Greens refer PwC to Nacc; yes campaign holds voice events across the country – as it happened
PwC’s irrepressible altruism
If there was a betting favourite for whatever crazy name PwC and Allegro will come up with for the company that emerges from Project Bell, it must be something like To Be Determined Pty Ltd, which is right up there with Magical Mystery Tour.
The only detail about the Bell deal that acting chief executive Kristin Stubbins offered the NSW parliamentary inquiry last Monday was about PwC’s commitment to altruism: stating categorically that “PwC will make no financial gain” from splitting off the firm’s government work, and that after their investigation PwC would name “everyone who has done a wrong thing”.
The great unravelling: Inside PwC’s game-changing week
The unravelling began with an email to all staff at 1.04pm last Sunday from PwC Australia’s acting chief executive Kristin Stubbins, who opened with a polite apology for interrupting everyone’s weekend to “share a couple of important updates”.
The tone was upbeat – Stubbins thanked everyone for their patience, resilience and support – but it couldn’t mask the ugly truth in her updates. PwC global was seizing control of the Australian operation and installing a new CEO and the firm was planning a fire sale of its once mighty government consulting practice – a business which had generated about $600 million in annual revenue – to private equity investor Allegro Funds for just $1.
PwC acting chief executive Kristin Stubbins speaks during a parliamentary inquiry this week. Edwina Pickles
While Stubbins’ update quickly became public, a hastily arranged emergency meeting later held at about the same time between Australian partners and PwC global chairman Bob Moritz went under the radar.
Moritz was anything but polite as he blamed the Australian partnership for the crisis, one attendee said. The “berating” went down badly with an audience already reeling from the news that PwC global was taking over the Australian firm by installing global clients and industries leader, Kevin Burrowes, as CEO without a partnership vote.
This was a bitter pill to swallow for the members of a firm that has been the largest accounting firm in Australia since the very first Business Review Top 100 list in 1999 and which is now likely to end up smaller than long-time rivals Deloitte, EY and KPMG. It is a devastating come-down for an outfit that has long prided itself on being the premium brand among the big four consulting firms.
The scandal has already spawned an Australian Federal Police investigation, three parliamentary investigations and a new inquiry by the Tax Practitioners Board, the body which uncovered the leaks in the first place.
The partnership of 900 and roughly 10,000 staff will suffer for the actions of an out-of-control portion of its tax division that, in the words of Senate committee, led PwC into “a deliberate strategy over many years to cover up the breach of confidentiality and the plan by PwC personnel to monetise it”.
In her email, Stubbins said it had been “an honour” to be the firm’s acting CEO and that she was “really proud” of the actions taken during her short reign. But she also issued a veiled warning about what was to come under incoming leader Burrowes.
“Kevin’s extensive knowledge of the PwC Network standards and governance structures will be a huge asset to our firm as we continue our journey to rebuild trust and confidence among our clients, people and stakeholders,” she wrote.
Moritz’s private remarks were caustic and he didn’t hold back in public either. In a statement outlining the changes, he said “under past leadership, PwC Australia failed to meet the Network’s Code of Conduct and uphold the Network’s professional standards and values. Its past actions are not representative of the work and behaviours of PwC around the world and I am deeply sorry to our clients, our broader stakeholders and our people. PwC Australia has significant work to do and I am confident that the steps they are taking with the Network’s support will result in a stronger firm.”
The message couldn’t be clearer to partners: once PwC global has its way with this wayward branch office, what will be probably left is a smaller, humbled outfit that offers core audit, consulting and tax services and is led by a new team. This tiny circa $3 billion operation will not be allowed to affect the PwC’s global $US50 billion ($75.5 billion) machine.
While the firm has emphasised that Burrowes, currently based in Singapore, won’t formally take up the CEO role until he clears Australia’s immigration requirements, he was in the country this week for a short visit to take stock of the situation. Everyone who met him is unanimous in their assessment: this is not a man to be trifled with. It was clear there will likely be no limits to the changes he will make to reform the firm, they said.
If the unceremonious naming of four partners involved in the tax leaks scandal at the start of June was seen akin to casually throwing chum from a shark boat, what will follow over the following months will be the biggest feeding frenzy of broken careers since the collapse of former big five firm Arthur Andersen in 2002.
PwC will survive – its auditing services, if nothing else, remain critical to investors – but it, and the sector, will never be quite the same again. This “journey to rebuild trust and confidence” will be painful and likely take years.
On Monday, Stubbins provided more detail about the proposed sale of the firm’s government, health, infrastructure, defence and risk consulting business during an appearance at NSW parliamentary inquiry into consultants. It was the first time she had addressed the tax leaks scandal in public since she took over from former leader Tom Seymour.
Stubbins told the inquiry the firm’s leaders believed the Allegro deal was the best way to save the jobs of the 1500 staff left without work after the Department of Finance cut the firm off from future contracts for lying about the extent of the tax leaks scandal.
During her hour-long appearance, she also repeatedly apologised for the confidentiality breach, promised that the firm was reforming its operations but also defiantly emphasised just how much the firm’s clients relied upon the advice and help of the firm’s operatives.
“[I] would just say that we believe by having two completely independent firms, there will be no disruption to client service. We play a vital role in providing services to government,” she said. “But also we’re making sure that approximately 1500 or more staff have job security ... we are confident that the transaction is a good one and offers the best opportunity for our staff to thrive and succeed.”
She added: “PwC Australia will make no financial gain from the transaction. We’ve taken this step [selling to Allegro] because it is the right thing to do for our public sector clients to ensure continuity of service and to protect the jobs of the many talented people in our government business. Over 1500 jobs.”
The pitch, first revealed in AFR Weekend last Friday and fleshed out by the parties on Sunday, is that Allegro will create a company, codenamed Bell, with about 130 PwC partners and up to 2000 staff that will have about $300 million in theoretical billings.
This proposed company will only provide consulting services to public sector organisations and will have what Allegro describes as “ASX-listed standards of governance” with a company structure and an independent chairman and a majority of independent non-executive directors on its board.
The plan, which is structured to appease concerns about potential conflicts of interest, will only offer consulting services to governments and will not service commercial organisations. That means its viability depends almost entirely on the Albanese government and Department of Finance officials. Neither group has commented publicly so far.
Stubbins’ testimony on Monday made it clear that many details of the deal were still being fleshed out. She also revealed that PwC and Allegro had yet to define key aspects of the deal, including if PwC would still audit government entities or advise state-owned corporations if the sale went ahead.
She told the inquiry PwC was seeking to sign the deal with Allegro by the end of July, which would lead to the transfer of roughly 130 partners and 1750 staff (including additional staff from risk advisory) to Bell by September.
The urgency around the deal, which was conceived only in mid-June, stemmed in part from concerns that state governments would soon follow the Commonwealth in effectively banning PwC from extending existing contracts or signing new ones. “My mail was that the states were going to start [cutting] us off soon,” one PwC partner says.
In the background, Stubbins’ executive team has been forcing dozens of partners into early retirement. Some were high performers, cut down in what should have been the prime of their careers. One insider said another group being exited were veteran partners with deep connections within the partnership. They are known informally as “burden” partners because of their cost compared to their contribution to the firm’s bottom line.
The aim is to slim down a firm that had in the past been willing to give any new service a try if there was money to be made. These changes had to be made by the end of the financial year on Friday so that the firm could go into the 2023-24 year with a radically reduced cost base.
There was more to come. During yet another hastily arranged meeting on Wednesday at about 3pm, partners were told that the total income pool available to them will be cut by 20 per cent in 2023-24. They were told that the reductions would be graduated so that higher-earning partners would take more of a hit than junior partners. Partners expected to earn between $340,000 and $3.7 million this financial year. One PwC partner drily noted: “This has cost partners a lot of money.”
An attendee said the details were typically vague. Presenting in the meeting were Stubbins, deals leader Rob Silverwood and chief operating officer Liza Maimone. Silverwood, the man who came up with the idea to sell off the government consulting arm to save it, spoke about the proposed sale. Maimone spoke to financials. The overall message was lower partner income, cost cutting and limited redundancies.
The 130 partners going across to the proposed Bell deal will forfeit their retirement payments. That act alone will save at least tens of millions in future profits over time. There is now a large question mark over the long-term viability of the payment plan given the attention focused on conflicts of interest by former PwC partners (annual payments averaging $140,000 are made out of the continuing profits of the firm to eligible former partners).
The proposed sale to Allegro and the exiting partners will cut the 900-strong partnership to roughly 700, while the firm’s 10,000-strong staff is likely to be reduced to about 8000. This week, a relatively modest 47 staff members have been cut. This is just the start.
During her testimony on Monday, Stubbins made the startling admission that the firm began a serious investigation into the tax leaks scandal only when she became leader on May 8.
“I became the acting CEO six weeks ago ... we commenced a very, very detailed root-cause analysis at that time,” Stubbins said. “We have been doing a very, very thorough investigation, involving help from two external law firms, and so we will expect to announce consequences, you will see that publicly, and they will be severe.”
That promise to name names will destroy careers more and further reduce the size of the partnership. Those named will also be likely cut off from the firm’s retirement payment plan.
There’s been a lot of action on the public relations front, with individual partners and ex-partners hiring their own damage control experts. But this is the money phase, which means it’s time to start lawyering up. It’s not going to be pretty.