The importance of audit for private equity-backed businesses

For PE-backed businesses, audit should be more than a statutory requirement. At its best, it provides transparency, strengthens investor confidence and gives management teams a clearer view of the financial, operational and reporting risks that could affect value creation. In a PE environment, where ownership horizons are often defined by growth plans, refinancing events or exit strategies, the audit can become an important part of building trust in the numbers and confidence in the business.

That role is becoming more important as audit regulation tightens and audits become more demanding for both auditors and finance teams. Rising expectations around audit quality, governance and reporting mean that management teams should not view the audit simply as a cost or compliance burden. When approached proactively, the audit process can help identify key business risks, sharpen financial reporting, improve controls and support better decision-making across the investment lifecycle.

PE ownership also brings specific reporting challenges. Funding structures can be complex, often combining: 

• debt
• equity instruments
• preference shares
• shareholder loans
• contingent arrangements
• management incentive plans. 

These arrangements are usually designed to achieve commercial and value creation objectives, rather than to fit neatly within UK GAAP or IFRS reporting frameworks. As a result, there can be significant judgement involved in determining how transactions should be classified, measured and presented in the financial statements.

Alternative performance measures are therefore particularly important in the PE environment. EBITDA and adjusted EBITDA are widely used to assess operational performance, compare businesses and support valuation analysis. However, these measures need to be applied consistently and explained clearly. The statutory financial statements, strategic report and directors’ report should provide sufficient narrative for readers to understand not only the reported results but also the quality of earnings, cash generation, liquidity, margin trends and progress being made against the investment thesis.

This is where an experienced auditor can add real value. Auditors are uniquely placed because they receive information from across the business and test it in detail. Through robust challenge, data-led analysis and a clear understanding of risk, they can help management identify control gaps, weaknesses in reporting processes, inconsistencies in transaction cycles and areas where finance functions may need to evolve to support growth. This can reduce audit friction in future years and help finance teams focus on the areas that matter most.

An audit can also support transaction readiness. For PE-backed businesses preparing for a refinance, disposal, or exit, credible financial reporting reduces buyer risk and supports due diligence. Auditors can help ensure that acquisitions, disposals, reorganisations, related party transactions, dividends, tax exposures and shareholder arrangements are appropriately reflected. Where completion accounts, working capital, net debt or debt-like items are relevant to pricing, assurance over the underlying accounting can be particularly valuable.

Some areas will require specialist input. Classification of financial instruments as basic or non-basic under UK GAAP, embedded derivatives under IFRS, leaver provisions attached to management equity and post-deal impairment reviews can all involve complex judgement. In these situations, financial reporting specialists can complement management’s own expertise, support the development of robust accounting positions and provide insight into market practice, valuation assumptions and disclosure expectations.

Looking ahead, the highly anticipated changes to FRS 102 will affect reporting year ends beginning on or after 1 January 2026. These changes will see a significant change in areas such as revenue recognition and lease accounting, bringing many aspects of UK GAAP close to IFRS-based principles. Businesses may need to reassess existing customer contracts, leasing arrangements and accounting policies to understand the impact on reported results and the balance sheet. The amendments also introduce additional disclosure requirements, increasing expectations around the quality and depth of information provided in financial statements. 

For PE-backed businesses, the changes could have wider implications for covenant reporting, EBITDA and other key performance metrics used by lenders, management teams and investors. Given the potential impact on financial reporting, systems, processes and stakeholder communication, early preparation will be important to ensure a smooth transaction and avoid unexpected consequences.

Ultimately, the value of audit in a PE-backed business depends on the quality of the relationship between management and the audit team. Open dialogue, early engagement and a shared focus on the key risks can turn the audit from a year-end compliance exercise into a source of insight. For management teams and investors, that means better reporting, stronger governance and greater confidence in the decisions that drive value.

PE-backed businesses face a unique combination of growth opportunities and reporting challenges. Our specialists work with private equity firms and their portfolio companies throughout the investment lifecycle. From acquisitions and refinancing to investor reporting and exit readiness, maintaining robust financial reporting, strong governance and effective risk management can help management teams navigate complexity and support long-term value creation.

Our proactive approach to audit, financial reporting and wider business processes provides greater confidence for investors and stakeholders, while helping organisations address issues early and adapt to evolving market and regulatory expectations. If you would like to discuss any of the topics covered in this insight or explore the implications for your business, please contact us.