We’re getting along with PwC, ATO says
By Tom Ravlic
The Australian Taxation Office has told a review of PwC Australia’s tax governance and internal control framework that relationships with the firm and the revenue authority are much better.
Former ATO second commissioner Bruce Quigley has done a second review of PwC Australia’s internal systems, and it reveals that tax office officials find the firm is more transparent with them.
The Tax Office goes to war with Seymour as Sayers goes big
While PwC tax divisions was mired in a paper war with the Tax Office, the firm transformed from a conservative accounting firm to hard-charging, hard-drinking financial services company.
“I even got on the pitch and went out and visited clients, which was almost bloody unheard of for a CEO,” Luke Sayers admitted. It was 2018 and it was an unprecedented crisis.
An angry Australian Taxation Office had fired the first shot in what would prove a lengthy, hot war with PwC, and it had found its mark.
Having promised the firm’s biggest clients that their sensitive documents would be legally protected from the ATO, the head of PwC Australia was being forced to visit those same clients and admit they got it wrong.
“I remember going to a number of clients because a part of the issue here was it wasn’t the firm’s legal professional privilege to forego, it was the client’s,” Sayers told parliament last Friday.
“And the client needed to give permission. And so there was a massive exercise to go and talk to clients, which you can imagine how difficult that was.”
There were clients who just waived their legal rights. But many didn’t, and they went berserk. PwC’s advisers had promised the material would be protected, they complained. What was going on? Tax clients of PwC that claimed privilege over documents included Glencore, Carlton and United Breweries’ then owner Anheuser-Busch InBev and meat giant JBS.
It got worse. The firm also had to explain to certain clients that some of the correspondence they thought was protected by legal professional privilege but would now be visible to the ATO included partners disparaging each other, the Tax Office, and – most excruciating of all – the clients themselves.
“There were a number of instances where the legal privilege model was not followed appropriately,” Sayers said last week. “And we needed to go and sit down with clients and explain that and then work between the client, the Tax Office and ourselves…[in] producing thousands and thousands and thousands and thousands of documents and emails.”
This document war started immediately after the then-senior tax officer Mark Konza found out in August 2016 that PwC had helped ride-share giant Uber restructure in a way that sidestepped new tax laws designed to force multinationals to pay more tax in Australia.
Long frustrated with PwC’s tax advisers, it was the final straw for the ATO. It responded by firing off dozens of formal document production notices to the firm; more than 46 between 2016 and 2021, each one requiring that thousands of documents be found and handed over.
The result was to mire the tax division, its internal lawyers, its risk and quality team, and eventually the CEO, in an expensive, time-consuming and years-long battle with one of its main regulators.
But four years after Sayers had taken the helm, the rest of the firm that was flying. The aggressive, sales-driven culture he led was delivering results. Partners were doing very well, and no one really wanted trouble within a small part of the business to rein in the success.
In part three of this special series examining the PwC tax leaks scandal, we reveal the firm’s questionable legal privilege strategy; the “full court press” the firm mounted in response; and PwC’s complete shift from conservative accounting firm to hard-charging, hard-drinking financial services company.
Push against aggressive schemes
The Tax Office presaged its document war against PwC with a series of warnings to the whole tax advisory sector.
Between 2015 and 2016, the Tax Office issued 17 taxpayer alerts to warn advisers about emerging higher risk tax arrangements. Three referred to PwC-designed tax structures put in place by Uber and Adobe, to sidestep Australia’s new multinational tax avoidance laws.
To the Tax Office, PwC appeared to be over-represented in aggressive tax schemes, and this needed to be stopped. So officials began to use the agency’s all-powerful compulsory information gathering notices – known as 353s because they were from section 353 of the Taxation Administration Act – on the firm.
“So from 2016, the ATO started to serve notices upon the firm,” Beattie told parliament last week.
“And they were very broad notices in the sense that instead of being referable to particular clients, as many notices would, they were referable to tax alerts.
“So it was a very significant job to sit and determine the clients that actually fell within the tax alerts for the purpose of the production. So in 2017, there was constant engagement with the ATO, which certainly escalated by the time we got to 2018 concerning production.”
PwC got more requests than other firms because the ATO believed they were involved in more risky schemes. Other firms basically complied with the requests. But not PwC.
The firm and its clients resisted releasing material by repeatedly claiming the documents and correspondence being sought was protected by legal professional privilege. The principle protects communications and documents produced for the dominant purpose of legal advice between a lawyer and their clients from disclosure without the permission of the client.
The Tax Office responded to the legal privilege claims by issuing even more 353s, this time about internal PwC correspondence and documentations, including performance appraisals. As of mid-2023, the ATO was still seeking documents from the firm using these powers.
