Big four partnerships should be capped at 400: ‘Structural separation’ recommended in audit, consulting work after PwC scandal

‘Structural separation’ recommended in audit, consulting work after PwC scandal

The audit and consulting sector faces upheaval following a raft of recommendations in a new Parliamentary report in the wake of the PwC tax scandal, but the Greens say it doesn’t go far enough

David Ross 7 Nov 2024

Audit and consulting partnerships would be limited to 400 partners and the sector put under a regulatory microscope under a proposed plan from a parliamentary inquiry. 

In response to scandals surrounding professional services giant PwC, a parliamentary inquiry has recommended the audit and consulting firms face a wave of sweeping changes, with more than 40 recommendations to reform the sector. 

The report calls for key partnerships to be limited to a maximum of 400 partners, down from the current 1000 limit. 

This would bring the audit and consulting firm in-line with their legal partnership counterparts. 

Firms of greater than 3000 staff would also be required to implement the Corporations Act requirements for governance and accountability and adopt ASX corporate governance principles, under the proposed changes. 

The parliamentary review also calls for the “operational separation” of large firms, barring them from supplying both audit and consulting services to the same clients. 

Labor Senator Deb O’Neill stressed the split was crucial to head off conflicts of interest questions in the sector. 

She said the change would “ensure that audit services aren’t compromised by the desire to retain clients in more profitable sections of the firm”.

“The proper function of the audit sector matters to every Australian. We all have superannuation, and we all rely on audit firms to ensure the security of our financial markets,” she said. 

“Right now, the consulting sector benefits from deliberate ambiguity.”

The committee also calls for the sector to be subjected to a regulator, as well as imposing a “suitable penalty regime calibrated to the seriousness of the misconduct, for partnerships who have engaged in misconduct”. 

Ms O’Neill said consulting in government and the private sector were “operating without any safeguards”. 

She said the firm’s “unlike lawyers, accountants, electricians, nurses and countless other professions,” do not have any formal qualification requirements or regulatory body overseeing the sector. 

“As admitted lawyers or accountants, some consultants are already members of professional bodies, and our recommendation won’t apply to them,” she said. 

“The recommendation simply creates a safety net, ensuring that nobody will be operating in government consulting without even a basic registration, and an accompanying professional commitment to ethics and ethical accountability.”

Ms O’Neill told The Australian the report balanced the need for reforming the audit and consulting sector against “the need to protect the profitability of Australian businesses, in particular small and medium enterprises”.

“The increased trust in Australian businesses and financial markets that will result from better audit standards will have benefits across our economy. A more accountable audit sector is in the financial interests of every Australian,” she said. 

The parliamentary report also calls for major firm PwC Australia to be barred from tendering for government work until all ongoing investigations into the firm’s misuse of confidential tax information be investigated. 

The scandal surrounding the sector was sparked by revelations PwC misused confidential tax briefings to shape tax strategies for clients ahead of the introduction of new laws in 2016. 

Ms O’Neill said the recent revelations PwC International demanded the local firm run its communications and responses to regulators through overseas staff was concerning. 

“We’ve added a recommendation to make sure that if international bodies take over Australian firms doing government work, we will know about it. This will ensure the protection of Australian Government information, and interests,” she said. 

But Greens Senator Barbara Pocock said the report didn’t go far enough, calling for firms to be capped at 100 partners and a ban on political donations from the audit and consulting giants. 

“We need systemic change to ensure that the PwC tax leaks scandal can never happen again,” she said. 

Ms Pocock also said audit and consulting arms of firms should be separately incorporated as different companies.

More to come.

Big fourpartnerships should be capped at 400, inquiry finds

Edmund Tadros Professional services editor

Nov 7, 2024

The big four consulting firms could be forced to cut their partnerships to a maximum of 400 equity partners and separate out the management of their audit and non-audit practices under recommended and sweeping reforms to the sector that strike at the very heart of their lucrative business models.

The 16 key recommendations of the joint inquiry into the structure of the big four consulting firms also include banning auditors from doing any non-audit work for auditing clients, expanding the oversight of the corporate regulator to include non-audit partners and the firms themselves and the re-establishment of a beefed-up audit quality inspection program.

Senator Deborah O’Neill said the AFR’s coverage of the PwC tax leaks scandal have forced consulting firms to undergo a reckoning. Luis Ascui

The final report of the committee, chaired by Labor senator Deborah O’Neill, has also made another 24 recommendations covering the way auditing is conducted and reported to the market, the potential creation of an audit-quality focused agency, enhanced whistleblower protections and rewards and regulation of the consulting sector.

The joint inquiry was established last June after the extent of the PwC tax leaks scandal was made public and like an earlier Senate inquiry into consultants has acted as a proxy inquiry into the matter while also exploring governance across the sector.

“This report is the legacy of the PwC tax leaks scandal, and the sector-wide misconduct that was uncovered in the aftermath,” Senator O’Neill said in a statement.

“This report charts a path forward for the sector, towards a more accountable, transparent and just financial sector. What we heard, and what was revealed about this sector, was the stuff of corporate nightmares. These firms - so integral to our financial sector - were engaged in base profit seeking and exploitation of their privileged place. The tax leaks scandal revealed how they were prepared to use confidential government information for their own benefit.”

Senator Deborah O’Neill. Alex Ellinghausen

The final report, which was adopted without dissent, comes after 12 days of public hearings that led to a succession of PwC current and former leaders called to explain their actions. The inquiry received 83 submissions and published 196 responses to questions on notice.

“The report recommends an increased regulatory framework across the audit, accounting and consulting sectors, which is balanced by the crucial requirement of ensuring that small and medium enterprises remain viable into the future,” Senator O’Neill said.

