EY partners grilled at inquiry over failure to disclose Santos contract while working on government’s ‘future of gas statement’
The inquiry’s chair, Greens MP Abigail Boyd, told the inquiry that conducting modelling alone presented a potential or perceived conflict of interest that should have been disclosed for the sake of transparency. She also accused the firm of “breathtaking arrogance” in response to the committee member’s questions.
PwC pays $10m to partners who moved to Scyne
PwC Australia paid 23 of the roughly 100 partners who moved across to Scyne Advisory the value of their accrued partnership retirement payments last year, a move that cost the consulting giant more than $10 million.
The payments, calculated as a percentage of what eligible partners would have been owed, were done to sever ongoing financial ties between the consulting spin-off and the embattled big four firm.
The Australian Financial Review has been told the amounts were the subject of hard-fought negotiations between the eligible partners and PwC, and that the highest individual payout was almost $1 million.
Scyne’s Diane Rutter, Adrian Loader and Rich Gwilym at the inquiry on Monday. Peter Rae
The payouts were revealed during a NSW parliamentary hearing into consultants held in Sydney on Monday, which was also told by Scyne’s operatives how their corporate structure and public-sector-only focus eliminated the conflicts inherent in the big four consulting partnership model.
Later in the morning, representatives from EY were forced to repeatedly reassure the committee the firm’s practice of working with public sector and private sector clients did not create a conflict of interest for the big four firm.
Scyne was created when PwC sold its public sector consulting arm to private equity investor Allegro Funds in July 2023 for $1, after the big four firm was effectively cut off from winning new federal government work when the extent of its tax leaks scandal became public in May.
The tax leaks scandal involved a former PwC tax partner sharing secret government information within the firm. It was then used to develop structures to sidestep new tax laws he was helping to develop. The scandal has hurt the firm’s Australian operation and increased scrutiny of the multibillion-dollar consulting sector.
‘No residual financial link’
Scyne Advisory managing partner Rich Gwilym told the inquiry that the payouts were to ensure Scyne advisers were no longer linked financially to PwC.
“[There] was a valuation that was undertaken by PwC and a payment made to equate to the benefit that had been accrued up until that point in time,” Mr Gwilym said in Sydney on Monday.
NSW Greens MP Abigail Boyd asked: “Just to be absolutely clear, then there is no residual financial interest [by the former partners] in … PwC?”
Mr Gwilym confirmed “there is no residual financial interest and there’s no residual link for the partners that have come across into Scyne [from] PwC”.
Mr Gwilym also said Scyne does not have a similar retirement payment plan, with the former PwC partners, now classed as directors, receiving a monthly salary and superannuation payments subject to pay-as-you-go taxation at the new firm.
NSW Greens MP Abigail Boyd at the inquiry. Peter Rae
All have ‘an equity interest’
PwC’s retirement payment plan pays more than 625 former partners $140,000 a year – some for life – out of the profits of the firm. It is designed to reward former personnel for their work, stop them from joining rivals and encourage loyalty to PwC long after they have departed. It has also raised conflict of interest concerns.
Allegro Funds co-founder Adrian Loader earlier described how Scyne had been developed upon a “conflict-free foundation”. This included the new consulting firm being structured as a corporation in contrast to the partnership structures of the big four firms, serving only public sector clients and having what he described as an “ASX level of governance”.
“We needed to eliminate the inherent conflicts of serving both public and private sectors,” Mr Loader said. Scyne, which also has about 1200 former PwC staff, does not provide services to the private sector.
“If you’re doing work on both sides, that’s where the inherent conflict is,” Mr Loader said.
“The real question is, ‘How do you manage it? And what are the ramifications for how you actually manage it?’ And, look, it’s easier to manage if there’s no inherent conflict.”
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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
Scyne v EY: Allegro’s Adrian Loader just wedged the consulting sector
By separating itself from PwC, Scyne and its private equity backer Allegro have created a huge problem for rivals that don’t want to follow its example.
Inherent conflict.
With just two words, Adrian Loader, the founding partner of private equity firm Allegro and board member of Scyne Advisory, the former government consulting arm of PwC, deftly nailed the problem that EY, Deloitte and KPMG face if they want to avoid being forced to spin off their government services divisions.
Loader appeared on Monday before NSW parliament’s inquiry into the state government’s use and management of consulting services. Scyne, which isn’t even three months old, was established after Allegro paid just $1 for the PwC government consulting arm that was at the heart of last year’s tax leak scandals.
Allegro founding partner and Scyne board member Adrian Loader at Monday’s hearing. Peter Rae
Allegro’s thinking in setting up Scyne, Loader explained, was simple. The new firm needed to be separate from PwC. It needed to have ASX levels of governance. And it “needed to eliminate the inherent conflicts of serving both the public and the private sector”.
Loader said Scyne staff would still need to manage individual conflicts, but this process would simply be “easier to manage if there’s no inherent conflict”.
His words reverberated through the evidence of the second set of witnesses from EY, led by government and health sciences leader Catherine Friday, and risk and independence leader Leigh Walker.
Friday argued the structural separation between Scyne and PwC did not reduce conflicts – individuals could still be conflicted, there may be conflict within a specific sector, or conflicts in work for different departments.
“I think it’s down to the culture processes and practices that you have within your organisation for managing those conflicts of interest, be they real or perceived,” she said.
But inquiry chairwoman, Greens MP Abigail Boyd, leapt on this in the context of an apparent conflict between EY’s work for the government on economic modelling for gas policy, and its audit work for Santos.
Friday and Walker insisted there was no issue under the professional services regulatory framework and EY’s own standards. The economic modelling work did not have anything to do with Santos and, in any event, EY is legally barred from advocating for audit clients.
But Boyd was undeterred, arguing the average person would just see a perceived conflict. “It makes the government look bad. It makes our democratic institutions look bad.”
The EY witnesses had every right to feel frustrated at the use of the Santos example. Very strict rules set out what an auditor can and can’t do, and to those who work under this regime every day, there does not appear to be a real or perceived conflict. It would likely be a different story if EY was providing Santos with non-assurance services.
But Monday’s exchange showed just how far perceptions have shifted since the PwC scandal broke and since Scyne was formed.
The conflicts the consulting sector thought were manageable, and that the public would never even think about, are now in the spotlight. And politicians, who appear to have lost faith in the ability of the big three to manage them, can point to Scyne and Loader’s “inherent conflict” argument and say, why not be like them.
Ironically, the firm that was established as a result of misconduct, and that arguably should be the black sheep of the sector, may have wedged its rivals.
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James Thomson is senior Chanticleer columnist based in Melbourne. He was the Companies editor and editor of BRW Magazine. Connect with James on Twitter. Email James at j.thomson@afr.com