Contained within the correspondence are repeated instances of partners disparaging each other and the Tax Office. One example from February 2016 made public last week included former PwC tax partner Pete Calleja outlining a plan to convince politicians to install a board at the ATO to rein in the “highly politicised leadership” of tax commissioner Chris Jordan. This would, in Calleja’s words, impose “trust in a sustained manner” compared to what he describes as the “current opportunistic chaos”. It was all so personal – and the Tax Office now knew the poor regard in which they were held by the firm.
Also contained within the correspondence being handed over to the Tax Office were emails showing that PwC had used confidential government information to market its advice to clients like Uber – the leaks scandal that has triggered the break-up of what was once the country’s dominant professional services firm.
Legal privilege promises
The ability to claim privilege was actually part of the firm’s then strategy. Part of the thinking, according to a former senior partner, went: “The lawyers have legal privilege. Why don’t we do the same?′
That meant that one of the selling points for the firm’s tax advisers was the promise that the correspondence and documents related to the advice would be protected from disclosure thanks to legal privilege.
The problem was that the firm was frequently making promises about privilege based on protocols that they did not follow and therefore had no basis in law.
When the legal privilege claims were tested in court, the firm didn’t fare well. In 2022, the Federal Court ruled PwC incorrectly claimed privilege over the majority of the relevant documents related to its JBS tax advice.
Justice Mark Moshinsky found that 58 per cent of PwC’s claims of privilege over a sample of the documents were wrong.
The ATO had taken JBS to court accusing it of tax avoidance and sued to overturn a claim of legal professional privilege by PwC over nearly 44,000 documents.
The 353 document battle with the Tax Office led to a falling out between Tom Seymour, then a key lieutenant of Sayers and the head of Financial Advisory (where tax and legal sat) and the Asia Pacific Americas Tax Leader, and Beattie, the firm’s then-general counsel.
Beattie, who became general counsel in 2005 until she left without fanfare last year, describes herself as “quite forthright” and “able to speak loudly” when required.
Those who interacted with her at the firm describe her as fearsome and very serious, seen as being as powerful as the then-CEO Sayers.
She declined to comment for this series.
“She’s hard, she’s wooden, she’s transactional,” says one former partner.
Beattie told parliament last week she was at first confused about why the tax officials were displaying such a “level of agitation about legal professional privilege”.
“They were raising very serious allegations [that] the firm was using privilege in a way that was designed to hide matters from the Australian Tax Office and that concern had been ignited, if you like, by the firm’s response to the ATO notices,” she said.
She dug into the matter and concluded that Seymour had been permitting parts of the practice to ignore the protocols. Beattie also identified another former tax partner, Neil Fuller, as one of the individuals not following the protocols. Fuller could not be reached for comment.
Beattie told parliament that it “became apparent that privilege claims had been made for which there was not a proper basis, that there was a small group within the tax group who had not been performing in accordance or adhering to the protocols that I had put in place in relation to how legal engagements should be carried out”.
This led to the “very difficult period in which there were discussions with clients, there were discussions with the ATO, about the fact that documents where clients had understood ... they were getting a legal engagement, they were not getting a legal engagement. And so the production was redone.”
It eventually led to a confrontation between the pair.
“I was the one who made sure these protocols were put in place. I was the person who spoke to Tom Seymour and said to him: these protocols are here, and they have to be followed. And if you wish to grow the tax practice, so that the tax practice can provide a legal service, you need to comply with this.”
In response to Beattie’s allegations, Seymour told parliament last week: “What I can say is that there was significant tension between myself and Ms Beattie about the fact that we were not getting documents delivered to the Tax Office in satisfaction of the Tax Office. I have a view that our legal response was not run well, and that we were too legalistic.”
Seymour has declined through a lawyer to comment for this series.
The Tax Office would eventually secretly settle with PwC in 2022 and 2023 over more than 170 legal professional privilege claims for $642,600, discounted from $1.428 million. As part of the settlement, the Tax Office agreed not to take action against five multinational clients that supported the legal privilege claims.
But away from the war, the volleys of legal requests from the ATO that plagued Meredith Beattie and Tom Seymour, the house that Luke Sayers built was leaving its rivals in its wake.
Sayers’ ambitions
Sayers was on a high. Revenue had grown by 26 per cent during his first four-year term to $1.9 billion in FY2016. Consulting now made up 70 per cent of sales, up from almost 40 per cent at the start of Sayers’ leadership.
Tax revenue was growing more modestly, at around 2 per cent a year, well behind the growth rate of the firm. The auditors would point out they had the No. 1 corporate audit practice in the country. But everyone knew consulting was now the firm’s primary growth engine despite having narrower profit margins.
