Jozef Imrich, name worthy of Kafka, has his finger on the pulse of any irony of interest and shares his findings to keep you in-the-know with the savviest trend setters and infomaniacs.
''I want to stay as close to the edge as I can without going over. Out on the edge you see all kinds of things you can't see from the center.''
-Kurt Vonnegut
PwC and the Big 4 have been in full defence mode before the Senate’s inquiry into consultants, and for good reason. They are protecting the global tax avoidance trade which earns them billions. Adam Lucas and James Guthrie report.
PwC and the Big 4 have been in full defence mode before the Senate’s inquiry into consultants, and for good reason. They are protecting the global tax avoidance trade which earns them billions. Adam Lucas and James Guthriereport.
The scandalous behaviour and lack of accountability of the Big Four accountancy firms – Deloitte, KPMG, PwC and EY – remains a regular feature of the news cycle as the Senate Inquiry into consultants draws to a close. While government consulting has been the fast-growth business for the Big 4, their bread and butter remains the other two divisions: audit and tax (avoidance) advice.
So it is that, despite the demands of the Senate for release of the Linklaters report into the PwC scandal in Australia – PwC Global had commissioned the report – the firm has refused to provide it.
As David Cay Johnston, US journalist and tax expert told his subscribers this week, “PwC is doing everything possible to make sure that big US and UK names – of partners and client companies – won’t hit the headlines outside of Australia.
An email cache uncovered by AFR showed that PwC had quickly put together an international swat team, “Project North America”, to market the intel to multinationals interested in avoiding new Australian taxes … PwC Australia had charged $2.5 million in fees in 2016 to advise 14 clients how to sidestep new multinational tax avoidance laws based on the intelligence shared by tax partner [Peter] Collins”.
Time for reform
Together with several critical accounting colleagues from Macquarie University, Sydney University, the University of Wollongong, and the Open University (UK), we have been making a series of parliamentary submissions, as well as writing popular and journal articles documenting these issues and recommending to the government a series of substantive reforms to the way auditing, accounting and consultancies are performed and operate in Australia.
MWM has been instrumental in drawing attention to the many questionable, unethical and even illegal practices in which the Big Four have allegedly been involved over many years. With this in mind, we have been invited by MWM to draw readers’ attention to some of this work in the hope that it might provide some more impetus for reform.
The audit oligopoly
A major reason for shining a light on the activities of the Big Four is that they audit 98 per cent of global corporations with a turnover of US$1 billion or more. They audit all the FTSE 100 Index firms in the UK, and ALL THE Fortune 500 companies in the US.
They also audit 97 per cent of Australia’s ASX 300 companies. Many of these companies are known to be involved in profit shifting, transfer pricing and the use of complex corporate structures involving tax havens. In July 2023, the Tax Justice Network reported that
US$480 billion a year is lost to global tax abuse.
Of that sum, US$311 billion is the result of cross-border corporate tax abuse by transnational corporations, while US$169 billion is the result of offshore tax abuse by wealthy individuals.
Although the Big Four have repeatedly been accused of engaging in conflicts of interest while assuring the public and regulators that there is ‘nothing to see here’, the empirical evidence suggests that there is, to the contrary, plenty to see here.
Audit quality and consultancy capture
Despite their dominance of global audit processes, the Big Four have repeatedly failed to identify fraudulent accounting practices in significant firms that have subsequently collapsed, including WorldCom, Thomas Cook, Lehmann Brothers, Carillion, BHS, IMDB and WireCard, to name just a few.
The evidence we have compiled in the parliamentary submissions and popular and journal articles we have hyperlinked below demonstrates how global consultancy firms – and most prominently, the Big Four, have captured regulatory agencies, government service providers, senior bureaucrats and members of ruling political parties.
This has enabled them to shape the legal, regulatory, and policy processes to favour themselves and their corporate clients to the detriment of the public interest in every nation in which they operate.
We wholeheartedly support calls by Michael West, Jeff Knapp and other contributors to MWM that appropriate regulation of audit, tax advisory and consultancy firms is essential to shift the balance from profit-making to protecting the public interest.
Our analysis supports previous calls by tax experts and industry insiders to break up these firms and force a structural separation between their strategic advisory, taxation and auditing functions. We have also argued there are substantial grounds for abolishing the opaque structures of limited liability partnerships (LLPs), which effectively enable these partnerships to internalise the extent of their accountability for wrongdoing.
