Audit reform: why increased regulation strengthens the case for private investment

Political scrutiny of the audit sector following high-profile failures has prompted increased regulation, but the market will remain attractive to private investment  

• The UK audit and accounting sector has seen accelerated private equity investment over the last five years. Stable cash flows, long-term client relationships, regional dispersion, and the potential for productivity improvements via technology make the industry attractive for investors. This has led to a flurry of dealmaking and significant consolidation of regional players into UK-wide operators. 

• Policymakers have responded to a series of historic audit failures linked to high-profile corporate collapses, including BHS and Carillion. These resulted in thousands of employees losing their jobs, left billions unpaid to suppliers, and cancelled hundreds of public sector contracts. Government took action via the announcement of a new audit reform bill and promise of a strengthened regulator. 

• Despite this increased scrutiny, we find that new regulations will not dampen the investment thesis fuelling the uptick in dealmaking in this market; in fact, they may even strengthen the argument for additional private capital to address industry-wide demand pressures. 

The audit reform bill

Despite the long-acknowledged need for change, audit reform in the UK has been in flux for several years, shaped by a mix of political hesitation, regulatory shortcomings, and major corporate scandals. The long-awaited draft Audit Reform and Corporate Governance Bill was finally included in last year’s King’s Speech by the then newly elected Labour Government, which promised to move these reforms forward. 

The draft Bill replaces the regulator responsible for the sector, the Financial Reporting Council (FRC), with a new statutory body – equipped with a defined budget and enhanced investigatory powers, the Audit, Reporting and Governance Authority (ARGA). The Bill is considered largely uncontroversial and includes the following proposals: 

1. Public interest entity (PIE) definition expansion: The current definition of PIEs is outdated (based on historical data) and does not include large, systemically important private companies – there are likely to be consultations on defining PIE criteria and thresholds, raising the lower bound (750 employee/£750 million turnover ) and removing some exceptions for smaller firms, given the complexity of the audits required and the current capacity in the market to undertake significantly more complex audits.  

2. Competition & conflicts of interest: Implements some of the CMA’s recommendations from its market review in 2019, including keeping restrictions on non-audit services to reduce Big Four dominance. Although it has since watered down plans for mandatory joint audits for large PIEs. 

3. ARGA’s sanction powers: Empowers ARGA to sanction non-accountant directors for knowingly or recklessly approving misleading financial reports. Consultation is ongoing to calibrate penalties to ensure the balance is correct. 

While Labour faces many competing priorities, senior stakeholders across the Party – including Business Secretary Jonny Reynolds and Chancellor Rachel Reeves – back the Bill. It is scheduled to be introduced to Parliament later this year, with phased implementation likely stretching into 2027. 

However, these reforms to increase regulation also coincide with the UK political pendulum swinging back towards deregulation. The FRC (ARGA) is gaining new powers, as other regulators are being stripped of theirs. This may lead to further weakening of the proposed measures. 

There are also potential competition concerns. Since the CMA’s 2019 market study, the regulator has increasingly focused on issues of localised competition across several other sectors. If the trend of consolidation continues, the audit market may once again come under the scrutiny of the CMA. 

Increased scrutiny does not translate into hostility toward private investment 

So what does this scrutiny and regulation mean for private investors in the sector? Despite some media concerns highlighting the rising involvement of private capital in the sector, the FRC (and, by deference, the Government) is taking a pragmatic and pro-investment view, which it hopes can help to relieve supply-side constraints, such as talent shortages, market concentrations and capability gaps – by investing fresh capital into the sector.  

Demand-side pressures (new regulatory requirements, public-sector outsourcing audits) and supply-side challenges (talent shortages, geographic coverage gaps) are straining UK audit capacity. For local authorities, only 1% of bodies published 2022/23 audited accounts on time, creating an unprecedented backlog. 

However, the focus of legislative reforms is almost exclusively on the top end of the market (PIEs), where only a few firms outside of the Big Four choose to operate due to the stricter regulatory requirements. By attempting to reduce the dominance of the Big Four through increased competition and market diversification, the government aims to enhance the sector's resilience. 

Private capital can and is driving capacity expansion, technology adoption, and geographic coverage - strengthening market resilience while capturing growth 

The extent to which private investment in the sector can improve choice and quality in the market will be key in shaping the regulators’ opinion. The FRC’s current market study into SME audit, for example, is likely to find that SMEs require more flexible pricing options and choice whilst maintaining audit quality - more easily unlocked by new investment in firm capabilities. 

The regulator will, of course, need to consider the impact of increased PE investment in the sector – particularly what it means for the ownership structures of these firms in a sector once dominated by traditional partnership models. There are prohibitions on audit services that a PE-owned firm can provide to the fund, its portfolio companies, or any significant affiliate of the companies; however, recent deals have demonstrated that these have not proven insurmountable. In September 2024, the FRC reiterated that “[it] is not in principle against a greater participation of external private capital in the UK audit market,” and is very open to constructive conversations with private investors.  

The non-PIE market will remain very attractive to investors 

Despite the noise, mid-market practices will remain out of scope for the stricter PIE requirements and will continue to benefit from: 

• Full cross-sell flexibility (tax, advisory, wealth management services) 

• No mandatory audit partner rotation 

• Lower enforcement / fine risk compared to Big Four auditors 

The collapse of Carillion and BHS has rightly galvanised policy reform on public interest entities, and higher capital and compliance costs lie ahead in this space. This leaves the attractive SME & non-PIE market largely out of the regulators' interest. Private investors who step in to fund talent development, AI-driven audit tools, and regional roll-ups can help alleviate capacity constraints, address public sector backlogs, and amplify competition beyond the Big Four. In doing so, they not only generate attractive returns but also bolster the sector’s overall resilience, aligning with a key government priority.  

Flint has provided political and regulatory due diligence for several deals in the sector. Our competition team of former CMA officials provides advice on deal clearance and undertakings when necessary.  

This blog was written by Associate Director Dylan Saralis. Dylan advises businesses and investors on political, policy and commercial strategy, with a focus on private markets. 

If you would like to discuss the sector, please do get in touch with Dylan Saralis or Joe Jones here.