PCAOB warns auditors about AI and PE

Public Company Accounting Oversight Board officials are sounding a cautious note about the spread of artificial intelligence technology private equity funding at auditing firms.

Speaking Tuesday at the AICPA Conference on Current SEC and PCAOB Developments in Washington, D.C., PCAOB acting chair George Botic acknowledged the opportunities and challenges offered by both AI and PE, as he did in a recent interview with Mark Firiedlich for Accounting Today.

"From what I have observed at this early stage of its adoption by accounting firms, AI has the potential to transform how audits are performed and to improve the quality of audits," he said at the conference. "For example, AI can already enhance risk assessment and evidence gathering by making it possible to efficiently analyze entire populations in certain scenarios, which can significantly reduce the risk of missing irregularities or unusual patterns. Overall, this points to a future where AI helps automate manual processes and thereby enables auditors to focus on areas that require judgment. Auditors may "find their work enriched. Tasks that are tedious have been [or will be] outsourced to machines."

But Botic also sees a negative side to AI with the potential erosion of critical thinking, skepticism and professional judgment by auditors. "However, research has also shown that a growing dependence on AI has the potential to erode qualities that go to the core of what it means to be an effective auditor," he said. "A recent MIT study found that using AI poses a risk to critical thinking, even going as far to suggest that the usage of large language models could actually harm learning.

"AI may also threaten auditors' professional skepticism and judgment," Botic added. "There are academic studies that outline the risk of becoming reliant on agentic AI, warning auditors of placing too much trust in technology outputs. These risks will also necessitate the identification of new and different paths for junior auditors to gain those important skills either from the academic community or after they are employed by accounting firms."

Private equity issues

Botic sees pluses and minuses with private equity investments in accounting firms in the U.S. and abroad. 

"In terms of opportunity, private equity capital arguably provides many benefits," he said. "It can be used to assist firms with recruitment, retention, and succession planning as well as to finance investments in technologies including AI. Private equity investments can also accelerate a firm's growth by funding the expansion of existing business lines of service, the entrance into new business areas, and the acquisition of other firms through individual purchases or as roll-up transactions. By increasing firm capacity, modernizing audit tools with advanced technologies, and creating efficiencies, these opportunities have the potential to enhance a firm's ability to consistently perform quality audits."

However, as with AI, he sees risks with PE as well. "But these opportunities also come with risks that, I believe, warrant further discussion and input from all market participants," said Botic. "Private equity firms are ultimately seeking returns for investors by focusing on accelerating growth and looking ahead to selling their interests to another buyer in the private or public markets. To be clear, seeking returns for investors is not inherently problematic, but that short-term focus may, over time, begin to shift firm incentives so that profitability outweighs audit quality."

He cited a recent study by Accountancy Europe that warned about the pressure for increased profitability that could lead to cost-cutting, aggressive fee negotiations and rapid expansion strategies by PE-funded auditing firms that could put strains on the staff and cause them to spend less time to exercise professional judgment and skepticism and weaken their controls and independence.

"Moreover, consolidation driven by private equity roll-ups may reduce the number of accounting firms performing public company audits, thereby concentrating market power and potentially leaving smaller public companies with far fewer auditors competing to provide them with audits," said Botic. "Both AI and private equity investments in accounting firms carry the potential to truly reshape the profession. Yet these opportunities come with clear challenges to ensure that overreliance on AI and the pressures of private equity do not jeopardize audit quality."

Botic compared the PCAOB to one of his favorite Christmas movies, "It's a Wonderful Life."

"Similar to George Bailey's experience of seeing a world without him in it, a world without the PCAOB would not include the following three pillars of investor protection," he said.

PE warning

He was followed by another PCAOB official who sounded similar warnings. 

"Keep an eye on the rise of private equity firms investing in audit firms," said Christine Gutia, director of the PCAOB's Division of Registration and Inspections. "This is an area that we are paying careful attention to. Certainly private equity has poured billions of dollars of new capital into CPA firms over the last several years. Of the more than 90 significant PE-related transactions and firm mergers since 2020, more than half of those deals occurred so far this year, 2025. As others have shared, these investments present both opportunities and risks for audit quality. For example, private equity can fund succession planning, finance technology investments and support talent recruitment. It can help firms grow and potentially improve quality controls, and thus audit quality. Of course, investments by private equity firms can be especially appealing to smaller firms since investments in these firms can help make them more competitive."

However, she too sees possible "cracks in the roof." "Private equity threatens to increase pressure on profitability, which can lead to reduced staffing on audit engagements, fewer specialists and maybe other resource constraints," said Gutia. "The risks also include threats to auditor independence and audit firm culture. So we'll be focused on these areas, amongst others, especially when we're performing our quality control inspection procedures at firms that have undergone or are in the process of seeking private equity and other alternative practice structure changes."

She sounded a warning about AI as well. "The second area also has been spoken about quite often so it's no surprise that continuing our look into the future would not be complete without understanding how artificial intelligence figures into the equation," said Gutia. "As with private equity, there are both opportunities and risks here as well. AI has the potential to improve audit quality, but the human element cannot be removed. So PCAOB inspectors will continue to be focused on AI as well in our 2026 work. Our inspectors frequently meet with firms,  generally the larger firms, to learn and understand where they and sometimes their issuers are using new technology, especially AI. Many firms have invited us to view demonstrations of their new tools, and do so generally while they're piloting them, before they actually roll them out to the larger population of issuer audit clients."

The PCAOB is keeping a close eye on AI use at firms. "We try as much as possible to incorporate developing an understanding of audit firms' innovative and technology approaches into our inspection processes, and at a firm level that includes performance of our quality control inspection procedures, in addition of course to what we see if anything used in the audit files we select for review," Gutia added. "Audit firms seem to agree that the human element is paramount in the execution of high-quality audits, so while new technologies and artificial intelligence are tools that help enable an audit's execution, professional skepticism, professional judgment, and supervision and review remain as fundamental as ever to an auditor's responsibility and therefore will remain as a key focus of ours."