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Monday, July 31, 2023

PwC and a question of character

4 Corners Monday night. A shadow state that eats our public sector and undermines democracy.



PwC settled ‘false LPP’ penalties days before bid to suppress emails Neil Chenoweth Neil Chenoweth


AUGUST 2023

 

ESSAYS

PwC and a question of character 

By Judith Brett
Photograph of a man with his pants down revealing "PWC" written on his underwear and hunched over a photocopier

Photograph by Chase Middleton 

How a culture of outsourcing created a shadow public service and captured government 

Whatever happened to character? Among the books my mother left behind is an old brown book with thick cardboardy pages, slightly foxed, and the spine carefully reinforced with brown paper. It’s called Building of Character. This is its opening line: “The building of character is the most important business of life. It matters little what works a man may leave in the world; his real success is measured in what he has wrought along the years in his own being.”

The book was written in 1894 by an American Presbyterian minister, James Russell Miller, who was a prolific author of books of advice on how to live a good and godly life. My mother’s copy has no date, but she probably read it in the early 1940s before she married, when she was a youth worker with the Young Women’s Christian Association.

Now, let’s not worry about the use of “man” for everyone, but focus on the idea of character, a quality that inheres in a person and is that person’s own responsibility to develop. It is the secularised core of the person, the nub of the self, and it is the work of a lifetime.

What constituted strong or good character could be filled out in various ways, with various virtues in various combinations. But at its heart was self-restraint, control of the impulses such as anger, lust and greed. There were gendered differences in their ideal distribution, with women specialising in the virtues of compassion. The concept of character was embedded in a rich and complex moral discourse about desirable human attributes in which there were few excuses for bad behaviour and no DNA.

I have been thinking a lot about character as I ponder the scandal at the Australian division of PricewaterhouseCoopers (PwC). PwC is one of the “big four” global accounting firms, along with Deloitte, EY and KPMG. It entered Australia in 1946 when local accounting firm, Flack & Flack, was invited to join the international firm, then just Price Waterhouse, and has since grown, through mergers and acquisitions, into a huge global network of professional services firms.

Peter-John Collins, a partner in PwC Australia and head of its international tax section, was a member of a group advising Treasury on how to design laws to ensure that multinational companies such as Google and Apple pay tax on the sales they make in Australia, for example by preventing them shifting their Australian revenue to lower taxed countries. Collins signed confidentiality agreements in 2013 and again in 2016 that he would not disclose knowledge he gained in this process of the government’s planned tax reforms. The Multinational Anti-Avoidance Law (MAAL), drafted when Joe Hockey was treasurer, came into effect on January 1, 2016, to apply to the next financial year.

By April, the Australian Tax Office (ATO) was worried. It had noticed that some multinational companies were already restructuring their businesses in ways that seemed designed to work around the new law, and that such schemes were being marketed. Had there been early warning of the legislation? Had Collins leaked? The ATO asked PwC for copies of correspondence and internal documents. PwC was, to say the least, uncooperative, repeatedly claiming that requested documents were protected by legal professional privilege and so could not be released. So the ATO tried another tactic, requesting copies of relevant internal emails, which were not protected.

As senior ATO officer Jeremy Hirschhorn later told a Senate committee, the ATO eventually “got some emails which suggested that there had been a breach of confidentiality in relation to a Treasury consultation process”. But as this was not primarily a tax matter, the ATO did not have the power to investigate it further. So in March 2018, it referred its suspicions about Collins and PwC to the Australian Federal Police. The AFP concluded in turn that the evidence was insufficient to pursue prosecution, so in July 2022, the ATO referred the matter to the Tax Practitioners Board and handed over the emails.

The Tax Practitioners Board (TPB) is the federal government agency responsible for the registration and regulation of tax practitioners, and for ensuring compliance with the TPB’s code of conduct. Those found not to comply can be deregistered, which is what happened to Peter-John Collins two days before Christmas 2022. And he could not reapply for registration for two years, which seems a mild sanction. Conveniently, he had left PwC shortly before.

On January 19, the TPB published the reasons for Collins’ deregistration. He had breached items one and five of the board’s code of conduct. He had failed to “act honestly and with integrity”, and did not have “adequate arrangements for the management of conflicts of interest”. PwC was also found to have had inadequate arrangements for managing conflicts of interests and was ordered to provide training on a six-monthly basis to relevant partners and staff.