She added: “Since the Financial Review’s initial reporting of the PwC tax leaks scandal in February 2023, multidisciplinary audit, accounting and consulting firms have undergone an immense reckoning with both the ethical failures of their sector, and the wrath of public opinion aimed at their shortcomings.”

“This report marks the beginning of a new chapter for the audit, accounting and consulting sectors, in which accountability, transparency and ethical responsibility must become the norm.”

More to come...

Find out the inside scoop about Accenture, Deloitte, EY, KPMG, PwC and McKinsey. Sign up to our weekly Professional Life newsletter.

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

Big four consultancy firms should have partner numbers slashed by up to 600, Australian inquiry says - Guardian

Ethics and Professional Accountability: Structural Challenges in the Audit, Assurance and Consultancy Industry

REPORT - November 202

Recommendation 35
6.97 The Committee recommends that the Australia Government consider options to improve the Australian Taxation Office’s tax settlement procedures with a view to making their details more transparent to all taxpayers and setting out appropriate procedures and protocols for their use, negotiation and terms.

 

2.64 As set out in Chapters 3 to 6, issues associated with conflicts of interest appear to be a widespread problem for the Big Four firms and mechanisms to manage and resolve them are failing within the firms, in the professional bodies and in the regulators. Hence, the committee is making a range of recommendations to address those failings.

 

2.65 The committee is not yet convinced that PwC and the other Big Four firms are on an effective path to learning from their mistakes. Hence, further work by parliamentary committees may be necessary. The committee, therefore, suggests that parliamentary committees should carefully monitor and review the effectiveness of the reforms proposed by this committee and the F&PA committee.

 

2.66 The committee suggests that the government consider what sanctions it may impose on PwC and its leaders in the period 2012 – 2024 to address its ongoing lack of accountability. The committee notes that measures such as freezing government procurement contracts with PwC are unlikely to have a significant impact because, since the formation of Scyne, PwC no longer works under

Commonwealth procurements.

 

Issues arising from PwC interactions with the committee

2.26 PwC has long represented itself as a leader in governance and advice in accounting, audit, law and other new branches of the consulting industry. There is a yawning chasm between the rhetoric of its public-facing promotional material and the reality the committee has encountered in its interactions with the various iterations of PwC and its leaders since 2012. The interactions that PwC and PwCIL have had with this committee have failed to meet the behaviours expected of a firm that has any respect for law and the parliament.

This has greatly diminished the firm’s standing in the eyes of the committee and should be a warning to all potential customers for the services they offer. At every turn, PwC has sought to avoid scrutiny and played for time, seeming to hope that the committee’s interest would wane. Ultimately, the firm was forced through threat of summons to attend hearings and provide material—often with significant redactions— in a tardy manner. The firm’s collective behaviour over the time since the tax matters became public reveal a general contempt for the democratic process. The committee will in due course consider a referral of relevant matters to the Privileges Committees of the Australian parliament.

         Consulting inquiry hands down final recommendations

Regulation

The inquiry into consulting firms has recommended limiting accounting partnerships to 400 partners and prohibiting the supply of both audit and non-audit services to the same client for large firms.

By Miranda Brownlee • 07 November 2024

The Parliamentary Joint Committee on Corporations and Financial Services Committee has tabled its final report for its inquiry into audit, assurance and consultancy industry, outlining 16 priority recommendations for immediate action and 40 in total.

Among the priority recommendations made by the Inquiry, the Committee has recommended that the Australian Government reduce the allowable size of partnerships for accountants to a maximum of 400 partners, to align with the limits of legal partnerships.

The committee said the 400 partner cap could be established with a suitable transition period of up to 5 years in order to minimise disruption to the sector.

"A review of progress to this end should be conducted after two years, if at that time the entity has not chosen to incorporate," the final report said.

The committee has also called for multi-disciplinary large accounting firms to be banned from supplying both audit and non-audit/consultancy services to the same client and their associated entities in both Australia and internationally.

Large multi-disciplinary accounting firms should also be required to implement operational separation of their audit practice from their non-audit practice, the committee said in its final report.

"The principles of operational separation should be materially consistent with those applying in the United Kingdom or other global best practice," it said.

The committee has also recommended that audit, accounting and consulting partnerships with greater than 3,000 staff be required to implement the Corporations Act 2001 requirements for governance and accountability, if appropriate through the adoption of the Australian Securities Exchange Corporate Governance principles. 

"This should include the requirement for multidisciplinary partnerships to prepare their own general purpose financial reports, including remuneration disclosures and other obligations which may be applicable to partnerships," it said.

"The government should review the operation of this measure within 3 years, with a view to extending its scope to mid-size partnerships."

The committee has also recommended that the Australian government legislate to enhance the Australian Security and Investments Commission’s power to take enforcement action against audit firms, not just individuals, including for quality management standards.

It also wants the government to give further powers to ASIC to oversee audit to cover all partners within multidisciplinary firms regardless of which part of the firm they work in, as required in the UK Financial Reporting Council Audit Firm Governance Code.

It has also urged ASIC to e-establish a program of random audit inspections and to supplement its existing risk-based approach by also reviewing audit files where conflicts of interest arise from the big four firms providing other services to their audit clients.

The report noted that such conflicts will no longer occur once the operational separation of audit is implemented.

The committee also wants to increase the level of resources that it devotes to financial report inspections and audit inspections until there is a significant improvement in audit quality.

A powerful parliamentary committee has called for the government to ban PwC Australia from tendering for government work until it demonstrates it has fixed its practice.

Members of the parliamentary joint committee on corporations and financial services have finalised their unanimous report into accounting, auditing and consulting firms, with the first of the 40 recommendations being a demand for a tendering ban on the global accounting firm.

Ban PwC from government work until it gets the all clear, committee says