Sayers had pushed the firm hard into consulting just as public and private sector organisations ramped up their use of external advisers.
He was voted in unopposed for a second (and maximum) four-year term as CEO in 2016. PwC was dominant; it was almost $400 million ahead of its nearest competitor, and Sayers’ income had risen in lockstep, from $2.9 million in 2013, his first full year as leader, to $3.6 million in 2016. “His CEO performance was off the chart,” says Alexander*, the former consulting partner.
Sayers’ ambitions had only grown over time. In his second term at the top, he started weighing in on controversial topics. In August 2016, he waded into the stuffy world of boardroom politics by noting there was “a very incestuous group [of] people coming through to boards who have all had the same experiences”.
The move was electric to staff, average age 27 or 28, but came across as tin-eared to his haters in the firm.
Under him, the firm made other, wilder, moves. In 2018, Ben Roberts-Smith was offered a partnership at the firm, but the former soldier withdrew from talks after the publication of stories in The Age, The Sydney Morning Herald, and The Canberra Times that he claimed defamed him. Roberts-Smith would later be found by the Federal Court to be a war criminal, murderer and bully who was complicit in the unlawful killing of four unarmed prisoners in Afghanistan.
At times, partners, used to being consulted over the big and small decision-making within the firm, would openly rebel. When he was once asked at a meeting about his “captain’s calls”, Sayers shot back: “I am the captain!”
Between 2012 and 2022, PwC recruited 24 former tax officers, including two former assistant commissioners. To be fair, other firms were also actively recruiting from the public service.
PwC staff fostered relationships with politicians, clients and potential clients. In August 2018, PwC hosted a full-day, $12,500 a head fundraising event for the Liberal Party at its Sydney offices where guests could “nominate up to five meetings with ministers” before attending a private dinner with prime minister Malcolm Turnbull and the cabinet.
The firm was also a long-time sponsor of the dinner held on federal budget night and typically attended by the prime minister, senior ministers and top business figures from around the country.
‘Inappropriate relationships’
Underwriting all of this was Sayers’ relentless push for partners to generate fees for the firm. “The resultant ‘tone at the top’ has been a clear pursuit of ‘premium peer growth’, understood to equate to being the biggest and the best of the big four firms, with the most highly paid partners,” Ziggy Switkowski wrote in a review after the tax leaks scandal broke.
The culture changed in other ways too. One former partner at the time says relationships and dalliances that would now be frowned upon were more openly carried out during this period.
“I couldn’t believe how many inappropriate relationships were going on,” says Rosannah*, a former IT consulting partner. “Younger women, older men.”
It was a time when corporations across the country, including PwC, tended to deal with issues such as sexual harassment allegations quietly and using non-disclosure agreements.
In 2017, two letters were sent by mail to almost two dozen senior partners of PwC Australia, including Sayers. Sent anonymously, the missives outlined what the author or authors described as ongoing tolerance of inappropriate behaviour at the big four accounting and consulting firm, including sexual harassment, bullying and extramarital affairs.
The firm’s spokeswoman responded that the letters “did not raise any specific allegations of sexual harassment”.
“Given the generic content of the letters, we did everything we could to remind all partners and staff of our values and expected behaviours both at work and in social environments.”
Sayers also issued a robust defence of the firm’s culture at the time.
There was enough concern about the practice of partners going out with staff that in 2018 the firm revealed that “all relationships between PwC partners and PwC employees must be disclosed to a member of our human capital team.”
This freewheeling culture could also be seen in the September 2018 three-day partner conference in Hong Kong. For certain partners, it was an opportunity to simply drink and party. Those present talk about partners carousing until the early morning and not bothering to attend official events.
One attendee described it as “one big Contiki tour with men behaving like boys and being inappropriate”. Two partners are rumoured to have gotten so drunk that when they showed up at the airport, they were not allowed to board the plane.
The firm estimated that in 2018, the income of PwC partners was, on average, 50 per cent higher than Deloitte partners, 30 per cent higher than EY partners and 25 per cent higher than KPMG partners. By any measure, it was an income boom. But no boom lasts forever.
Joint venture investment
Two events would shape the remainder of Sayers’ time at the firm. In 2018 Sayers and a small group of senior partners (including Sammy Kumar and Tony Peake) made small investments – Sayers put in $50,000 – in a joint venture, Australian Visa Processing that was pitching to privatise the entire process
Once word of the investment got around inside the partnership, there was outrage. Complaints were made, but not over the conflict of interest of the CEO and his closest mates investing in a venture that the firm was helping to bankroll. Part of the rage was that the offer hadn’t been made to the entire partnership to invest. Another part was the lack of judgment by Sayers and the others in making the investment.