PwC Australia chief executive Tom Seymour no doubt hoped that this was the end of the matter. Collins had left, and conflict-of-interest training was quickly put in place. Collins was the only person involved, and Seymour had had no knowledge of his actions. But, on the basis of the internal emails, heavily redacted though they were, the TPB had concluded that Collins was not alone: that he had disclosed confidential information to “other PwC personnel who, in turn, disclosed to clients or potential clients of PwC”, and that some at least were aware that the information was confidential. Hence the requirement for PwC to institute conflict-of-interest training.

On January 22, the Australian Financial Review’s Neil Chenoweth reported the TPB’s sanctioning of Collins and its reasons. This put a big question mark over the integrity of PwC, which was a major provider of services to the federal government. It was also the first that Treasurer Jim Chalmers knew of Collins’ breach of confidentiality and he was furious. Collins had in fact signed another confidentiality agreement with Treasury in 2018, well after the ATO had raised doubts about him. The ATO later told an incredulous Senator Barbara Pocock that it could not inform Treasury because it was subject to strict secrecy provisions. Reportedly, it had tried to get the TPB to back off its pursuit of the matter to protect confidential agreements between the ATO and the companies that were a target of the Multinational Anti-Avoidance Law.

On February 15, Labor Senator Deborah O’Neill raised the matter in the Senate Economics Legislation Committee. In response to her questions, the TPB representative repeated the board’s conclusion that Collins had not monetised the confidential information on his own. This, she told me, was the point at which the egg cracked. He had done it with others.

The question was who. On February 17, O’Neill lodged a question on notice in the Senate, requesting that the TPB table its reports, together with all the emails it had obtained. She told me that she was not really surprised by the TPB’s finding. She had long service on the Parliamentary Joint Committee on Corporations and Financial Services, and had seen plenty of evidence of the arrogance towards government from the global consulting firms that dealt with the world’s mega corporations. “We were not just dealing with one bad apple, but an orchard of bad trees.”

One hundred and forty-four pages of heavily redacted emails were duly received, and published by the Senate on May 2. They were shocking. Collins had provided a flow of information about the progress of the government’s legislation, telling recipients it was “for your eyes only”, and to treat it as “rumour” or “gossip”. Many partners, including chief executive Seymour, clearly knew the information they were discussing was confidential, but PwC stood to make at least $2.5 million and senior partners in the tax division were very pleased with themselves. In Senate estimates on May 30, O’Neill pointed out that Collins was advising Treasury “not as a consultant, but as a knowledgeable Australian citizen … bringing his knowledge to the table in order that the parliament might make good laws for the country”. But none of those exchanging emails were acting as citizens as they devised ways to rob the Australian taxpayer. They were, says O’Neill, “taking the Australian people for mugs”.

Here are excerpts from an email sent on January 6, 2016, in which a senior partner is reporting on the success of the “north American project”.

 

 

We got this outcome because:

we identified US tech two years ago as representing a significant (at least for controversy!) upside sector for the Australian firm as the ATO reacted to problems it had with their structures, and [we] diligently built relationships with key offshore buyers.

we were aggressive in telling these relationships they needed to act early (heavily helped by the accuracy of the intelligence that Peter Collins was able to supply and our analysis of the politics).

we were first to them with innovative approaches to the problem. ([redacted] was critical in stimulating their thinking and presenting ideas no one else had, especially in relation to the first draft of the law).

… In total, we expect (based on fee estimates that we have agreed with clients) that revenue from this first stage of the MAAL projects will be approximately $2.5 million … Our work has been efficient and seamless – we have received some excellent client feedback as to responsiveness, the quality of our work and the dedication of the team. I hope I haven’t missed anyone who was part of this great effort.

Who was this “we”? In the Senate, O’Neill and newly elected South Australian Greens Senator Barbara Pocock were asking for names, and have continued to do so. Pocock has referred the matter to the new National Anti-Corruption Commission. She wants to know who benefited and “who was involved in covering up these events and helped in any way to ensure they did not receive public scrutiny or consequences”.

Since the story broke, PwC has been trying to staunch the bleeding of its reputation and its revenue as it loses lucrative consultancy work for federal and state governments. Executives have stepped down, including chief executive Seymour, partners have “exited”, others have retired. The reputational damage was spreading beyond Australia and a new chief executive, Kevin Burrowes, has been brought in from PwC’s global network. His key priority will be to “enhance the firm’s culture, with a focus on ethics and controls”.

PwC’s entire public-sector advisory business has now been hived off, sold for a dollar to a private equity firm, Allegro Funds, and named Scyne. Fully independent of PwC, it will take on 1750 of its former employees, existing clients and contracts, and have robust corporate governance. A spokesperson explained that the name Scyne, which is old English for scene, means beautiful and bright, and that “the name was chosen to indicate a new dawn”. Really? I would have thought Phoenix would have been a better name.

