US regulator fines PwC Australia for late disclosure of leaks scandal
The powerful US audit watchdog has fined PwC Australia $US600,000 ($921,000) for failing to disclose that it was being investigated by the Tax Practitioners Board for more than a year, in the latest fallout to hit the firm over its tax leaks scandal.
The US Public Company Accounting Oversight Board found that the “siloed nature of the firm’s practices, combined with a lack of [candour] by firm leadership” had caused the delayed reporting.
The PwC scandal was the biggest business story of 2023. Martin Ollman
The PCOAB also ordered PwC Australia to strengthen its compliance with its regulatory requirements. The firm consented to the order without admitting or denying the board’s findings,
The fine, which focuses only on the Australian firm’s tardy reporting, adds new risk to the firm’s global operations from the scandal, which stemmed from a former PwC Australia partner sharing confidential government information with PwC personnel.
PwC International, which currently has “oversight” of the Australian firm, has defied Senate orders to produce a report into the international aspects of the tax leaks matter. The PCOAB fine is the first time an overseas regulator has acted over the matter.
The PCOAB’s “settled disciplinary order” stated that PwC Australia violated the regulator’s rules and quality control standards, specifically by failing “to timely report” the start and conclusion of proceedings against the firm by the TPB.
‘Not acceptable’
“Failure to disclose required information is not acceptable, and the PCAOB will hold firms accountable,” Ms Williams also said in the statement, released on Thursday (Friday AEDT).
The order requires PwC Australia to undertake certain remedial measures to establish, revise, or supplement, as necessary, policies and procedures, including monitoring procedures.
The changes are to provide the firm with reasonable assurance that personnel comply with its policies and procedures related to reporting requirements and those policies and procedures related to compliance are suitably designed and are being effectively applied.
A PwC Australia executive told the Australian Senate inquiry into consultants in October that the firm had “unfortunately” missed the statutory 30-day deadline to self-declare “reportable events”.
The firm was first informed in February 2022 about the TPB investigation. The TPB made its finding against the firm and the former partner in November 2022. The matter was reported by The Australian Financial Review in January 2023.
Late report
PwC Australia did not submit its “special report” about the “administrative or disciplinary” matter to the PCAOB until June 20, according to its public report on the regulator’s website. This is more than a year after the initial TPB alert.
PwC Australia, like other big local auditing firms, has a range of reporting obligations to the PCAOB because of its role in auditing companies based in the US such as the American operations of companies such as Westpac and Woodside Energy Group.
In September 2021, the PCAOB fined KPMG Australia $US450,000 over “widespread” cheating on tests designed to ensure partners and staff acted with integrity and had the relevant skills for their work.
Separately, PCAOB also fined PwC US $US2.75 million over auditor independence violations relating to the actions of the firm’s tax experts.
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Timothy Moore writes on monetary policy, equities, commodities and currencies. He is the overnight markets editor and writes Before the Bell. Connect with Timothy on Twitter. Email Timothy at timothy.moore@afr.com
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
The once-secret legal agreement between PwC International and its member firms gives five senior partners sweeping powers over a global brand that generates $US53 billion ($81 billion) in revenue and employs more than 364,000 staff across 151 countries.
The “supervised remediation” section of The Regulations of PricewaterhouseCoopers International Limited allows the five-member global network leadership team to take control of a PwC branch if they decide that member firm is a “defaulting firm”. They can take actions such as order “remedial action” and appoint new leadership.
PwC International’s network leadership team: PwC global chairman Bob Moritz (left); Asia Pacific and China chairman Raymund Chao; Europe chairman Petra Justenhoven; Kevin Ellis, the alliance senior partner for UK and the Middle East; and senior US partner Tim Ryan. Bloomberg, LinkedIn
The rarely used powers were activated last June when PwC International informed PwC Australia it was a “defaulting firm” under its regulations due to the tax leaks scandal. The local outfit was ordered to “take all necessary steps” to appoint global partner Kevin Burrowes as interim chief executive.
Mr Burrowes was appointed a partner in PwC Australia and its chief executive days after the June letter from PwC International. He now reports to PwC Australia’s board of partners and not directly to PwC International.
But more than nine months after the legal letter, PwC Australia remains under the “supervised remediation” of the global firm. The firm, for its part, insists that PwC International is not in control of PwC Australia but rather has an “oversight” role.
The regulations are closely-held and typically not seen by rank and file partners. The Australian Financial Review, which has previously reported on the remediation letter, has seen excerpts of the firm’s international regulations.
One senior PwC partner described the regulations as similar to the standard international franchise agreements used by other multinational brands.
Another described it as akin to having rarely invoked powers designed to act as a “Sword of Damocles” held over member firms to ensure they behave. A third former partner said that PwC International is typically reluctant to intervene in a member firm’s activities but acts decisively when it does take action.
Excerpts of PwC International’s regulations.
PwC International is the London-based company that runs the PwC brand and sets and polices member firms that operate within the global PwC network.
The regulations state that the firm’s global network leadership team – made up of PwC global chairman Bob Moritz; Asia Pacific and China chairman Raymund Chao; Europe chairman Petra Justenhoven; Kevin Ellis, the alliance senior partner for UK and the Middle East; and senior US partner Tim Ryan – can declare that a member firm is a “defaulting firm” for a broad range of reasons.
These include that a member firm “is in breach of any of the network standards, policies, the organisational documents of the company or any related agreement” or “by act or omission ... has caused or is likely to cause a breakdown in trust and confidence in the defaulting firm or significant damage to the reputation, goodwill or standing of the PwC Network”.
‘Take remedial action’
Once the global leadership team has made this determination, they can then order the “defaulting firm” to “take remedial action reasonably designed to cure any breach or act or omission”. To avoid doubt, the regulations state the network leadership team “may impose whatever remedial action it deems fit upon a defaulting firm”.
Excerpts of PwC International’s regulations.
The network leadership team can also replace management for a wide range of reasons, including that senior partners have “engaged in fraud or corruption; wilfully neglected the business and/or their responsibilities to clients, the PwC Network or the subject firm; committed material breaches of legal or regulatory requirements; intentionally or recklessly disregarded the interests of the PwC Network... or any member of territory senior management is unable to perform or incapable of performing... his or her role”.
Member firm leaders can also be replaced when they have “caused or are likely to cause a breakdown in trust and confidence in the subject firm or territory senior management or significant damage to the reputation, goodwill or standing” of PwC.
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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
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