PwC and the ‘asbestos mulch’ still scoring government contracts
Despite being subjected to a full-scale government review, PwC recently won a fat audit contract with the NBN.
The mere whisper of PwC continues to cause hisses up and down Parliament Drive, with the disgraced firm effectively put in no man’s land regarding its ability to win further government work.
Department Finance chiefs confirmed to the Senate last month that public servants are still conducting a comprehensive review to find out whether PwC meets the “ethical standard for future contracting” across the whole of the public sector governed by Commonwealth Procurement Rules.
But not everyone in the Canberra blob got the memo. While said review was underway, the Australian National Audit Office awarded a significant $11 million three-year audit of the National Broadband Network to, you guessed it, the Excel legends over at the Kevin Burrowes-led PwC.
PwC won the work again after the audit office ran an open tender in August. This was some two weeks after Jim Chalmers and Katy Gallagher held their fire-and-brimstone press conference about the PwC scandal, announcing new laws intended to “restore public confidence and help prevent this from happening again”.
Rather than seeing PwC’s tender application come in and scoff “lol”, the audit office went ahead and handed them NBN Co’s accounts for the next three years. “I mean it’s the NBN Co, enjoy believing these numbers, lads… give it to PwC.”
Also, how about the front of PwC. Look we’re firmly in the penalty box, see there’s my foot, there’s the line right there. No one said anything about audit work for a government-owned monopoly, though. Wink.
‘Asbestos in the mulch’
This is all very top-of-mind for senators Richard Colbeck, Deb O’Neill and Barbara Pocock, who have been zeroing-in on which outsourcers should or shouldn’t sit on the panels which bid for government contracts.
Take Sayers Group, the eponymous consultancy business run by Luke Sayers, who despite being the CEO of PwC while the tax imbroglio took place – he insists he had no knowledge of the breaches – continues to glide past the mess at his old firm.
To the continued bewilderment of some, Sayers Group remains on not one, not two, but three panels for government work.
At the aforementioned hearing involving finance chiefs, O’Neill remarked that much of the response to the PwC scandal has been “buried beneath the surface into some sort of distorted and perverse quiet space that the gentlemen discuss and sort out between themselves”.
Pocock sarcastically asked “and it’s not even buried, is it?” Before Colbeck provided his own dry commentary, calling it “asbestos in the mulch”. Perfect analogy-execution senators, 10s from all judges.
It’s really quite remarkable watching the many, many hours of hearings see them arrive at this point – Liberal, Labor and Green taking the piss, partisanship gone, plainly pointing out toxic elements that remain rooted in the delivery of government in this country.
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Mark Di Stefano is Rear Window columnist, based in the Sydney newsroom. He previously worked at BuzzFeed, the Financial Times and The Information before joining the Financial Review as a media and tech correspondent. Connect with Mark on Twitter. Email Mark at mark.distefano@afr.com
The last thing KPMG or any of the big four consulting firms needed was a big client joining the bashing party.
Battered from pillar to post in government inquiries and the court of public opinion, the one place consulting firms have been protected is inside boardrooms.
Who’s to blame in the Downer-KPMG case? It’s a corporate whodunit. David Rowe
There, the big four are still the go-to for statutory audits and other assurance and advisory work thanks to their decades of service, corporate knowledge, big teams, global footprints and directors’ often long ties with the respective firms. They still keep corporate Australia’s wheels spinning.
That’s what makes the Downer EDI board’s decision to go after KPMG so intriguing. The top-100 listed Australian company, facing class actions of its own, has sought to blame its long-time auditor KPMG for failing to detect accounting irregularities.
Who’s to blame? It’s a corporate whodunit. The big company, the big audit firm, the alleged continuous disclosure breaches and the fired-up investors – nursing losses and unhappy enough to pile into class actions. KPMG says it will vigorously defend the claims.
But directors will be watching for another reason: the fallout between a listed company and one of the four professional services giants in corporate Australia, which could hit KPMG much more than the $5 million a year forgone in Downer’s audit fees.
This case lands as the tectonic plates under corporate Australia threaten to start shifting. The old world order of KPMG, PwC, Deloitte and EY dominating both statutory audits and advisory work is up for debate, as concerns grow about potential conflicts, capability and the cosy relations between many boards and management teams and the consulting firms.
Downer EDI chairman Mark Menhinnitt with CEO Peter Tompkins. Louise Kennerley
The tipping point was last year’s PwC tax leaks scandal, which shone a light on the potential for conflicts inside consulting firms. The politicians are doing a splendid job exploiting that topic and putting serious heat on the likes of KPMG boss Andrew Yeates.
The penny has dropped that consulting firms’ tentacles reach the whole Australian corporate universe.
These firms’ partners rub shoulders with CEOs and CFOs, their former partners hang out with directors and join their boards, while graduates often leave after a few years to run finance functions inside big corporations. It has been like that for decades.
