    I suppose when Private Equity firms have consolidated everything else they will go after each other until there is only one. Sounds like Marx’s description of the path of industrial capitalism. Marx expected consolidation to be followed by the proletarian revolution.

    1. Neutrino

      Magna Carta, Runnymede, Barons and all that had a good run about eight centuries ago. Now the neo-everything world has people living through a reversal of that where the Barons in and out of PE say Not Enough. They and their ilk have been rewriting the rules, aided by compliant legislators, funded and cross-sold by soulless Wall Street, and bent on squeezing out every last drop of precious bodily fluids cash.
      Their historical thrust could lead to new guillotines and Anastasias, or it could lead to enservitude.

  2. none

    And then to part 2, how well turning more of medicine over to nurse practitioners (NPs) and physician assistants (PAs) is working out.

    We should be so lucky as to be treated by actual NP’s and PA’s, instead of what is coming next:

    “Hippocratic directly promotes how it can undercut the living wages of real nurses as a feature, not a bug. One page of the company’s website compares a human nurse’s $90 per hour salary to an AI agent’s $9 an-hour running costs. Hippocratic claims its AI nurses outperform human nurses regarding bedside manner, education, and narrowly miss on satisfaction, according to a survey.”

  3. Colonel Smithers

    Thank you, Yves.

    I worked at Grant Thornton’s UK arm for the second half of 2022 and, like many colleagues, could not wait to jump ship.

    For years, GT has been desperate to make the big four the big five, so one can see why bringing such capital helps and how such investors could facilitate consolidation around GT.

    In the UK, it’s thought a combination of or combinations involving GT, BDO, PA and RSM could provide another big player.

    In the UK, the opposition Labour Party is having its programme written by Blair’s team (which includes the amazin’ Sanna Marin), banks (Barclays, HSBC, Citi, Goldman Sachs and JP Morgan) and private equity firms.

    Labour aims to have not just private sector ownership of infrastructure and delivery of services and commitments like net zero, but private sector secondees to Whitehall and the localities and on agencies to oversee planning permission / land use and deliver education and vocational training. And only private sector involvement, even if it costs more than the public sector, not an expansion of the state after decades of roll back.

    Private equity is already involved with providing care services and milking it. For example, an adult needing constant care can get up to £3000 per month. The private equity intermediary will get at least two thirds of that.

    Private equity is also involved with providing translators.

    Local authority staff are instructed to pay as soon as practicable and without querying. In some cases, under the guise of senior manager oversight, payments are processed up the managerial chain as the fees are so exorbitant and dodgy.

    1. paul

      Rather than an election, it looks like the blair starmer landslide will be merely handing over the reins (of a broken nag, dragging a three wheel cart).

      I’m wondering if he will have a clause 4 style laugh and rename the party from ‘labour’ to ‘plutocracy’.

      After all, between Julian Assange and Jeremy Corbyn, that is what, with every colourless fibre of his drab, wannabe life, he has been fighting so strongly for.

  4. Yaiyen

    It really scare me where west is going, after 2008 financial crash wall street started to buy up all other industry, I have a feeling the money they got from stock market profit margin wasn’t enough. The only country I see trying to stop neoliberals is China, Russia I don’t count they have too much neoliberals running around, the only reason their economy even started to grow was because west put sanction on Russia, so they had to finally invest in their own country. That is not good leadership in my opinion, you can’t ask billionaire to invest in your own country when the government is not even doing that them self, even on Brics Russia was dragging their feet for years, only after they lost 300 billion worth of asset then they started to fast track brics

  5. Roquentin

    You should check out the /r/accounting subreddit. As an accountant, I read it on a pretty regular basis and it’s one of the more rowdy and lively professional subreddits. Let me tell you, even without PE getting involved this trend you are observing in hospitals is well underway. It’s common knowledge that a massive shortage of CPAs is on the horizon, not very many people want to do this anymore. MBA programs and finance have been siphoning off graduates with the skills and the desire to do accounting because both offered higher earning potential, the MBA was easier and if you were really great at math you could just do finance and make even more. This shortage is no small part of why I’m getting my CPA license (hope toi have it early next year).

    Anyhow, the general consensus is that Big 4 and public accounting in general completely isn’t worth it. No one is happy or very willing to put up with the ridiculous hours and most people work barely long enough to get the work requirement necessary to get a CPA license. The firms know this, more or less encourage it, get a bunch of fresh grads in, underpay them, work them like dogs, they quit after a year or two and another group of grads comes in to take their place. That stream of graduates is dwindling. Predictably, a lot of these firms are turning towards outsourcing work to countries with cheaper labor.

    I bring this up to say PE coming in to squeeze even more money out of public accounting firms will not go well. The situation is tense and close to a boiling point as it is. The relationship is mostly adversarial, everyone knows it’s in your best interest to jump ship the minute you get a better offer, and with a shortage their usually is one.

  6. Louis Fyne

    it was inevitable, but add accounting to the long list of industries/services (banks, department stores, car dealers, hospitals, etc.) that are being rolled into multi-state, non-locally-owned conglomerations.

    A shame as like the prior examples, many old-school accounting firms are active in their communities via philanthropy and/or local business networking

  7. Felix_47

    Regarding medical care we have a good model in the British NHS. Despite complaints about waits etc. when it is adequately funded (which is not the case now) it is the only reasonable way to do health care. Fee for service or even capitation leads to doctors and owners trying to maximize return. Like firemen paramedics who provide medical care doctors and nurses should be on a government salary with benefits and tuition help. There should be no bonus for excess surgery or treatment (productivity) and we should let the doctors figure out what is worth doing with no financial reward. We should outlaw patenting medical devices. Salk did not patent the polio vaccine did he? People that go into medicine should do it because they want to help people. What we now have are overwhelmingly people coming into medicine in the US and Pakistan and points farther whose only goal is to make bank. In their native countries there is national health care and they simply come to the US to make bank. If we just copied the NHS with its flaws acknowledging that over the last 75 years quite a few have been worked out and then funded it reasonably the outcome would be better for health care providers and patients.

  8. jhallc

    After 4 years I finally got around to making an appointment with my regular optometrist for an exam. I found out my regular optometrist of more than a decade retired and the office was sold to AEG Partners, a private group. Went ahead with the exam anyway. I ended getting some new high tech images of my eyes taken that I had never had done before by a technician. On the way out I had to pay $89, as medicare and my supplemental healthcare wouldn’t cover those particular charges. Suffice it to say I will be looking for a new non-corporate eye doctor.

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