But despite all this damage control, the story keeps running. As I was preparing this essay, Neil Chenoweth reported in AFR that Peter-John Collins was not the only one to breach confidentiality. Someone else was leaking too.

Chenoweth and Edmund Tadros at AFRand senators O’Neill and Pocock have their teeth into this, and show no signs of letting go. The Parliamentary Joint Committee on Corporations and Financial Services is running an inquiry, with O’Neill in the chair, “into recent allegations of and responses to misconduct in the Australian operations of the major accounting, audit, and consultancy firms (including but not exclusive to the ‘Big Four’), via a detailed investigation and analysis of regulatory, technical, and legal settings, and broader cultural factors”. The other consultancy firms must be furious that PwC’s bad behaviour has put them all in the frame.

Down among the weeds of these events are many questions: about the secrecy provisions that the ATO believed prevented it from informing Treasury of its suspicions about Collins, even as Treasury continued to use him as an adviser; about the opaque structures of partnerships and their remuneration practices; about the use of claims of professional legal privilege to obstruct requests for information; about the informal links among networks of powerful men and the significance of them all being men. No doubt there are others, and more may emerge. For readers wanting more detail on this unseemly story, I can recommend a report published in June by the Senate Standing Committee on Finance and Public Administration, titled “PwC: A calculated breach of trust”.


However the story ends, I now want to step back from the detail a little and reflect on the larger ethical and political implications of the scandal. For me, there are two big stories here: an ethical story about the decline of character, and a political story about the government’s reliance on external consultants.

So, back to where I started, to the question of character. As I read through the emails, I asked myself: Who are these men? What were they thinking, or not? What school did they go to? Where did they grow up? Were they entitled old WASP private school boys, or upwardly mobile sons of aspirational immigrants? Or Poms who learnt their trade in the City of London? Were they friends? Did they drink together? Belong to the same clubs? Did they discuss using the confidential information over drinks? How did they get to be this way, that they had so little of what was once called “character”, were so lacking in the strength of will to resist temptation, had so little sense of commitment to the public interest, that they could lie for profit? Did they even know that what they were doing was wrong?

Especially shocking to me as I read through the emails was how brazen it all was, how openly it was acknowledged that Peter-John Collins was breaking his confidentiality agreement with Treasury, and how little anyone worried about any potential consequences. The scent of money was in their noses, and the pack was off.

At the end of May, Kristin Stubbins, who had become acting chief executive after Seymour had stepped aside, issued an open letter of apology to the community, the Australian government, its clients, and to “the 10,000 values-driven, hard-working PwC partners and staff who have been unfairly impacted”.

The firm, she wrote, “did not have adequate processes and governance in place”, and had a culture in its tax business that “both allowed inappropriate behaviour and has not, until now, always properly held our leaders and those involved to account. At the time this occurred there was a culture of aggressive marketing in our tax business. Over a period, this aggressive behaviour and drive for growth permeated certain parts of our leadership and allowed for purpose to be replaced by profit. Our governance process failed to identify and keep this in check.”

Let’s be clear here. The behaviour that Stubbins describes as “inappropriate”, a much overworked word also used for wearing shorts to a cocktail party or groping a colleague, is someone signing a confidentiality agreement and then breaking it in order to monetise the knowledge they had promised to keep mum about. I would have called it lying. I promise not to tell anyone, but then I do. And worse, I do it so that I and my friends can make some money. I would not call this “inappropriate” behaviour; it’s dishonesty and greed, and shows that the doer of the deeds is not a person of good character. But not one of the partners seemed to notice that they no longer had an operating conscience.

Stubbins avoids the question of personal moral agency and instead sees the cause of the bad behaviour in the inadequate processes of governance and in the culture of the tax department, and so shifts responsibility from individuals to institutional processes. This has become a standard move: when things go wrong, blame the culture and introduce some compliance training. In an appendix to “PwC: A calculated breach of trust”, PwC’s chief risk and ethics leader, Tony O’Malley, reports that PwC has now developed a firm-wide e-learning Confidentiality module, as well as one on the Tax Agent Code of Conduct for relevant personnel, and that nearly all staff members have completed them.

In the heyday of character, from the mid-19th to the mid-20th century, the success of professionals such as doctors, lawyers and accountants depended a good deal on their individual reputations for probity and skill. They worked on their own or in small practices where character and reputation were closely tied to respectability in a face-to-face world. People wanted to know that their doctor, lawyer or accountant was of sound character and could be trusted. Today, many professionals work in large institutions where their individual characters are all but invisible, absorbed into the reputation of the firm. It is the firm that people trust or not, not the individual professional, and firms started to develop various processes to regulate and guarantee the behaviour of the professionals who worked for them.