Directors know all about the relationships – but can often rightly point to the benefits of hiring former KPMG/PwC auditor partners or consultants to chair their audit or remuneration subcommittees.
There is definitely a place in corporate Australia for someone who has spent a career grilling CFOs over their financial statements, revenue recognition policies and amortisation schedules. But some of the inside baseball connections are getting a bit much.
Growing scepticism
Investors and proxy advisers are wising up and asking chairmen to explain board appointments, auditor nominations and other audit and assurance fees paid to the likes of KPMG. There is growing scepticism about some of the old world order.
The movement is gaining steam – the consulting firms, under pressure to grow revenue, know it. The directors know it, too. Investors are poking around situations like Downer and Lendlease, for example, which is another long-time KPMG client. There are renewed calls for fresh blood and turnover in mandates. KPMG signed Downer’s accounts for the past nine years, taking over from Deloitte in 2015.
So the Downer/KPMG case is worth watching, although these things tend to be settled before the tea really starts flowing.
KPMG said more about the matter than its soon-to-be former audit client on Monday. A spokesman said it was “disappointed by” Downer’s decision to commence proceedings and bring a cross-claim against the firm.
“We have been open in our engagement with the company throughout this matter and continue to have a high degree of confidence in the audit work performed,” he said.
It is not unheard of for an auditor to be swept up in a class action claim – but it is hardly something to crow about. Indeed, we usually see companies or class action firms go after big four auditors when a business has gone bust, not springing back into some sort of respectable shape like Downer.
While the class action lawyers will try to extract money out of whoever they can, it will be interesting to see what sort of case can be built against the former auditor.
How much should an auditor know? The number crunchers go into the likes of Downer twice a year to review the financial statements, and one or two other times to test internal controls. All up, an auditor might spend eight weeks a year with such a client, and juggle a few assignments at a time. Partners and their charges are often stretched, particularly in the busy seasons that occur in the weeks after the June 30 and December 31 balance dates.
The class actions, as explained by Downer in its half-year report, allege breaches of continuous disclosure obligations and that it failed to correct or qualify various statements about a maintenance contract in its Australian utilities business and the impact on Downer’s financial performance. Downer is fighting the claims.
The contract was Downer’s five-year, $600 million dealwith Victorian power network company AusNet (now owned by Canadian investor Brookfield).
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Anthony Macdonald is a Chanticleer columnist. He is a former Street Talk co-editor and has 10 years' experience as a business journalist and worked at PwC, auditing and advising financial services companies. Connect with Anthony on Twitter. Email Anthony at a.macdonald@afr.com
Scyne goes to court to stop partner working
PwC spin-off Scyne Advisory has made a legal bid to stop a former partner moving to services contractor Downer EDI.
Scyne issued former partner Connie Heaney with the injunction application ahead of her scheduled start date at Downer on Monday.
A Monday morning NSW Supreme Court hearing about the matter ordered the parties to exchange documents ahead of a further hearing on Thursday. In the meantime, Ms Heaney has begun working at Downer.
Canberra-based Ms Heaney has experience working on Defence and other government-related projects.
She formally moved to Scyne in November and before this had worked at PwC as a partner for three years, including 1½ years as a partner. She also worked at KPMG for a decade in customer and operations advisory and then as part of the firm’s law practice.
From PwC to Scyne
Ms Heaney was part of a group of roughly 100 PwC partners and about 1200 staff that moved to Scyne when the big four firm’s public sector consulting arm was sold to private equity investor Allegro Funds for $1.
The firesale came about because PwC was effectively cut off from winning new federal government work when the extent of its tax leaks scandal became public in May.
Scyne is being represented by Damian Sturzaker, a partner at Marque Lawyers, and the summons and affidavits were co-signed by Mark Jansen, a Canberra-based partner of Scyne and the firm’s head of defence work. Ms Heaney is being represented by James Simpson of Hamilton Locke.
A spokesman for Scyne said the firm would not comment on the matter because it was before the court. Ms Heaney could not be reached and her legal representative declined to comment.
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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
KPMG hit with £1.5mn fine for ‘serious failings’ in M&C Saatchi auditKPMG has been fined £1.46mn by the UK accounting regulator for “serious failings” in its audit of M&C Saatchi, the advertising agency that was hit by an accounting scandal in 2019.
The Financial Reporting Council fined the Big Four firm for failing to meet audit requirements during its review of M&C Saatchi’s accounts for the year to December 2018.
“KPMG’s audit did not meet the required quality standards in a number of respects amounting to serious audit failings and breaches of audit standards,” said Claudia Mortimore, deputy executive counsel at the FRC.
The disclosure of accounting errors forced M&C Saatchi to adjust its headline profits before tax by £14mn and its statutory pre-tax profits by a total of £28.1mn for 2018 and previous years.