ICIJ Accountinggiant pwc is in crisis mode amid a growing Australian tax leak scandal
How PwC was forced out of the shadows
The partnership’s standard way of dealing with tricky issues isn’t working and the likely price of this scandal – both in financial and career terms – just keeps rising.
PwC Australia is struggling to manage the fallout from its tax leaks scandal. AFR
Word had already spread before the PwC Australia partner webcast scheduled for 2pm on Monday that former chief executive Tom Seymour would likely announce his retirement.
The rumour was quickly confirmed at the meeting – Seymour would leave the firm early at the end of September. Partners were also told that former Telstra CEO Ziggy Switkowski would lead a review of all aspects of the firm’s “governance, accountability and culture”, and that he wouldn’t report back until September.
Almost two weeks into what had become a major crisis, this was the firm’s big move to try to regain at least some measure of control of the narrative. PwC’s leaders were confident this was the decisive action needed to clear the air, to show how seriously they were taking the scandal.
They were wrong.
Like almost every step they have taken since the full extent of the tax leaks scandal became public in May, the response was seen as a day late and a dollar short by everyone that mattered.
A brutal news cycle shredded any hope PwC had that this would be a circuit breaker.
Labor senator Deborah O’Neill, who helped reveal the extent of the tax leaks, homed in on the review. “Let’s call it what it is – an exercise in damage control. Those who breached trust must be subject to Commonwealth and regulator review ... not what PwC is proposing,” Senator O’Neill said on Monday afternoon.
Greens senator Barbara Pocock called the inquiry “totally inappropriate for what is needed” and commented that the firm promising to release a summary of findings was “not the same thing as making the findings available to the public”.
Current and former partners were no less damning. A current partner says the review timeline is “a joke”. He told AFR Weekend that waiting that long for recommendations amid such a crisis was light years away from what the firm would advise its own clients to do in the same circumstances.
A former partner agreed, saying it would be “stupid” to wait four months until Switkowski reported back to take further action, such as retiring more partners. “They still don’t realise how bad it is. They take very incremental steps in a crisis,” he says.
From the perspective of PwC’s leadership these were big – previously unthinkable – concessions. The most senior partner at the firm, who was in charge of tax at the time of the leaks, would be leaving early (two other partners had already stepped down from leadership positions); and an eminent business figure would lead a no-holds barred investigation into the firm. Not to mention there is also an international investigation going on that is being run by law firm Linklaters. No details of that review, run by PwC’s global executive, have been released.
The poor reception to Monday’s announcement is another stark illustration of how the firm’s leaders have seemed continually unable to respond effectively to an issue which became public in January and blew up into a scandal at the start of the month after a cache of internal firm emails were released by parliament. Those heavily redacted emails, first reported by The Australian Financial Review, detailed how dozens of PwC operatives used updates on government tax plans that were meant to be confidential to drum up new clients.
The fact that PwC can’t escape the spotlight in itself illuminates the secretive, legalistic and overly self-confident culture of a firm that has long operated in the shadows. It raises the question of whether the culture that allowed partners to think it was okay to leverage its access so brazenly is the same reason that every move since the emails became public has only served to trigger the very people they are trying to assuage.
The partnership’s standard way of dealing with tricky issues – having the offending partners and/or staff members quietly leave, promising to change and then moving on to the next business opportunity – isn’t working. PwC’s usual legally-driven MO has been well and truly disrupted.
Meanwhile, with politicians readying to grill leaders in Senate estimates this week and commercial clients starting to question whether PwC can be the trusted partner it purports to be, the likely price of this scandal – both in financial and career terms – just keeps rising.
The week actually began with more damaging detail about the extent of the firm’s tax leaks project emerging.
Monday’s Financial Review revealed that Apple, Google and Microsoft were believed to be among 23 US tech firms that PwC contacted hours after treasurer Joe Hockey announced an anti-tax avoidance law in the May 2015 budget, to say the big four firm had a workaround plan for the legislation.
Then, along with the firm’s announcement of Seymour’s early retirement and the Switkowski review, a federal government source confirmed that ministers were exploring ways to impose a “financial penalty” on the firm over the scandal.
By Tuesday, Senator O’Neill confirmed she would seek to identify the roughly 50 PwC partners and 14 US tech companies named in the emails in upcoming Senate estimates. That promise, if realised, will cause alarm around the entire PwC global network.
That’s because in addition to the emails featuring the names of dozens of partners from Australia, there are partners from countries including the UK, the US and Ireland discussing the project to advise the US tech companies on how to sidestep the new tax rules the Australian firm had helped Treasury develop. In addition, one email references to working on the project with “other PwC network firms extensively” including partners from PwC Singapore and PwC Netherlands.
The potential for the 14 tech companies that took up the advice to also be named is an even bigger concern. Will those firms continue to do business with PwC if they are outed?