Budgetary policy is so difficult that most countries in the west are unlikely to live happily ever after
Fairy tales are comforting because the lead characters usually possess a special power and something magical turns up, enabling everyone to live happily ever after. Across Europe and the US, governments are running their budgets in such fantasy worlds. You do not need a particularly Germanic view of public finance to know this is unlikely to end well.
The Congressional Budget Office warned last week that the US government finances were on an unsustainable path. The independent watchdog forecast that US government borrowing would be relatively stable over the next 10 years at about 6 per cent of gross domestic product. That level would far exceed the 3.7 per cent average of the previous 50 years, a period that included the global financial crisis and the coronavirus pandemic. To give a starker comparison, prospective US borrowing is also about 50 per cent higher than that proposed by former British chancellor Kwasi Kwarteng in his 2022 “mini” Budget, which blew up the UK bond market.
That alone would be sufficiently worrying if we could take the CBO figures at face value. But we should not because the congressional watchdog has been persistently too optimistic in recent years, partly as it has to base its projections on existing US government policy. This implausibly assumes most of Donald Trump’s 2017 tax cuts will expire at the end of 2025. It also assumes that the public spending restrictions in the 2023 Fiscal Responsibility Act will continue to bite after 2025. These suggest that discretionary US government spending including defence will decline from 6.4 per cent of GDP last year to 5.1 per cent in 2034. Over the past 50 years, these expenditures have averaged 8 per cent of GDP. These assumptions are also not credible.
Add to that the slightly optimistic assessment that the US government will be able to borrow short term permanently at below 3 per cent and the true fantastical nature of these forecasts becomes apparent. Even though the CBO’s headline projection is that US public debt is not on a sustainable path and will rise from 97.3 per cent of GDP in 2023 through an all time US record in 2028 and to 116 per cent in 2034, the prospects are significantly worse.
The US budget deficit is projected to remain historically high even with sharp reductions in non-defence discretionary spending
Share of GDP (%)
Revenues
Defence
Non-defence
Mandatory
Net interest
Although not as extreme, similar public finance fairy stories dominate European debates. Following the Kwarteng debacle and subsequent tax U-turns, independent forecasts by the UK’s Office for Budget Responsibility show UK debt stabilising as a share of GDP towards the end of the decade. But these forecasts rest on the UK’s own fictions that the government will start increasing fuel duty in line with inflation, that the revenue benefits of immigration will have no implications for public spending, that restraint in public spending will come at a time of huge dissatisfaction in public services and that big cuts in government capital expenditure are consistent with accelerated progress towards net zero.
We still do not know how the new European fiscal framework will operate in practice, but the debt sustainability analyses that will guide its work will be subject to the same Panglossian forecasting assumptions evident in the US and UK. The position will be no easier when you add the twin structural difficulties in the eurozone that the European Central Bank looks likely to be slow in easing monetary policy, inhibiting European growth, and that fiscal differences between northern and southern Europe remain stark.
The bad news for all western countries is that on top of far-too-optimistic forecasting assumptions, maintaining the quality of health and social security programmes with rapidly ageing populations will require higher taxes without the prospect of improved services. That is a difficult electoral offer.
The good news is that the necessary consolidation of budgets is far from impossible so long as we don’t start falling for new fiscal fantasies.
On the political left, the most pervasive fiction is that all the necessary funds can be raised from “the rich” with next to zero consequences for the rest of the population. To raise the sums necessary, higher taxes have to extend much further down the income and wealth distributions. The more concentrated they are, the more tax avoidance activity will be encouraged, limiting revenues.
The greatest illusion for centrists is that there is a way to persuade the public that higher taxes and more public investment is needed and in all of our collective interests. Examples of open, honest and successful revenue-raising programmes which minimise distortions by also reforming taxes are noticeable by their scarcity. Even textbook attempts, such as the 2002 increases in UK national insurance, chose the tax least visible to the public but also with the greatest labour market costs.
On the right, the long-standing fairy tale of choice is that tax cuts raise revenues. While true in rare specific cases, the overwhelmingevidence is that broad-brush tax reductions, such as those in the US in 2017, worsened the public finances, even if they were positive for growth.
But perhaps the biggest fantasy of all is the expectation that anything will happen to resolve unsustainable budgets without a crisis. We are much more likely to continue muddling along, pretending things are just about OK until something cracks. The trouble is that the fiscal system will break and there will be no happy ending.