Hannah Forsyth, from the Australian Catholic University, has written about the history of white professional work and its relationship with virtue. Over the past 50 years or so, she argues, professions have experienced a “moral deskilling”, as professional virtue shifted from inhering in individuals, as their personal character, to a system of standards and regulations for the management of quality, risk and ethics. This regulation became the task of managers, a growing breed of professionals whose skills were seen as generic, able to be applied across a range of settings by people who did not share the knowledge or the values of the people they managed. Academics, doctors in large hospitals, teachers, social workers, all became subject to reporting regimes in a burgeoning audit culture where there is less and less space for the exercise of professional judgement. It has made much professional work less personally rewarding than it once was. Just ask anyone who teaches in a university. But that is another story.

To return to PwC. The second big story arising from this scandal is about the hollowing out of the federal public service, as core work in policy development has been outsourced to big consultancy firms. In the 2021–22 financial year, five firms gained $2 billion from consultancy work. Helen Dickinson from UNSW Sydney estimates that the value of consultancy work for the Australian public service undertaken by the “big four” firms increased by 400 per cent between 2012 and 2022. The public service has lost relevant skills and expertise, and the public has lost transparency as a whole bunch of public functions are pulled from public view. For example, unlike public servants, consultants are not part of the executive branch of government and so cannot be called before Senate estimates.

The reliance on consultants and other external providers has its origins in neoliberalism’s shifting of resources from the public to the private sector. It was part of a worldwide trend, and in Australia was most vigorously pursued by Coalition governments with their reflex suspicion of public servants. While external advice to government can be useful, the downsides of the practice are many as the public service loses and fails to replenish skill and institutional memory. Earlier this year, two British political economists, Rosie Collington and Mariana Mazzucato, published a book titled The Big Con: How the Consulting Industry Weakens our Businesses, Infantilizes our Governments and Warps our Economies. Consultancies, they argue, have hollowed out state capacity: “The more governments and businesses outsource, the less they know how to do”. Labor is now committed to winding back the federal government’s reliance on consultants and has promised that more jobs will be filled by public servants.

About time. In her letter of public apology, Stubbins refers to the 10,000 hard-working, values-driven PwC staff and partners, and decries the fact that, in the tax business, parts of the leadership “allowed for profit to be replaced by purpose”. But as Senator Barbara Pocock put to me, what is the purpose of a big consulting firm if it is not to make a profit? “Their business model requires the aggressive pursuit of cash. To pretend that there is a value ethos that can be restored is nonsense.” Of course protecting the firm’s social licence is crucial for its capacity to make money, but it is a means not an end. Unlike the public service, serving the public good is not the prime reason for PwC’s existence, nor that of other consultancy firms. A Senate committee is currently investigating the management and integrity of consulting services to the federal government. It is due to report by September 26.

Finance Minister Katy Gallagher has said that the federal government’s over-reliance on consultancies was worse than she had realised. “We’re taking steps to rectify that, but it’s going to take a bit of time because of the way the imbalance has occurred over particularly the last five to seven years,” she told ABC radio.

I asked Senator Pocock why the PwC scandal had so angered her. She was an academic at the University of South Australia’s business school when she researched the working lives of people such as nurses and retail workers whose incomes were well below $100,000 a year. According to AFR, the incomes of PwC partners ranged, in pre-pandemic times, from $380,000 for junior partners to $3.9 million for the most senior partners. As Pocock says, “These consultants, scooping up public money, lived on a different planet from nurses and retail workers, and most of the rest of us.”

For Senator O’Neill, her anger stemmed from the importance of truth and integrity in the conduct of business. Our superannuation, our pensions, our public services, all depend on telling the truth about the books, she said.

While I was writing this essay, the final report from the royal commission into the robodebt scheme was released, documenting the callous cruelty with which previous Coalition governments illegally went after measly amounts of taxpayers’ money from poor and vulnerable people. At the same time, a bunch of very rich men were scheming to rob the public purse and thought they could get away with it.

JUDITH BRETT

Judith Brett is an emeritus professor of politics at La Trobe University. Her latest book is Doing Politics: Writing on Public Life.