Then on Thursday, details of an email sent by acting PwC CEO Kristin Stubbins to a select group of retired partners were published in the Financial Review. In it, she wrote that the firm now had multiple “work streams” under way to “ensure we get our business reputation back on track” with the federal government and regulators.
Stubbins also wrote: “We recognise we need to rebuild trust. We’re listening closely to clients and other stakeholders, including the federal government and regulators, and will engage openly and transparently as we move forward.”
Senator O’Neill wasn’t impressed. “If those lines are to be taken at all seriously, then the PwC decision makers, the lawyers and their advisers need to get out of their own way: halt the cover-up,” the senator says.
“I call on them, in the name of the Australian people they sought to defraud, to release the names of all the PwC partners and staff involved in the tax scandal in the next 24-48 hours. Anything less is simply more scandalous.
“That action – the release of the full set of names – and only that action, will be the only viable beginning of possible redemption for PwC in the marketplace and with the people of Australia. It’s time, right now, today, to do the right thing. Name the names.”
The flailing response to the crisis is despite the continued presence of global executives from PwC overseeing the Australian leadership. To outsiders, the painfully slow and incremental public statements seem bewildering, especially coming from an organisation that in Australia is 10,000 strong and generated revenue of $2.8 billion last financial year.
There are two levels that explain the firm’s ongoing slow motion response. The approach the firm’s executive has long taken to managing issues, and the very nature of a 900-person partnership where most partners are owners with long-standing relationships to each other.
At the executive level, the very fact that Seymour was in the cache of emails released at the start of May (he denies knowing that the tax marketing plan was based upon confidential information) meant the firm couldn’t truly begin to respond to the crisis until he stepped down as leader, on May 8, six days into the crisis.
It also meant that the wider partnership was mostly unaware of the extent of the issue. They had, understandably, believed earlier assurances that the whole matter was related to one former partner breaching the government’s confidence in 2014. The entire approach until Seymour stepped down was, in his words, “technical and legalistic in nature”.
Multiple current and former partners describe a legally-driven approach – to argue semantics, to use clever wordplay in response to queries, to deny and downplay, and to use legal threats – as the standard operating procedure for years. The approach is to “not to concede any ground”, says the former partner. It was a strategy that worked effectively. Until it didn’t.
Added to this, the firm’s governance board is currently made up of partners more junior than the CEO and a partnership secretary that works for the firm. As CEO, Stubbins also sits on the governance board, as well as heading the executive board.
“The governance board don’t have the teeth to challenge the executive board on the CEO,” yet another former partner says. He adds that “many of the people in the firm haven’t had to deal with [a] crisis like this.”
The second level of the problem is that the very strength of the relationships that bind the partnership have become a weakness at a time when quick, and ruthless, action is needed. Even the presence of the firm’s global executive have not sped matters up.
Yet another ex-partner believes the firm is doing a lot behind the scenes, and says it is time for the leaders to make all of this action public.
You want to see all the action in its entirety,” he says. “The unfortunate thing is people are commenting on bits [of information]. The firm needs to say ‘this is all we are doing’.”
He says the firm should have already retired many of the partners directly involved in the conduct. He also thinks the firm will be obliged to make some form of announcement about any additional retirements, if and when they happen. That’s a move that would be anathema to a partnership built upon long-term relationships.
AFR Weekend has previously noted the firm’s acting PwC, Stubbins, has just two key questions to answer in this crisis. How can she allow any of the tax partners in receipt of the emails to remain partners at the firm? And how can the firm credibly run a so-called independent review of its own operations?
It’s clear she and the firm’s leadership will defer answering the first question for as long as possible, and the political response to its internal review shows the firm has failed to answer the second question credibly.
The threat level is only increasing for the firm. On Thursday, Assistant Treasurer Stephen Jones became the first minister to openly link PwC’s tax leaks scandal with the consulting work the firm does for the federal government.
Assistant Treasurer Stephen Jones is angry with PwC. Rhett Wyman
Asked about the leaks, Jones replied: “the Albanese Government believes what PwC [was] engaged in is a disgrace. It’s an absolute disgrace and [our] initial response is not going be to the last response ... we’ve got Treasury looking at this and what other sanctions may be available.”
Ominously for the firm, he then added: “The relationship between the Commonwealth and the consultant organisations that we work with is based on trust and we cannot work with you if that trust is breached. At a global level we are also reducing our reliance on consultant organisations because we think the pendulum has swung far too far in reliance on outsourcing so much of that stuff which should be core Government public service work.”
For a bureaucracy that had already adopted a ‘go slow’ on extending or signing PwC contracts, signals don’t come much clearer.
The PwC brand, in the midst of an international branding campaign to “build trust”, is officially radioactive.