Not helping matters was that one of the potential investors in AVP was a PwC US audit client, which indicated it was quite happy to dump the firm as auditor to get in on the ground floor of what could be a massive payday if it came off.
PwC US went crazy. This led to PwC International – the London-based company that runs the PwC brand and sets and polices member firms that operate within its global network – aggressively intervening. Sayers, and the two other partners, were chastised, forced to sell back their investments in AVP and fined.
Around the same time, Sayers had developed a plan – called Project Kookaburra – to sell the firm’s Australian, New Zealand and South-East Asian consulting business for more than $1 billion.
Sayers framed it as a way to eliminate the conflict of the firm providing consulting service to audit clients and the issue of providing advice to public and private sector clients at the same time. This is an inherent problem in the industry that leaders of rival big four firms to this day refuse to concede.
The idea was that the big four firms would eventually all have to split their consulting arm and the money could be used to pay off the retired partners’ payment plan liability.
The retirement payments – averaging $140,000 a year – were paid out of ongoing profits and created problems for former partners who wanted to work in roles where being paid by PwC would cause an actual, or perceived, conflict of interest. PwC International’s answer was a hard no.
Sayers still thinks it’s a good idea. “I firmly believe that it is inevitable at some stage – all the big four firms will be getting rid of their consulting arms, in some way, shape or form,” he told parliament on Friday.
Former partners broadly interpret both incidents as killing any hope Sayers would have of becoming PwC’s next global chairman.
Sayers has told friends it was Project Kookaburra that caused a breakdown in the relationship between himself and the global firm.
He also denied any ambitions to become the next global chairman of PwC or to run the proposed Project Kookaburra firm.
But Sayers’ pending exit raised another pivotal question for PwC: who could replace him?
(*Current and former PwC staff still refuse to speak publicly against the firm, fearing it will affect their relationships, legal obligations and, often, their retirement benefits. It is an obsession with, ironically, confidentiality. All interviewees have requested their names not be used. In place, we have used pseudonyms and, where required, short descriptions of the speaker.)
Tomorrow part 4: Seymour’s rise to the top
Read more about the PwC tax leaks scandal
Part one | ‘We couldn’t believe it’: Insiders reveal how PwC unravelled as scandal broke The inside story of how PwC transformed from dull accountant into a sales-driven firm that would tear itself apart. Part one charts the rise of the two men who have defined the firm for the past twelve years: Luke Sayers and Tom Seymour.
Part two | The emails that almost destroyed PwC Australia Insiders thought it was a “joke” for PwC to both advise the government on tax reform while helping clients exploit those reforms. One meeting sent the Tax Office over the edge.
PwC leaders at war over tax scandal PwC’s former general counsel says she repeatedly advised then chief Luke Sayers and the governance board that legal professional privilege was being misused.
Sayers, Seymour round on Burrowes’ global role Kevin Burrowes’ second role with PwC International was the focus of the joint parliamentary inquiry into consulting on Friday morning.
Chanticleer | PwC hasn’t paid full price for eight years of risk failure Exactly who deserves the most blame for the PwC scandal remains a subject of fierce debate. But it’s the systemic failures of risk management that really matter.
Opinion | Penitence, bravado and rattling the PwC can The firm’s alumni deploy the “I take full responsibility, it was all the other guy’s fault” defence.
‘This may not end well for you’: The secret war behind the PwC inquiry Documents tabled by three federal agencies raise questions about whether the ATO tried to shut down the investigation into the PwC tax leaks and targeted the man leading it, Michael O’Neill.
How confidential tax information was shared at PwC At least six former PwC partners were involved in leaking confidential information from Treasury, the Tax Office and Board of Tax, legal reports concluded.
‘Shadow’ culture of profit first blamed for PwC tax leaks scandal A scathing report into the big four consultancy laid bare the brutal, uncompromising culture at the top that led to the firm’s tax leaks scandal.
‘Growth at all costs’: what PwC report found The mindset was said to have been “growth at all costs” with a spotlight on “revenue, revenue, revenue”.
‘We are deeply sorry for that behaviour and the culture’ The full text of the open letter from PwC Australia CEO Kevin Burrowes.
PwC partner leaked government tax plans to clients The former head of international tax for PwC Australia, Peter Collins, has been deregistered by the Tax Practitioners Board for dishonesty and for sharing confidential government briefings with PwC partners and clients.
AFR journalists win Gold Walkley for PwC story Neil Chenoweth and Edmund Tadros broke one of the biggest stories of the year, which ultimately led to the break-up of the accounting firm in Australia.