Thursday, June 08, 2023

Why punishing PwC won’t be as easy as it seems

PwC has given the names of at least 67 of its consultants, including some based in the UK, to Australian politicians investigating a tax leak scandal that threatens the firm’s global reputation.

In response to questions, PwC has written to the Australian Senate giving the names of current and former staff potentially connected to the leaking of confidential government tax plans.

Why punishing PwC won’t be as easy as it seems

Pinning responsibility onto a big organisation is complex. And government has to look at its own role in the controversies over consultants.

John KehoeEconomics editor

The PwC tax leak controversy is a textbook case study into the dangers for businesses trying to sweep misconduct under the carpet and not dealing with problems head-on.

Audit and consulting firm PwC finds itself uncomfortably highlighted. Eamon Gallagher

It is reminiscent of the banks and wealth managers who denied there were problems and conflicts of interest in the financial services sector, only to be publicly humiliated by a royal commission.

Cover-ups and glossing over misbehaviour often causes more reputational and legal damage than the original misconduct itself.

Effective leadership requires fessing up to wrongdoing early and weeding out transgressors, rather than letting the problem fester and risk it becoming bigger than Ben-Hur among politicians and the media.

A stitch in time saves nine, rather than hoping a problem away.

The banks and wealth managers ended up paying multibillion-dollar penalties.

PwC’s tax partners stonewalled as far back as late 2016, including by claiming legal professional privilege against the Australian Taxation Office’s investigation.

It will now pay a much bigger price given its obfuscation and the fact that an unrelenting Labor-Greens-led committee control a Senate probe.

PwC, particularly its implicated tax partners, deserves criticism and punishment for selling confidential Treasury tax secrets to multinational clients.

Nevertheless, punishing PwC is complicated for several reasons.

Little understood by general observers is that the implicated tax partners were not paid consultants working for the government. They volunteered on Treasury tax law consultations, along with other firms, to provide feedback on then-treasurer Joe Hockey’s proposed multinational anti-avoidance law. This is common practice.

Yet, lost in the furore is that PwC’s Canberra consultants are an entirely different part of the firm that has very little to do with PwC’s tax partners, who are mainly based in Sydney and Melbourne.

The tax partners typically don’t charge to be on Treasury and ATO consultations to bring real-world experience to policymaking and tax administration.

A cynic may say one of the motivating factors to volunteer to participate in such consultations may be to gather intelligence from Canberra.

We don’t just want bureaucrats in ivory towers imposing tax changes without comprehending the real-world effects.

Nevertheless, Treasurer Jim Chalmers has acknowledged consulting the private sector on tax law changes is important. We don’t just want bureaucrats in ivory towers imposing tax changes without comprehending the real-world effects.

Regrettably, PwC cheated the system and betrayed trust.

PwC’s tax team long had the reputation as being one of the most innovative and aggressive in corporate and international tax.

For years, there has been disquiet among corporate tax practitioners that the ATO leadership under former KPMG partners Chris Jordan and Jeremy Hirschhorn were too tough on corporate taxpayers. But in light of the PwC revelations, it’s hard to have too much sympathy.

Banning PwC’s tax team from government consultations for a set period would have been an easy first step, among other sanctions.

But financially penalising the PwC tax team is difficult because it typically doesn’t earn much, if any, revenue from the government.

Now, the political witch-hunt has reached such epic proportions that there is a real risk the baby is thrown out with the bathwater and punishments are misdirected.

Partnerships are different to publicly listed companies.

Almost all the profits are distributed annually to PwC’s 900 partners. The breaches took place about eight years ago.

The partners at the time profited from the millions of dollars in extra revenue the firm gained from selling confidential government tax information.

But some beneficiaries are no longer at the firm. Some partners have retired through natural attrition given the compulsory retirement age for partners is 55.

Peter Collins has left. Nine partners are on leave.

To be sure, former partners still receive some life-long payments based on future profits, which is sure to be a point of contention at the firm relating to the exited tax partners.

A small group within PwC’s tax leadership originally hid the full extent of the behaviour from non-tax partners.

Nevertheless, most of the financial costs are likely to be borne by today’s partners and staff. Many of them were not partners or even employed by PwC at the time.

While they may have been indirect beneficiaries from legacy work and client relationships inherited from the offending tax partners, many of those in audit and consulting had nothing to do with the confidentiality breach.

The biggest losers in PwC could be its Canberra-based consulting team, which earned about $500 million in revenue over the past two years from the federal government.

Almost every public service agency at Senate hearings was asked by Labor and Greens senators what contracts they had with PwC and how much they were paying the firm.

The scrutiny likely means that some risk-averse public servants will shy away from awarding PwC new contracts, even if it is considered the most capable firm to deliver the services.

Hence, the paid Canberra consultants working in many different departments are in the firing line. It would undoubtedly be unsettling for Canberra staff, many of whom were not even employed by PwC when the incidents occurred. They have families, mortgages and work to deliver for the government.

Moreover, government consulting is not as profitable as it seems for the big four firms. The profit margins are substantially lower than tax and audit work for commercial clients.

Government work provides a steady, annuity-style income stream to ride the ups and downs of the commercial marketplace. But after the cost of staff and overheads, the profits are not as big as the headline revenues suggest.

To be sure, working inside government also has spin-off benefits of influencing policy and understanding what the government is up to.

It is certainly true that over the previous decade the Coalition government became too dependent on outsourcing work to consultants.

Many middle managers in the public service have become little more than procurement specialists.

As a taxpayer and citizen of Canberra, it is devastating to learn how basic skills of the public service have been run down.

Work that was once core to agencies, is now outsourced to former public servants being paid more by big consultancies.

To be sure, consultants have their place, but Canberra has been overrun with them due to a deterioration in the quality of the public service.

The culture of the public service also encourages outsourcing because too many public servants are scared to make decisions, take responsibility and be accountable for their actions.

The dithering for more than five years in the bureaucracy on how to handle the PwC matter is a case in point, until media scrutiny led to wider action.

But the issues exposed by the PwC affair go far beyond the firm itself and extend to wider reflection about the role of consultants and the model of government.

PwC and the people who are responsible need to be held to account. But targeting the penalties is harder than it seems.

John Kehoe is Economics editor at Parliament House, Canberra. He writes on economics, politics and business. John was Washington correspondent covering Donald Trump’s election. He joined the Financial Review in 2008 from Treasury. Connect with John on Twitter. Email John at