The Perils of Overleveraged Private Equity: How Audit Failures Exacerbate Systemic Risks

The private equity industry, long celebrated for its ability to revitalize underperforming companies, has increasingly come under scrutiny for its role in fostering financial instability. From 2023 to 2025, a wave of high-profile audit failures and bankruptcies has exposed the dangers of overleveraged, opaque strategies employed by private equity firms. These cases underscore how aggressive debt financing, coupled with inadequate auditor oversight, can lead to catastrophic outcomes for portfolio companies-and by extension, broader markets.

The Debt-Driven Downfall of Portfolio Companies

Private equity firms often rely on leveraged buyouts to amplify returns, but this strategy can backfire when debt burdens become unsustainable. A prime example is Platinum Equity, whose portfolio companies-including LifeScan, Aventiv, and United Site Services- defaulted or collapsed due to excessive debt. Similarly, Veritas Capital's Anthology, an education-tech firm, filed for Chapter 11 bankruptcy in September 2025 after a debt-fueled acquisition spree left it unable to adapt to market shifts or service its $1.8 billion in liabilities.

The healthcare sector has also been hard-hit. Genesis Healthcare, owned by ReGen Healthcare (affiliated with Pinta Capital Partners), defaulted on over $1 billion in debt and filed for bankruptcy in July 2025. The company's collapse was attributed to asset-stripping and high-risk borrowing, practices common in private equity-backed firms. These cases reflect a pattern: private equity's short-term profit orientation often prioritizes debt extraction over long-term operational resilience.

Auditor Oversight: Missed Red Flags and Ethical Gaps

The audit failures in these cases highlight systemic weaknesses in financial oversight. According to a report by , 70% of large U.S. bankruptcies in the first quarter of 2025 involved private equity-owned firms, despite such firms representing just 6.5% of the economy. Auditors frequently overlooked warning signs, including unsustainable debt levels, opaque financial structures, and operational risks. For instance, Forever 21, owned by a private equity consortium, filed for bankruptcy in March 2025 with $1.5 billion in debt, while Zips Car Wash and Joann Inc. followed similar trajectories.

The International Ethics Standards Board for Accountants (IESBA) has raised alarms about ethical conflicts in auditor independence. A 2025 Staff Alert from IESBA warned that private equity investments in accounting firms could compromise confidentiality, ethical culture, and independence-issues that may have contributed to audit failures in overleveraged portfolios.

The Broader Implications

The fallout from these failures extends beyond individual companies. As Moody's noted, private equity-backed firms defaulted at twice the rate of non-private equity-backed companies in 2024, a trend that persisted into 2025. Rising interest rates and economic uncertainty have further strained debt-laden portfolios, forcing painful restructurings or liquidations. For investors, the lesson is clear: high-risk strategies that prioritize short-term gains over transparency and sustainability carry systemic risks.

Conclusion

The audit failures and bankruptcies of 2023–2025 serve as cautionary tales for the private equity industry. Overleveraged bets on opaque companies, combined with inadequate auditor scrutiny, have led to cascading financial collapses. As regulators and investors demand greater accountability, the industry must address these vulnerabilities-or face growing reputational and financial consequences.