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  • Location information (both through your device’s location settings and IP address)
  • Search history
  • Browsing history
  • Purchase history
  • Physical interactions (that is, how you physically use your device)

This information, taken as a whole, is way more valuable and useful than whatever you talk about, and basically anyone who wants to can buy it. Advertising companies don’t, as a rule, connect this data to anything that can specifically identify you (like your name and address). That wouldn’t be hard to do, but there isn’t much in it for advertisers. They know everything you do, 24 hours a day, so what difference does your name make? The process itself is called fingerprinting, and it allows advertisers to track you across sites and apps. The scary world of online behavioral advertising – A few basic data points would be all anyone would need to get a rough idea of how to advertise to you. 

If your location is “Beverly Hills” and you recently spent an hour looking at the Lexus website, you’re probably a rich guy in the market for a new car. In olden times, that’s all they’d need to target you, maybe with a billboard in your neighborhood or something. But online behavioral advertising collects so much other information—you bought a tent last month, you watched Star Trek on Sunday night—that targeting becomes scarily precise, to the point that it can feel supernatural.”

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New York Times Op-Ed:  ‘The Bear’ and the Need for a Place to Belong, by David French(Author, Divided We Fall: America’s Secession Threat and How to Restore Our Nation (2020)):

The BearEvery now and then, a fictional character can have a profound real-world impact. I’m thinking, for example, of Jason Sudeikis’s Ted Lasso in 2020. There was a moment in the first season of the character’s self-titled show when a simple act of immediate forgiveness symbolized the generosity of a show that radiated across American culture and reminded us of the power of kindness and mercy to alter the course of a person’s life.

In 2023, a very different character is revealing different truths, and the effect is, if anything, even richer and more meaningful. The character is Richie Jerimovich, brilliantly portrayed by Ebon Moss-Bachrach, and the show in which he appears is FX’s “The Bear,” the second season of which was released last month. Episode by episode, Richie opens a window into the souls of so very many of our friends and neighbors. He challenges us. He makes us examine ourselves. He forces us to answer an uncomfortable question: How do we respond to people in pain?

For those who haven’t watched the show or followed the growing amount of “Bear” discourse online, it rests on a simple and dark premise: An elite New York City chef, Carmy Berzatto (Jeremy Allen White), returns home to Chicago after his drug addict older brother dies by suicide and leaves him the local family sandwich shop.

Of course, Carmy doesn’t just inherit a sandwich shop, he also inherits its employees — a collection of longtime friends and co-workers who interact with one another with such high intensity and aggression that there are moments of the show that are actually painful to watch.

The entire cast is a delight, but from the opening episode, your attention is drawn to Richie. He was Carmy’s late brother’s best friend and serves as the sandwich shop’s de facto manager. He’s also angry, difficult and abusive. No one is louder than him. No one is more aggressive than him. From the first moment you see him, you recognize him as intolerable.

But just when you’re about to write him off as the villain of the show, you see something else: Richie is in immense pain. He just buried his best friend. He’s estranged from his now ex-wife, even though it’s evident he still adores her. He spends too little time with his young daughter. In a moment of candor, he tells Carmy that he’s “all I got.” That’s one reason for his constant, off-putting intensity. He’s lost so much. How can he lose the little that remains?

Like many viewers, I was drawn to Richie, in spite of all his anger and irrationality. Why? Because we know him. We know people like him. In some ways, we might even be him — especially if we’ve suffered profound loss. There are millions upon millions of Richies in these United States. ...

There is no one “Richie moment” like Ted Lasso’s singular act of forgiveness. There are instead a series of moments, but they all rest on an unshakable foundation: However dysfunctional they may appear on the surface, the crew at the sandwich shop actually love one another. And by “love” I don’t mean anything that looks sentimental, or even particularly tender. ...

One of the most beautiful passages in all of Scripture is in the Book of Isaiah. In Christian tradition, the prophet describes the coming messiah and declares, “A bruised reed he will not break, and a faintly burning wick he will not quench.” Richie is the very definition of a bruised reed, and as is so often the case, his bruises don’t manifest themselves in attractive ways. It’s easy to love someone who presents as vulnerable. It’s harder to love those who manifest their pain with rage and snarls.

I’ve seen this with my own eyes. I’ve seen how we’ve become a nation of bruised reeds, busy breaking one another. We see the rage but we miss the pain. We exclude the very people we most need to include. We lash back to inflict even greater wounds. We forget to seek the virtues hidden under a shell of vice. ...

[M]y amateur recommendation is to give Moss-Bachrach, the actor who plays Richie, all of the awards. Now. Episode by episode, his performance reveals both the nature of suffering and the simple human power of telling a person in pain — by deeds even more than by words — that he will not be left behind, that he has a place where he truly belongs.

Editor's Note:  If you would like to receive a weekly email each Sunday with links to the faith posts on TaxProf Blog, email me here.

Other op-eds by David French: