Mr Jordan, the outgoing tax commissioner, said the tax leaks scandal has forced Australian lawmakers to reexamine how the big four firms are structured and regulated. He said it would be a good idea to treat the big four firms like large unlisted companies.
“I think it’s a good time to look at the regulatory governance of partnerships,” Mr Jordan told The Australian Financial Review.
ASIC polices only a ‘sliver’ of big four firm activities
Edmund TadrosProfessional services editor
ASIC chairman Joe Longo says the corporate regulator can only police a “sliver” of services provided by the big four accounting firms because they operate in a grey legal area where they are neither “true partnerships” nor covered by federal corporate laws.
Mr Longo said last week the big four firms – Deloitte, EY, KPMG and PwC – were “very hard to regulate” due to the “extraordinary range” of services they offer and because they are governed by state-based partnership rules not designed for firms of their size.
A senior Australian Securities and Investments Commission officer also told the hearing the governance structures put in place by the firms – such as PwC promising to apply ASX corporate governance principles to its operations – were unenforceable by the regulator.
ASIC chairman Joe Longo says the regulator has limited oversight over the big four consulting firms. Alex Ellinghausen
The frank description of ASIC’s lack of power over the big four firms comes as outgoing tax commissioner Chris Jordan recommended the partnerships be brought under corporate laws to ensure firm executives have the same legal obligations as senior company leaders have under the Corporations Act.
The government is examining how the big four consulting firms should be regulated following the PwC tax leaks scandal. Ongoing parliamentary inquiries have questioned the ability of the firms and the sector to govern themselves following the tax matter and other high profile scandals such as widespread exam cheating at KPMG and workplace misconduct at EY.
The rapid growth of the big four means that existing laws no longer effectively apply to the firms, the ASIC chairman said.
“There’s no overarching federal law [around partnerships] and there is certainly no, to my knowledge, state-based regulator or institution of any note that [is] worrying about the affairs of a PwC or a KPMG...so we’re talking about an area that I think is very hard to regulate, frankly,” Mr Longo told the Senate estimates economics committee on Thursday.
The committee was also told that ASIC tended to focus on the activities of auditors, liquidators and financial service licence holders, while tax agents were policed by the Tax Practitioners Board. This means the activities of the firms’ consultants are not specifically covered by ASIC.
Big four partners are required to be chartered accountants and subject to the sector’s ethical rules, but the professional body’s ability to effectively police its members has been repeatedly called into question.
The PwC tax leaks matter involved former PwC international tax partner Peter Collins sharing secret government information within the firm. It was then used to develop schemes to sidestep new tax laws he was helping to develop.
The TPB cancelled Mr Collins’ registration as a tax agent for two years over the matter. But the corporate regulator was forced to use its power over financial advisers to sanction Mr Collins, even though the wrongdoing was unrelated to providing financial advice. ASIC banned him from providing financial advice for eight years.
Only a ‘sliver’
Mr Longo said it up to the government to decide if ASIC’s remit should be expanded to include the big four partnerships.
“It’s absolutely the case that we’re operating in a modern environment where we have these huge consulting firms and professional service firms that provide services across an extraordinary range of activity across jurisdictions,” he said.
“And so I know that Parliament is looking at this, but...ASIC’s role in that, we’re a sliver of that activity. Now that it’s a matter of for government, whether that sliver expands, but it is a sliver at the moment.”
The big four firms have grown from having about 1300 partners in 2002, or about 330 each, to almost 2800 partners, or an average of about 700 partners each.
Separately, Mr Jordan, the outgoing tax commissioner, said the tax leaks scandal has forced Australian lawmakers to reexamine how the big four firms are structured and regulated. He said it would be a good idea to treat the big four firms like large unlisted companies.
“I think it’s a good time to look at the regulatory governance of partnerships,” Mr Jordan told The Australian Financial Review.
“If you’re looking at what good has come out of the PwC matter, to my mind it has led to a clear focus on the regulatory governance. The firms have historically been partnerships, reflecting the regulatory discipline of making auditors, and others like liquidators, personally accountable.”
Outgoing Tax Commissioner Chris Jordan. His last years in the job have been dominated by PwC and GST scandals. Louie Douvis
He said that the big four are “systemically important large partnerships” which offered a broad range of services and should be subject to “ASIC corporate governance requirements”. A similar idea to bring partnerships under federal corporate laws has already been suggested former competition watchdog Graeme Samuel.
“I’m not saying treat them like a listed company, but like a large company...I don’t make policy. But personally, I think that would be well worth looking at,” Mr Jordan said.
This type of change would require laws requiring corporate audits to be signed off by an individual to be changed to allow auditors to work as part of a corporate structure, he said.
“That’s why you have partnerships, so the partner can sign [the audit] on behalf of the partnership,” he said.
“But how do you ensure organisational accountability? Partnership, with joint and several liability, on its face is a higher accountability than that of a corporate executive or director, but does the sheer number of those accountable blur this responsibility?”
He said many of the “fundamental assumptions” around auditing needed to be revisited.
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Edmund Tadros leads our coverage of the professional services sector. He is based in our Sydney newsroom.Connect with Edmund on Twitter. Email Edmund at edmundtadros@afr.com.au
Air of Kafka- Never mind the ACCC, Banducci, in Europe they fight anti-competitive behaviour with dawn raids!
“The European Commission raided fragrance and fashion companies, including Gucci-owner Kering, the energy drink maker Red Bull and more, all on suspicion of having violated EU anti-trust laws. The commission also raided tyre companies including Pirelli and Michelin for suspected cartel activity.
“In the UK, the Competition and Markets Authority accused food producers of contributing to food-price inflation by pushing up prices by more than their costs after launching an inquiry into the groceries sector.”
